From profit to purpose: The evolving landscape of sustainable investments

    • In Asia-Pacific, the issuance of sustainable debt has held steady, with some US$370 billion to US$400 billion worth of bonds issued annually from 2021 to 2023.
    • In Asia-Pacific, the issuance of sustainable debt has held steady, with some US$370 billion to US$400 billion worth of bonds issued annually from 2021 to 2023. PHOTO: YEN MENG JIIN, BT
    Published Wed, May 22, 2024 · 05:00 AM

    IN RECENT years, the investment world has witnessed a shift towards sustainable investing, in response to the global demand for more responsible investment practices that ensure long-term environmental sustainability.

    The sustainable debt market has seen exponential growth, ballooning from a modest US$150 billion to US$250 billion range in bonds issued between 2016 and 2017 to some US$7 trillion cumulatively at the end of 2023, with green bonds for environmental projects making up about half of the debt on issue.

    This reflects a growing investor appetite for environmentally focused investment opportunities, and a broader acceptance among institutional investors of sustainable investing being imperative to future financial strategies that align with global climate goals.

    At the same time, as more companies look to fund their sustainability transition efforts, we can expect to see existing investment vehicles also evolve in context with requirements of issuers.

    Take for example an energy producer that relies on dirty coal. We know that it is not possible for such an entity to move to fully renewable energy at the flick of a switch, and transition bonds and loans will be essential in this context to help these companies in their transition.

    As a result, these two trends have led to a simultaneous increase in both the demand for and supply of sustainable debt.

    Regional variations and political influences

    Sustainable investment practices exhibit notable regional variations, reflecting the intricate relationship between economic policies and sustainable investment trends. In Asia-Pacific, the issuance of sustainable debt has held steady, with some US$370 billion to US$400 billion worth of bonds issued annually from 2021 to 2023.

    In stark contrast, the US has experienced a significant decline, with sustainable debt issuance plummeting from around US$467 billion in 2021 to just US$214 billion in 2023, a reduction which can largely be attributed to rising interest rates and a politically charged climate that has occasionally cast doubts on the feasibility of responsible investments.

    While the progress being made in this space is encouraging, there is also the question of how sustainable investments are measured and held accountable.

    Sustainable-linked bonds, for instance, are designed with specific environmental performance targets. Failure to meet these targets triggers step-up provisions that impose financial penalties, such as (higher) interest payments, thereby ensuring that issuers are committed to their environmental goals.

    The integrity of these instruments is ensured through rigorous third-party verification processes, which assess compliance and impact.

    Companies are also increasingly taking more concrete and well-defined steps in their sustainable investing strategies, and many have initiated structured approaches with clear, ambitious goals to ensure impactful investments.

    For instance, some firms aim for a substantial portion of their balance sheets to be dedicated to investments, alongside significant reductions in CO2 emissions and wide-reaching social impacts.

    At Zurich, we launched our strategic foray into impact investing around 2017 with the articulation of impact investment targets, and by 2019, the allocation had grown to around US$4.6 billion, heavily skewed towards green bonds along with social and sustainability bonds.

    Considerations for sustainable investing strategies

    On top of setting clear goals, there are also a couple of things that must be considered in a proper sustainable investing strategy.

    Firstly, ongoing engagement with invested entities is paramount – it serves as a catalyst for companies to adopt more sustainable business models. Abrupt disengagement from companies that do not meet sustainability criteria may seem decisive, but it does not effectively promote sustainable practices.

    By maintaining active dialogue and support, investors can help steer companies towards reducing emissions further, aligning with global climate targets and contributing to a more sustainable future.

    Investors also need to be aware of how dynamics might shift as they make progress with their sustainable investments. Initially, significant reductions can be achieved by divesting from high-emission bonds associated with industries like oil, gas and coal.

    Once these easier targets have been met, future reductions will require more nuanced decision-making, which will include addressing matured bonds that are closer to sustainability targets, and may involve tough choices with potentially greater impacts on investment income.

    Next step: Sovereign bonds

    Achieving many of these early targets will involve incorporating and advancing ESG principles across asset classes such as equities, credit, private debt and real estate.

    But there is still a significant portion of typical portfolios – mainly comprising sovereign bonds – that still lack comprehensive ESG integration, and not all governments are currently prepared or willing to issue green debt, making the transition uneven and complicated.

    However, we do see a promising shift – some governments are increasingly aligning their funding strategies with ESG criteria, as seen in recent issuances by the Australian government, which announced on Apr 10 that it would seek to issue around A$7 billion (S$6.3 billion) worth of green bonds maturing in June 2034.

    This is likely to serve as an inspiration for other nations and could potentially broaden the scope for ESG integration into sovereign bonds globally, supporting a systematic reduction in greenhouse gas emissions through strategic investment practices.

    Insurers as institutional investors: Playing the long game

    Many insurers function as institutional investors, offering specialised funds that have sustainable objectives and practices at the core of their investment strategies and portfolios, and can play a key role in advancing the sustainable investment market.

    These entities bring a unique perspective to the arena of sustainable investments that stems primarily from the sector’s deep expertise in risk management and a profound understanding of long-term financial commitments.

    For insurers, the alignment of investment strategies with long-term liabilities, such as those encountered in life insurance, is crucial. Investments in sustainable and green projects, which often have durations of 20 to 30 years, naturally align with the long-tail risks inherent to certain lines of business, making them ideal for insurance companies to manage their balance sheets.

    The financial sector today is undergoing significant transformation, with sustainable investing increasingly being integrated into mainstream strategies. This shift, highlighted by the growth of the sustainable debt market and the adoption of ESG principles, marks a pivotal change in aligning financial practices with urgent environmental goals.

    Insurers, with considerable expertise in risk management and long-term financial planning, are ideally positioned to promote sustainable investment practices.

    As stakeholders in a greener future, it is imperative for all sectors to amplify their commitment to sustainable practices, and we invite businesses, investors and policymakers to engage actively in shaping a sustainable financial landscape. This collaborative effort is critical to achieving the substantial, long-term changes required to address our planet’s most pressing environmental challenges.

    The writer is managing director and regional chief investment officer, Asia-Pacific, of Zurich Insurance