Investors, regulators and stakeholders in capital markets are paying increasing attention to social issues within the ESG construct and this theme will rise in prominence over 2022, according to the latest Sustainable Fitch ESG credit report.
The report said it “expects to see a rising level of issuance of sustainability and sustainability-linked debt as investors combine climate and social objectives under single mandates.
The release of the EU’s draft Social Taxonomy over 2022 will reflect a growing demand to consider ‘S’ in ESG integration and evaluation and a need for guidance on how to capture and address wide ranging social issues from employment to diversity to human rights.”
Marina Petroleka, global head of ESG research, Sustainable Fitch, said, “Our ESG credit trends for 2022 emphasise the nexus between social and environmental issues, which are becoming more prominent for issuers, investors, regulators and stakeholders,”
She added, “How these issues evolve in 2022 may reveal intensifying transmission mechanisms of ESG risks into potential credit risks.”
Figures from Bloomberg New Energy Finance show that total volumes of sustainable debt issuance last year exceeded $4trillion, more than double 2020’s end of year value.
Social and sustainability bonds, which finance social and community-based projects in full or combined with green objectives, also rose to new heights in 2021, reaching nearly $400 billion in combined issuance.
However, as the Fitch report noted, it is difficult to assess the impact social issues have on issuers’ financial performance because there is a lack of consistent and numerical data.
In fact a recent report by BNP Paribas showed that over half of institutional investors believed the social components being the most difficult to assess, up from 41% in 2017.
Change is underway with the Fitch report pointing to the Corporate Sustainability Reporting Directive (CSRD) and the EU Social Taxonomy.
The CSRD will impose mandatory ESG reporting on almost 50,000 large companies operating in the EU. This is a significant jump from the 10,000 companies subject to the current Non-Financial Reporting Directive, which the CSRD will replace.
Social reporting under the CSRD is likely to include working conditions, Diversity, Equity and Inclusion (DE&I) and supply chains.
The addition of a social framework to the EU taxonomy, expected in the next year, will also provide guidance on the private sector’s contribution to socially sustainable outcomes and support more issuance of corporate bonds with social targets or use of proceeds, according to Fitch.
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