The European Union will take one of its most significant steps ever this year towards clarifying what sustainability means in practice. The EU Taxonomy legislation will stipulate what economic activities will qualify as ‘sustainable’ or ‘green’. This is generally accepted as being a boost for the green bond market.
However, the greater clarity it brings could also lead to reputational risk for companies that issue bonds in the Eurozone but fail to meet increasingly mainstream sustainability standards, opening them up to the potential threat of divestment.
New analysis by NN Investment Partners (NN IP) shows that 206 of the 729 companies issuing investment grade (IG) bonds worth EUR300 million or more in the Eurozone fail to qualify for the Bloomberg Barclays MSCI Euro Aggregate Sustainable SRI Sector Neutral Index. These companies account for 28 per cent of the number of companies in the non-sustainable equivalent, the Bloomberg Barclays Euro Aggregate Corporate Index, and one quarter (25 per cent) of its bonds in issuance. NN IP notes that companies which fail to qualify operate in several sectors including companies that are involved in controversial practices, such as manufacturing tobacco and weapons, as well as companies in sectors ranging from financials to chemicals.
Under NN IP’s own sustainability criteria, even 10 per cent of the companies by market value in the Bloomberg Barclays MSCI Euro Aggregate Sustainable SRI Sector Neutral Index fail to meet acceptable sustainability standards because they fail to demonstrate sufficient commitment to climate-related goals or doing no significant harm. They are concentrated in the financials, chemicals and energy sectors.
Annemieke Coldeweijer, Co-Lead Portfolio Manager, Sustainable Credit, NN Investment Partners, says: “Our analysis illustrates how important it is for fund managers to apply their own selection criteria rather than relying on a label or sustainability index. This to ensure that our clients assets are allocated in a truly sustainable manner.
“The EU Taxonomy will cast a spotlight on companies as they will have to report details about their activities and ambitions with respect to environmental, social and governance related topics. Transparency will be key here. Any failure to do so could withhold investors from investing in these companies.”