Sustainable finance, amid so much confusion and “bubble” risks. Only one in three ESG-rated funds really have an impact on the climate

Sustainable finance, amid so much confusion and “bubble” risks. Only one in three ESG-rated funds really have an impact on the climate
Sustainable finance, amid so much confusion and “bubble” risks. Only one in three ESG-rated funds really have an impact on the climate

The problem with a “price bubble” is that when you are in it, it is very difficult to realize. What with hindsight appears obvious and glaring is often much less so in the present. All the more reason when no one really knows what they’re talking about. According to estimates more inclusive financial products in some way attributable to ESG criteria (environmental, social, governance, i.e. environment, social and corporate organization) are valid today 35 trillion dollars and therefore represent 36% of the assets managed globally. However, if a more stringent definition is adopted, the figure plummets to 2 thousand billion of Euro. Bloomberg estimated sustainable assets to be worth $ 12 trillion in 2019, a study by economists Fish, Kim e Venkatraman set the bar a 30 thousand billion. One of the big problems in the sector is, as we can see, the definitional uncertainty which confuses the waters a lot and makes it difficult for those who have to analyze the phenomenon to plumb them. Yet in 2019 they already existed 70 companies that issued ratings on Esg products, it is a pity that each one did it, and continues to do so, with its own criteria.

“Today there is a strong definitional and regulatory ambiguity concerning all these products. Exist different ratings non-financial companies that are often difficult to compare with each other because the questions they start from are different ”explains a Alfonso Del Giudice, professor of Finance and director of the Masters in Sustainable Finance at the Catholic University of Milan. The teacher recalls: “Today the main issuers of green bonds are sovereign states, Chinese banks and, as a curiosity, among private individuals we find Fanni Mae which then securitizes them (a US financial institution infamous for its role in the subprime mortgage crisis, ed). The ICMA, i.e. theInternational capital market association, is trying to bring some order and in 2018 proposed to introduce an external certification but, at least for now, it is not mandatory and Chinese banks don’t use it ”. There is not only the “E” representing the environment. In “S” that defines the social confusion is, if possible, even greater then points out the teacher.

The European Union, the global vanguard of the sector, is trying to regulate the matter but for now the picture remains rather chaotic. “Suffice it to say that according to a recent study, explains Del Giudice, two out of three products sold as sustainable have no real impact on combating climate change”. The phenomenon of greenwashing (i.e. green cleaning, which takes place by attributing sustainability licenses that in reality do not have) is an increasingly widespread practice even among large companies and financial giants.

What is certain is that i products labeled Esg increase and they do it fast. Even using the narrowest definition, the increase is tenfold in five years. Governments are pushing in this direction and directly contribute to placing on the market products with restrictions on the allocation of funds to sustainable projects. The “Esg” label sells, a bit like the “Bio” on food. And with zero rates and meager interests offered even from risky assets, the asset management industry rode the wave by expanding the range of financial products to customers. The yields are on average lower than those of normal bonds but, at least, something is done for the environment and for society. It is not always entirely obvious that this is true. In Europe every year between 6 and 8% of managed assets It “migrates” to ETF Esg, ie financial products that replicate the composition of indices that include only securities deemed sustainable.

Last September the Bank for International Settlements (Bri), a kind of central bank of central banks, has issued a warning. Many of these products show prices inflated compared to their actual value thus envisaging a “bubble” condition. “The most experienced operators in the sector have already started shorting (selling the securities on the short market, borrowing them with the commitment to return them at a certain maturity, a method to profit from any fall in prices, ed) some Esg products so they found an overvaluation, ”he notes Of the Judge. From here to draw comprehensive conclusions on the situation of the sector, however, there is some.

The BRI went so far as to compare the situation of ESG products to that of notorious MBS titles protagonists of the subprime mortgage crisis of 2008. But, all in all, the Bank of Settlements, which is primarily concerned with the stability of the banking system, is rather calm. Prices may fall but the damage will be paid mainly by savers. Just 1% of the bonds held by European banks and US insurance is classified Esg. In the case of US pension funds, this is around 4%. These data, specifies the BRI, these data underestimate the real exposure that also occurs indirectly through shares of companies and shares in private equity, but the situation is not such as to arouse excessive fears at the moment for the stability of the financial system.

Finally, a more comprehensive consideration. There is a tendency to think that companies that follow the ESG criteria tend to offer better returns to their shareholders and creditors. Managers use ESG financial products as a tool to mitigate the overall risk of a portfolio, deeming them safer than ordinary ones. A study by economists Aswath Damodaran and Bradford Cornell however, he resizes these assumptions by stating that there is no precise evidence to this effect. More generally, a certain disillusionment emerges from the research regarding the correspondence between value generation and responsibility. “Businesses will no longer become responsible thanks to the introduction of ESG criteria,” the study reads. The value, the two economists explain, is, as is well known, given by the expected cash flows over time parameterised for the level of risk. There is a favorable scenario in which i consumers prefer sustainability and they choose the products of ESG companies allowing them to conquer market shares and increase revenues.

These companies in perspective reduce the possibility of scandals and / or environmental disasters and therefore the overall risk of the investment. However, there is also one adverse scenario where consumers they choose products that cost less, favoring the price over sustainability and therefore “punishing” the companies that choose the “good” way. The conclusions of the research read “The possibility of earning with ESG products has made consultants, bankers, fund managers cheerleader of these products“. According to the two authors, the mechanism works better “on the contrary”. That is, companies that are committed to sustainability are not particularly rewarded by the market. However, the “bad” companies, when their nature comes to light, unequivocally suffer a penalty.

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