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Polluters: embrace ESG or lose funding choice

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Investors have shunned carbon-intensive and sin sectors this month. The message is clear: if they want to raise capital, companies in dirty industries need to show they are making meaningful moves towards becoming socially and environmentally responsible.

HSBC faced a conspicuous investor revolt in January, and last week bowed to pressure to precisely detail how it plans to phase out fossil fuel financing in a bid to reach net zero greenhouse gas emissions for the companies it finances by 2050. To the fossil fuel companies, this could mean one less bank they can go to for money in the future.

And on Monday, UK tobacco company Imperial Brands had to mostly rely on UK and German investors for its €1bn March 2033 bond sale, as French accounts largely rejected the trade.

Despite buyers such as BNP Paribas Asset Management and AXA holding long-standing blanket exclusions on tobacco investing, the lack of bids from France still surprised some lead managers.

Imperial Brands still did a deal that was more than twice subscribed and paid a small 5bp new issue concession, but the writing is on the wall. A growing group of investors are more serious than ever about not wanting to finance environmentally or socially damaging industries.

But it isn’t a case of simply signing up for green KPIs left, right and centre, or issuing social bonds. It’s a balancing act that can send company management tumbling.

While French fixed income investors wanted little to do with Imperial Brands, this week pressure from other equity investors ousted Emmanuel Faber from his role as chief executive of French food company Danone, over underperformance of its share price against peers.

Faber, long a champion of corporate ESG matters, was blamed by activist investors for poor results. But many have taken this as evidence some investors only care about ESG when it isn’t beating up the P&L.

But the tide is turning. The Net Zero Investment Framework will guide investors running assets worth $8.5tr (with surely others to sign up) on a path to considering the impact of their investments on wider society and the environment, with the sanction of divestment if they do not make a positive contribution.

For companies operating within dirtier sectors, the tools are there for them to show investors that ESG is an important part of their plans. Sustainability-linked debt is best used for those companies that have the most catching up to do on ESG matters. The dirtier the company, the more improvement is possible, and the larger overall impact that improvement will have on the environment and the company’s cost of funding.

This year, the sustainability-linked bond market has proven its viability for heavily polluting industries. The UN has named the fashion sector, for example, the second most polluting industry on the planet after oil and gas, and yet Swedish clothing retailer H&M won bumper demand last month for its €500m August 2029 SLB, in part because it made increasing use of recycled materials one of its KPIs.

Investor access will always be there, even for the most polluting, socially damaging companies. But when the dwindling pool of capital for issuers is only controlled by investors who prioritise short-term profit over all else, you can bet they’ll turn the screws on those who need it, knowing they have nowhere else to go.

For companies in every sector — but particularly for those that need to up their sustainability game — adopting ESG wholeheartedly is not just a matter of being a responsible business, but of retaining the most competitive funding options.

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