SUSTAINABLE and RESILIENT FINANCE OECD Business and Finance Outlook 2020 SUSTAINABLE and RESILIENT FINANCE
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Finance Outlook 2020 SUSTAINABLE AND SUSTAINABLE RESILIENT FINANCE BusinessOECD and SUSTAINABLE AND RESILIENT FINANCE OECD Business and Finance Outlook 2020 OECD Business and Finance Outlook 2020 SUSTAINABLE AND RESILIENT FINANCE This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of OECD member countries. This document, as well as any data and map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. Please cite this publication as: OECD (2020), OECD Business and Finance Outlook 2020: Sustainable and Resilient Finance, OECD Publishing, Paris, https://doi.org/10.1787/eb61fd29-en. ISBN 978-92-64-38456-9 (print) ISBN 978-92-64-54453-6 (pdf) OECD Business and Finance Outlook ISSN 2617-2569 (print) ISSN 2617-2577 (online) Photo credits: Cover © JM_Image Factory/Gettyimages.com. Corrigenda to publications may be found on line at: www.oecd.org/about/publishing/corrigenda.htm. © OECD 2020 The use of this work, whether digital or print, is governed by the Terms and Conditions to be found at http://www.oecd.org/termsandconditions. 3 Foreword This is the sixth edition of the OECD Business and Finance Outlook, an annual publication that presents unique data and analysis on the trends, both positive and negative, that are shaping tomorrow’s world of business, finance and investment. The COVID-19 pandemic has highlighted an urgent need to consider resilience in finance, both in the financial system itself and in the role played by capital and investors in making economic and social systems more dynamic and able to withstand external shocks. Using analysis from a wide range of perspectives, this year’s edition focuses on the environmental, social and governance (ESG) factors that are rapidly becoming a part of mainstream finance. It evaluates current ESG practices, and identifies priorities and actions to better align investments with sustainable, long-term value – in particular, the need for more consistent, comparable and verifiable data on ESG performance. The publication was prepared under the supervision of Antonio Gomes and Mats Isaksson, based on contributions from Robert Patalano and Riccardo Boffo (Chapter 1), Robert Patalano and Catriona Marshall (Chapter 2), Mats Isaksson (Chapter 3), Mamiko Yoko-Arai, Elsa Favre-Baron and Yael Regev (Chapter 4), Barbara Bijelic and Denis Bravenec (Chapter 5), Hans Christiansen and Sara Sultan (Chapter 6), and Raffaele Della Croce (Chapter 7). The following colleagues from the Directorate for Financial and Enterprise provided comments: Pablo Antolin, Winfrid Blaschke, Timothy Bishop, Tihana Bule, Jingjing Chen, Thomas Dannequin, Pamela Duffin, Oliver Garrett-Jones, Tyler Gillard, Shivani Kannabhiran, Fatos Koc, André Laboul, Flore-Anne Messy, Gary Mills, and Cristina Tebar-Less. The chapters also benefited from useful comments from the OECD Economics Department, Environment Directorate, Directorate for Public Governance, Directorate for Science, Technology and Innovation, and Trade and Agriculture Directorate. OECD BUSINESS AND FINANCE OUTLOOK 2020 © OECD 2020 5 Table of contents Foreword 3 Editorial 9 Abbreviations and acronyms 11 Executive summary 15 1. Environmental, social and governance (ESG) investing 17 1.1. Introduction 18 1.2. Dimensions of ESG investing and the financial ecosystem 20 1.3. ESG rating outputs and methodological challenges 26 1.4. Critique and empirical assessment 29 1.5. Policy considerations and conclusions 34 References 37 Notes 38 2. Making sense of the environmental pillar in ESG investing 41 2.1. Introduction 42 2.2. Putting the E pillar in context: greening the financial system 43 2.3. In practice: E scoring and performance 47 2.4. Supporting low-carbon transition and resilience into an economic recovery 63 References 65 Notes 66 3. Corporate governance and the management of ESG risks 69 3.1. The corporation, risk management and resilience 70 3.2. The nature and occurrence of corporate ESG risks 71 3.3. The G20/OECD Principles of Corporate Governance, risk management and ESG considerations 73 3.4. Evolving practices and challenges in managing ESG risks 75 3.5. Challenges and evolving practices with respect to recognition and disclosure of ESG risks 83 References 90 Notes 92 4. Integrating ESG factors in the investment decision-making process of institutional investors 95 4.1. Introduction 96 OECD BUSINESS AND FINANCE OUTLOOK 2020 © OECD 2020 6 4.2. Integrating ESG factors in the investment decision-making process 96 4.3. Strategies used for the integration of ESG criteria 102 4.4. Methods and tools to evaluate ESG criteria 106 4.5. Additional data and information that is currently missing 110 4.6. Conclusion 111 References 112 Notes 114 5. Promoting responsible lending in the banking sector: The next frontier for sustainable finance 119 5.1. Introduction 120 5.2. What is driving ESG in corporate lending transactions? 121 5.3. Current practices in ESG integration and due diligence in corporate lending 123 5.4. Select policy initiatives to enhance ESG in corporate lending 133 5.5. Conclusions 138 References 139 Annex 5.A. Questionnaire on current practices in E&S bank policies on corporate lending 144 Notes 145 6. State-owned enterprises, sustainable finance and resilience 147 6.1. The quest for environmental, social and governance (ESG) performance 149 6.2. ESG performance by SOEs: a snapshot of the evidence 153 6.3. Integrating sustainability considerations into state ownership policy 155 6.4. But SOEs are not just a force for good: Challenges arising from state ownership 158 6.5. State ownership, sustainability and resilience after the COVID-19 crisis 162 References 166 Notes 167 7. ESG and institutional investment in infrastructure 169 7.1. Introduction 170 7.2. The relevance of ESG factors and institutional capital in sustainable and quality infrastructure investment 171 7.3. ESG and institutional investment in infrastructure 173 7.4. Frameworks and tools for ESG analysis for infrastructure 177 7.5. Institutional investment in green investment and low-carbon infrastructure 181 7.6. Conclusions 186 References 188 Annex 7.A. Standards and frameworks related to infrastructure and ESG factors 190 Notes 190 FIGURES Figure 1.1. Share of market coverage by ESG scoring companies by region, 2012-2019 20 Figure 1.2. Share of market capitalisation by ESG scoring companies by region, 2019 21 Figure 1.3. The structure of the ESG financial ecosystem 23 Figure 1.4. Correlation of S&P 500 ESG ratings by different ESG score providers, 2019 27 Figure 1.5. Selected ESG ratings and issuer credit ratings by sector in the United States, 2019 27 Figure 1.6. Comparison of company ESG scores by different ESG score providers, 2019 28 Figure 1.7. Comparison of ESG and non-ESG MSCI indices by risk-adjusted performance 31 Figure 1.8. ESG top and bottom quintile Alpha by different providers in the United States, 2009-2019 32 Figure 1.9. Distribution of the performance of 300 sustainable funds (5 stars), 2019 33 OECD BUSINESS AND FINANCE OUTLOOK 2020 © OECD 2020 7 Figure 1.10. Distribution of the performance of 300 low sustainability funds (1 and 2 stars), 2019 33 Figure 1.11. Comparison of ESG and non-ESG MSCI indices since the COVID-19 pandemic 34 Figure 2.1. Overall ESG ratings and E scores do not align for all ESG rating providers 49 Figure 2.2. For some E score providers, high-E scores correlate with higher CO2 emissions 50 Figure 2.3. Rating providers that exhibit an alignment between high CO2 emissions and high-E scores, see both higher scope 1 and scope 2 CO2 emissions 51 Figure 2.4. For one provider, higher E-scoring companies exhibit higher revenue adjusted CO2 emissions 52 Figure 2.5. For some E score providers, high E scores correlate with higher waste produced and water withdrawals 53 Figure 2.6. For some E score providers, high E scores correlate with lower non-renewable energy use 53 Figure 2.7. Despite homogeneity in the naming of metric categories, the number of metrics, weighting, and supplementary analysis differ significantly 54 Figure 2.8. Environmental metrics can be grouped as falling somewhere along the input-output-outcome- process chain 57 Figure 2.9. Sovereign green bond issuance 62 Figure 5.1. Location of E&S due diligence teams of banks interviewed 128 Figure 5.2. Focus areas of policy and regulation related to sustainability in the banking sector 134 Figure 6.1. Types of information included in aggregate ownership reporting (number of countries) 151 Figure 6.2. Average ESG ratings by main sectors 154 Figure 6.3. Average ESG ratings for SOEs, by geographic region 154 Figure 6.4. How countries have promoted responsible business in the SOE sector, 2013-18 155 Figure 6.5. Share of government/SOE ownership in energy investment (percent, 2015-2019) 159 Figure 6.6. Main elements of the Guidelines on Anti-Corruption and Integrity in State-Owned Enterprises 162 Figure 7.1. Private capital assets under management by asset class, 2009 - 2019 172 Figure 7.2. Classification of risks linked to infrastructure assets 174 Figure 7.3. Example of ESG risk analysis for infrastructure > 175 Figure 7.4. Infrastructure investment value chain 179 Figure 7.5. Global growth of sustainable investing strategies, 2016–2018 181 Figure 7.6. Infrastructure investment by sector, 2017 185 TABLES Table 2.1.