ESG investing has recently slowed down its brilliant trajectory, both in terms of market and assets under management.
Specifically, investments focused on purely sustainable themes (such as energy transition or green debt) suffered in the stock market in 2022 and also in 2023, in the face of aggressive action by central banks and the escalation of war in different parts of the world, among other factors.
Carlos Farrás, managing partner and CIO of DPM Finanzas, spoke about this during his intervention at the Social Investor Forum, on ESG themes, organized by Inversión magazine.
“All fixed income has suffered. And more so in the case of sustainable debt because they tend to be longer-duration bonds and, therefore, have more sensitivity in price to interest rate rises. Last year, they fell by more than double digits,” he said.
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Sustainable debt issuance falls (ESG)
Rate hikes are also one of the reasons for the recent drop in sustainable debt issuance from 27 percent to 22 percent of the total, according to David Maroto, director of financing at Telefónica.
“They have caused the cost of the projects to be higher, the level of demand from investors is also higher and the supply has been lower,” Maroto said.
Basically, companies find less incentive to finance themselves at high-interest rates. But, in addition, the existing fragmentation between the different green and sustainable bond standards has not helped either, according to Maroto.
“For us, it’s important to know which way to go, which label is really going to be the one that investors prefer. Currently and for us, it’s the ICMA (the International Capital Markets Association) principles. If there is no standardization, we can go towards stabilization of this type of investment and not see this boom again,” warned Telefónica’s director of financing.
However, the tightening of monetary policy has not only affected fixed-income
It has also had an impact on sustainable equities (especially those focused on the energy transition and renewables), since these are companies that have just risen 300 percent on the stock market and which, in addition, use high leverage to finance their projects.
For this reason, Andrea González, CEO of Spainsif, urged caution and to avoid triumphalism “when it comes to making grand declarations regarding the greater profitability of sustainable investment”.
Although there is a positive correlation in the long term in favor of ESG investments (above all, the higher the level of sophistication of the strategy and the experience of the manager), this “does not mean that it will systematically perform better in all cases”, warned González.
ESG investment opportunities
Whatever the case, what different participants at the Social Investor Forum agreed on was that sustainability represents a business and investment opportunity right now, if you know how to take advantage of it.
In this regard, Farrás said that both green bonds and shares linked to the energy transition are good investment ideas.
“On the fixed income side there is an opportunity because we are close to the end of the interest rate hike and, instead of being in Treasury bills that pay me a three-and-a-bit at 6 months, I can guarantee myself a bond at 4-5 percent for five years,” Farrás reasoned.
“Why? Because we don’t know how long yields are going to be up there, but normally they will go back down. In that sense, green bonds have longer durations and it makes sense to incorporate them into portfolios,” he added.
Finally, he also pointed to the possibility of diversifying the portfolio with a position in renewable projects through both listed and unlisted companies.
In this regard, he recalled that the regulator has lowered the minimum private equity investment tickets to 10,000 euros to bring this modality closer to the retail investor (previously they exceeded 100,000 euros).
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First published in SocialInvestor. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
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