Investors still exposed to risks of green, sustainability-linked hybrids – S&P

      Published on Wednesday, 26 August , 2020      561      
Investors still exposed to risks of green, sustainability-linked hybrids – S&P

  • Bahrain News

Investments in green or sustainability-linked financial products are on the rise, but there is still a tension between investors on earmarking funds for such projects and the role capital plays on a balance sheet, says S & P Global Ratings.

The Greening of Financial Services report showed a dramatic increase in green and sustainable bond issuance, from around $50 billion in 2016, to more than $200 billion in 2019, with year to date figures suggesting there will be a further increase in 2020.

The ratings agency said issuing green or sustainability linked hybrids helps banks and insurers highlight their environmental and social governance (ESG) strategies, but investors are still exposed to the risk of broader businesses.

“We believe this is why the green or sustainability promises incorporated in such hybrids have so far been light on specific commitments, and we note that such hybrids may not match the investment mandate of some green and sustainability investment portfolios,” the report said.

A further challenge

The report also pointed out that the development of green and sustainable hybrid asset classes poses a further challenge, in that they could increase reputational risks for banks and insurers.

As an example, the ratings agency cited a scenario in which investors in a green-labelled hybrid may not receive hybrid payments because of problems that a bank or insurer faces from losses after a borrower or investment fails due to the crystallisation of ESG risks, for instance, from losses due to polluting.

S&P says it expects growing demand for green and sustainability assets to encourage incremental supply of such hybrids even if the limited price and diversification benefits seen by the issuers to date continues.

“Green and sustainability subordinated bond issuance has significantly lagged that of senior or secured asset classes, we think largely because of investor concerns that capital fungibility creates less clarity on the investor’s exposure to green and sustainability-related behaviour,” the report said.

“While recent green subordinated issues by banks and insurers have not, in our view, convinced investors that they have removed exposure to non-green activities, they do show a modest degree of investor diversification and noteworthy ESG credential signalling.”

Category Bahrain News, Business, Finance | 2020/08/26 latest update at 3:30 PM
Source : Zawya | Photocredit : Google
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