Growing concern over climate change and social issues are driving an unprecedented change in the way that money is invested today. According to a survey conducted by Morgan Stanley Institute for Sustainable Investing, eighty percent of individual investors, among them Millennials - the new generation of investors - are interested in investing their money not just for financial return, but also for positive social and/or environmental impact. Asset managers, pension funds, and other institutional investors are increasingly developing their capacities to serve this growing market.

Increased scrutiny on ESG risks

Green and other thematic bonds, which require issuers to disclose how bond proceeds are used and what the expected environmental and social impact of projects are, have played an important role in creating awareness and appetite in investors for higher transparency standards and more disclosure on sustainability-related issues.

The Sustainable Development Goals (SDGs) have also acted as catalysts by providing investors and other market participants with a framework to assess investments based on risk and contribution to society.

Moreover, asset owners such as pension funds are recognizing that environmental, social and governance (ESG) issues can have an influence on the risk-return profile of investment portfolios. They are increasingly using ESG information and developing ESG risk assessment methodologies and portfolio selection frameworks to enhance their credit risk analysis and make better informed investment decisions.

Credit rating agencies such as Fitch, Moody’s, and S&P Global Ratings are also making ESG factors more explicit in their credit assessment methodologies.

The focus on ESG is influencing the way sovereign issuers are engaging with investors. Ministries of finance and public debt managers are realizing the importance of incorporating ESG issues and progress on SDGs and Paris Agreement commitments into their investor relations functions.

Fostering dialogue between investors and issuers

The rising interest in this topic was evident at a roundtable organized by the World Bank Treasury in partnership with the Government Pension Investment Fund of Japan (GPIF) and APG, the Dutch pension fund, to promote dialogue between institutional investors and sovereign bond issuers on ESG risks and opportunities earlier this year. Seventeen institutional investors, including asset owners and asset managers from Asia, Europe and the US discussed their interest in broader proactive engagement with sovereign issuers, and shared approaches, perspectives and expectations with peers. Four sovereign issuers presented the ESG attributes of their government bond programs, national priorities and progress towards global commitments.