IMF calls for APAC climate fund labels and impact scores to address ‘problematic’ ESG scores

Researchers were unable to find evidence of a 'greenium' for sovereign green bonds in the region.

A policy paper published by the International Monetary Fund on Monday has backed the development of climate labels and “climate impact scores” as a way to steer more green investments into developing markets in Asia-Pacific.

IMF researchers said fund managers had been forced to rely on ESG scores in the absence of these tools, but criticised the scores for being “problematic as a climate metric”.

The paper cited previous analysis by the IMF and other research which showed little correlation between ESG ratings and environmental performance. It also noted that some oil and gas companies routinely receive better ESG scores than green companies as they are assessed relative to fossil fuel peers.

“Current methodologies of ESG rating agencies do not reward emerging market and developing economies that implement climate policies,” the researchers added. “Low scores may unfairly penalise Asian emerging markets as ESG funds allocate only a small share of their portfolio to emerging market assets, and this allocation is mostly concentrated in major emerging market economies such as China.”

The IMF has previously called for the creation of climate impact-oriented scores that capture positive or negative impacts which fall outside the scope of conventional ESG scores. A class-leading cement company, for example, could score well on a peer group-focused ESG rating but still have a poor climate impact score under prospective criteria mooted by the institution.

“In terms of climate impact, it does not matter how this firm compares with others in its industry, but only how carbon-intensive its activities are,” the IMF said at the time.

The use of climate investment fund labels has attracted regulatory interest in other markets, with mixed results. In Europe, EU authorities were forced to put the development of a flagship “Ecolabel” on hold due to the challenges of finding criteria which were sufficiently green while also being financially viable.

Nevertheless, there is clear demand for such a product.

Many investors have started treating the Article 8 and 9 fund designations under the EU Sustainable Finance Disclosure Regulation as de facto product labels, despite the fact that they emerged from a disclosure regime.

The UK is the latest jurisdiction to launch state-backed investment fund labels under the Financial Conduct Authority’s sustainable finance policy package, which was adopted last year. Asset managers can begin using three variants under the UK’s ESG fund label programme from July.

On the regulatory side, the IMF warned against using prudential regulation to encourage banks to provide climate financing, such as by using a “green supporting factor” to lower capital requirements associated with lower-carbon projects or renewables.

Such “premature adjustments” would be a poor substitute for effective climate policies, the researchers said, and will likely “be ineffective and generate unintended consequences”. The IMF’s position is in line with that of the EU’s banking regulator, which withdrew support for a green supporting factor in a long-awaited policy report last year.

Finally, the IMF paper found little evidence of a “greenium”, or cheaper borrowing costs associated with Asia-Pacific sovereign green bond issuance compared to other countries.

Researchers said the greenium for local issuers was “not statistically significant”, in comparison with an average greenium of approximately 6.5 basis points for sovereign issuers outside of the region.

“This suggests that the green bonds issued by Asia-Pacific sovereigns have not led to lower interest costs than would have been obtained by issuing a conventional instrument.”