Environmental, social, and governance (ESG), and “green” funds are growing at a rapid rate across the globe – and many mining companies have identified them as an important avenue for raising capital to expand their operations.
Global law firm White & Case believes that ensuring that borrowers have taken appropriate ESG and sustainability considerations into account has become a priority for many mining investors as well as financiers across the spectrum – from export credit agencies, development finance institutions and commercial lenders, through to stream and royalty financiers.
White & Case research shows that after successful implementation of ESG and sustainability initiatives, mining companies become more attractive to investors and financiers alike.
Meanwhile, Azure Capital partner, Chris Holman, says mining companies now aspire for ESG funds to invest in their company to provide this additional funding source but also to provides certain levels of market validation.
“Those who are adopting sustainable and clean technologies are also well-placed to obtain assistance from federal government stimulus contracts,” he says.
AUSIEX, one of Australia’s leading agency brokers for equities and ETF trade executions, says ESG-related stocks have increased considerably since 2019 and Australian investors are pouring into new “green” sectors, according to data from Australian Investment Exchange Limited (AUSIEX).
Data from AUSIEX, which traded A$55.25B of the total Australian market in FY2021, shows the trading value of direct equities and ETFs strongly associated with hydrogen, battery tech, and clean tech, as well as broader sustainability themes, has increased by 134% since 1 January 2019.
In total dollar value, trading in climate and ESG-related securities during the first five months of 2022 has nearly equalled the entire year of 2019. To date this year, A$1.04B has been traded compared to A$1.26B traded in 2019.
AUSIEX CEO Eric Blewitt said that while trading volume was highest in November 2021, around the time of COP26 in Glasgow, strong momentum continues. “2021 was the biggest year thus far with nearly A$3B worth of trades in ESG-related securities – this was more than a A$1B increase on 2020.
“This year, against a backdrop of rising inflation, monthly ESG trading figures have not been as high as 2021 but are still well over 100 times higher than in 2019.”
AUSIEX research has found that there has been a hydrogen hyperfocus from green investors.
The company says hydrogen investments are the most popular green sector across all generations of investors and represent around 80% of all ESG-related trades placed between 2019 and now.
The strong interest in this sector may have been driven by commitments by the former Australian federal government in early 2020 to invest in building a domestic hydrogen industry, as well as high-profile private-sector initiatives.
Battery and clean tech strengthening
During 2021, trading in battery and clean tech securities began to outstrip trading in broader sustainability themed securities and found particular favour with older generations.
Retail investors were more likely to invest in battery and clean tech securities compared to advised clients (directly advised or via wrap platform) who selected broader sustainability-themed investments.
ESG investing – a definition
According to US-based financial planners Sachetta, ESG investing essentially means considering environmental, social and/or governance criteria when evaluating companies to invest in, and favouring companies that rate well with these criteria:
- Environmental factors include whether a company contributes to greenhouse gasses and generates other forms of pollution, how it uses or conserves energy, its efforts around climate change, and how it uses land, water, and other natural resources
- Social factors include a company’s labour and safety standards, its efforts around diversity and inclusion, and its community impact or reputation
- Governance factors include transparency around taxes and reporting, the structure of a company’s board of directors, and its core values – essentially, its integrity
According to the largest global funds network, Calastone, the ESG “gold rush” is proving a boon for the active fund management industry around the world.
In the UK in 2021, traditional active equity funds garnered just A$1 in every A$10 of new money flowing into active funds in 2021, with the other A$9 heading for ESG versions.
ESG investing is beginning to become a meaningful driver of fixed income funds too. In Australia, A$4 in every A$10 of inflows to fixed income funds last year were devoted to ESG strategies. In this respect, Australian investors are ahead of those elsewhere. In the UK, for example, one quarter of net flows to bond funds were ESG-driven last year.
Trillion-dollar growth
Global ESG assets may surpass US$41T by 2022 and US$50T by 2025, one-third of the projected total assets under management globally, according to a new report by Bloomberg Intelligence (BI). The report says this trend continues the rise of ESG assets after they surpassed US$35T in 2020.
Jennifer Wu of JP Morgan says the shift to sustainable investing is so powerful because it’s being driven by demand from the bottom up.
“Quite simply, investors – from individual savers through to large institutions – are directing an ever-increasing proportion of their portfolios towards sustainable strategies as they look to use their capital to help create a more sustainable world.”
Ms Wu says the energy transition is creating new risks and opportunities for ESG funds.
“As well as focusing on the ESG credentials of individual companies, investors are starting to give more consideration to the sectors, countries and regions that have the resilience and competitiveness to thrive as the world moves towards a low carbon-future.
“Resilience is about the readiness of sustainable portfolios to withstand the transition to clean energy and the impact of physical climate events as global temperatures rise. As well as asking which companies are best prepared, investors also need to look at whether the countries in which they invest have the reserves to endure the pain of energy transition and to pay for the adaptation to a low carbon economy.”
According to Forbes, supporting green funds can help investors achieve goals that go beyond monetary returns.
“While your focus as an investor should always be on getting the best possible performance, more and more people also want their money to reward companies that have a positive impact on the environment and society.”
Forbes says ESG investing is a strategy that channels dollars to companies that meet stringent environmental, social and governance standards. Investing in the best ESG mutual funds, index funds and exchange-traded funds (ETFs) can help support responsible corporate behaviour without sacrificing performance or incurring excessive fees.
While ESG investing alone cannot solve the problems of climate change, social injustice and income inequality, backing companies that actively work to address these challenges is a great place to start, said Forbes.
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