ACTIVE ANALYSIS VS. PASSIVE INDICES ACTIVE ANALYSIS VS. PASSIVE INDICES

In the first half of 2021, SLLs amounted to $350 billion, compared with $197 billion in 2020. Even here, though, there are dangers of greenwashing. Typically, SLLs reward improvements in metrics measuring greenhouse gas emissions with reductions on a loan’s interest margin. Often, however, the improvements needed are soft and the rewards are small. There may also be a lack of transparency around targets for improvement and how they will be validated. Active management can offer a deeper assessment of how “green” some bonds and SLLs are in reality.

Source: Principles for Responsible Investment

Turning to private markets, there has been a huge increase in issuance of sustainability-linked loans (SLLs) used to finance specific green projects.

Active Analysis vs. Passive Indices

The data gap within some ESG asset classes highlights the benefits of active management, which can fill that void by leveraging in-house research capabilities. ESG ratings alone have their limitations. They use varying methodologies, and often they do not disclose them. Research by MIT’s Sloan School of Management found the correlation among six ratings agencies was 0.61 on average, compared with 0.99 for mainstream credit ratings from Moody’s and Standard & Poor’s. Active analysis of issuers can reveal new or different risks and opportunities than those provided by ESG ratings, arming investors with a broader scope of information. Active managers can also cater to clients’ individual investment goals, whether through fundamental ESG analysis or quantitative techniques.

By employing data screening, scalability, and a discerning approach to stock classification not bound by strict definitions, quants establish a holistic approach to analyzing companies’ management and operations, their interaction with stakeholders, and their exposure to risk. This can uncover value in the ESG space while navigating a potential bubble in ESG investing.”

The significant growth in the green bond market underscores the importance of scrutinizing individual issues and credits. As we await improved standards to enhance issuers’ accountability on their green bond pledges, green bond impact assessment provides a framework for evaluating the credibility and additionality of their securities.”

George Patterson

Eugenia Jackson

Chief Investment Officer, PGIM Quantitative Solutions

Global Head of ESG, PGIM

Source: Principles for Responsible Investment

The lack of meaningful data remains a fundamental challenge for ESG investors. The UN’s PRI group noted in a July 2021 report that “issuers do not always disclose sufficient data or do not do so effectively, posing measurement challenges.”

Take, for instance, Tesla losing its place in the S&P 500 ESG index. This took many ESG investors by surprise, given the electric car maker’s role in the EV transition. Yet the company’s overall ESG score suffered as a result of other metrics. Being a “climate solution” was not the whole picture for this index.

For passive investors, it is crucial to ensure that an index’s methodology aligns with their sustainability outcomes.

ESG-linked and green loan issuance

2017

2016

2018

2019

2020

2021

.05

100

ESG loans ($) / All loans ($)

Total ESG issuance ($ billion)

200

300

.15

ESG-linked loan share

Total ESG issuance

This figure illustrates the annual issuance of ESG-linked and green loans during the sample period from 2016 to September 2021. The sample consists of 1,127 ESG-linked and 1,228 green loan facilities from Refinitiv DealScan (DealScan, hereafter). In each bar, the dark and light areas indicate ESG-linked and green loan issuance amounts as a fraction of all loans, respectively (left y-axis). The dashed line indicates the total issuance amount of ESG-linked and green loans combined (right y-axis).

Green loan share

Source: PRI

ESG loans ($) / All loans ($)

Total ESG issuance ($ billion)

2016

2017

2018

2019

2020

2021

.05

100

200

.15

300

ESG-linked loan share

Green loan share

Total ESG issuance

Select a Chapter to Continue:

Chapters Menu

Explore

Now Reading

Select a Chapter to Continue:

Explore

Now Reading

Select a Chapter to Continue:

Explore

Now Reading

Explore

Now Reading