Leading investors call for ESG assessments from all issuers of securities

Deutsche Asset Management, Axa, Caisse des Depots, the Fonds de Réserve pour les Retraites, ERAFP and BNP Paribas Asset Management are among 22 major investors and others to sign a letter asking all issuers of securities to publish third-party ESG assessments on all products, in a move that would scale up existing best practice in the green bond space.

In a ‘declaration’ published on Friday ahead of a top-level climate summit in Paris, the signatories said their new initiative “is a first step towards a dialogue with issuers and investors at European level” around engaging second-party reviews for all capital-raising activities.

Issuers should select and pay for “the supplier[s] of their choice during their financing operations: bond issuances, project financing, IPO…”, the document stated. This supplier should then collect, process and assess ESG information “to help inform investors in their autonomous investment or project financing decisions”.

ESG research house Vigeo Eiris hailed it as a “significant step” that gives a “strong signal in favour” of the growth of sustainable and responsible finance in France and Europe.

For its part, it said would “meet the challenge of the future of extra-financial rating, and will act as the lead partner in this evolution in Europe and internationally”.

Second-party reviews have become a key part of the green bond market over the past decade. With a few exceptions, issuers publish a document from a third-party ESG house ahead of roadshowing a green bond.

The documents vary in content, depending on the provider and the issuer, but the overall aim is to provide green bond investors with an overview of the green credentials of the bonds’ use of proceeds. Some also include an assessment of the issuer’s own green performance.

However, the new declaration moves way beyond this – suggesting that issuers should communicate “their ESG rating as and in addition to their financial rating” on all products across equity and fixed-income.

“We are convinced that social, environmental, ethical and governance factors constitute real areas of risk that have an influence on the quality of credit and the intrinsic value of companies, and that they are drivers for future value creation,” the statement says.

And “because, in particular, large institutional investors with very long-term commitments express the need to analyse the sustainability of the business models of the companies, or projects, in which they plan to invest”.Other signatories include: Aviva France, Amundi, Group Aesio, AG2R La Mondiale, Candriam Investor Group, CM CIC Asset Management, CNP Assurances, Egamo, Euronext, Ircantec, La Banque Postale Asset Management, MGEN Group, Groupama Asset Management, Natixis, Harmonie Mutuelle and OFI Asset Management.

It has also been backed by Gerard Mestrallet, Chairman of the Board of Paris Europlace; Jean-Francois Boulier, President of the Association of Francaise des Investisseurs Institutionnels; Eric Pinon, President of the Association Francaise de Gestion Financiere; Bernard Spitz, President of the Federation Francaise de l’Assurance; and Thierry Beaudet, President of the Federation Nationale de la Mutualite Francaise.

Second party reviews and ESG ratings have been criticised for not being consistent and standardised enough – leaving some investors unable to compare different issuers or bonds.

The varying nature of assessment from the different providers is a long-standing issue in the green bond market, with market participants often claiming that some second-party reviews are too loose or qualitative.

Although second-party reviews have become almost ubiquitous for green bonds, there is an evolution into other, similar services: the credit ratings agencies have begun developing assessment services that can replace a second-party review, and there are certification processes based on science-based targets, too.

“We also intend to contribute, through this initiative, to the consolidation of independent European and global players in the international market for extra-financial analysis,” the statement adds, confirming its support for SRI-related labels for investment products.

The declaration comes as Europe’s policymakers are moving forward on creating a ‘shared language’ on climate change to help bolster capital flows into the space. The European Investment Bank is working with others to create a taxonomy, starting with mitigation and adaptation categories that are accepted by the European market. This may be widened to cover other areas of ESG in future. The taxonomy will not be a set of standards or labels, but may form the basis of one in years to come.