Investors Are Not That Picky After All, They Prefer Companies That Respect Human Rights

Markets are hungry for green and sustainable investments. Companies that respect the environment, are socially responsible, and are managed according to all the rules from corporate textbooks can today be assured that they will find investors to support them, either through bonds or through funds.

It is even sufficient for them to meet just one or two of the three mentioned standards to be targeted by those who will claim to be ESG (environmental, social and governance) investors. There is money available, and experts say there is no shortage even in today’s geopolitical circumstances; the only problem is the lack of quality investments.

The Number of Reports is Also Declining

It is easy to adorn oneself with the feathers of social and sustainable, but it is difficult to prove it. However, that is not even that important. It is not that these investors are too picky – even minimal interventions in business are sufficient for the label ‘ESG approved’, which means that any company that installs solar panels or guarantees in writing that it respects human rights can count on investor interest. But it does raise questions – it does.

– Are the social and governance aspects unfairly sidelined? I don’t know, but the environmental aspect is currently unstoppable. When we talk about the governance aspect, we should not neglect that standard either, as we recently had a public situation related to governance – emphasized Ante Žigman, the chairman of the Management Board of the regulatory agency Hanfa, at the recently held conference ‘Sustainable Financing: Mutual Expectations of the Financial and Real Sectors’ organized by the Croatian Banking Association and EY, with the support of the Croatian Employers’ Association.

Žigman mentioned four main areas in which the financial system should support the transition of the economy towards sustainability through its activities. These four areas are: financing sustainable transition, inclusiveness, resilience, and the contribution of the financial sector to global ambitions.

– However, it is clear that ESG reporting for entrepreneurs means a significant adjustment. Namely, the regulatory framework has been reduced to the Accounting Act, according to which all companies of public interest and companies with more than 500 employees are obliged to publish non-financial reports. Obligors will have to adjust their reporting processes, and those who have not published non-financial reports so far will have to establish a completely new reporting process – said Žigman, highlighting that in 2020, only 14 companies voluntarily published reports, and last year only five.

It is a pity, as the capital market would surely recognize ESG efforts.

– Only funds that have an ESG component are those that are growing. Almost all funds approved by Hanfa in the last two years have had the label ‘sustainable’. We currently have two corporate bonds that have a green element, committing to reduce CO2 emissions, apply better standards towards employees, and so on. If they do not fulfill this, they will have to pay a higher interest rate. Now that is already very concrete – said Žigman at that time.

Exclusion Criteria

Among the funds that invest within the ESG framework is, for example, Erste Green Invest, a thematic fund focused on companies whose operations are related to environmental and climate protection. The fund focuses on areas of energy, water, recycling, transformation, and adaptation to climate change.

Exclusion criteria include nuclear energy, the oil and gas industry, coal, green genetic engineering, animal testing, food speculation, child labor, the arms and weapons industry, tobacco, gambling, pornography and prostitution, and violations of human and labor rights.

Raiffeisen Sustainable Solid is a fund of Raiffeisenbank Croatia that is linked to the main Austrian fund of the same name. The focus of the fund is on sustainability, and what is unprecedented at least in Croatia is their announcement that they do not intend to finance coal industries after 2030.

This includes all companies that are active in coal mining, coal processing, coal combustion (for the production of electricity or thermal energy), coal transportation, and other infrastructure. In the process of sustainable investments, investment in coal production is not allowed. However, there are other negative criteria as well.

– Some of the negative criteria for financing include violations of human rights, violations of workers’ rights, the use of children as labor, corruption, falsification of financial reports, production and trade of nuclear weapons, production of military equipment and trade in it, production and processing of coal, exploitation of fossil fuels, the death penalty, non-cooperation in preventing money laundering, violations of media freedom, very large budgets for military equipment, corruption, possession of nuclear weapons, and similar – states the prospectus of that fund.

Green Portfolios

The Erste Asset Management fund is also dedicated to investing while considering environmental, social, and governance risks (ESG factors) and will focus on companies that contribute to climate protection and adaptation to climate change, waste reduction, and ecosystem protection through their products or services.

In addition to funds that finance companies, companies can also issue their own green bonds. Instead of waiting for investors to come on their own with funds, companies, as well as state and public enterprises, and even states themselves, issue their own green bonds to finance their transition to a low-carbon economy or environmentally friendly assets and projects.

The offer of green bonds is an important way for investors from the public and private sectors to raise the necessary capital. However, only two companies in Croatia have recognized this.

Recently, the European Bank for Reconstruction and Development invested 60 million euros in sustainability bonds issued by Raiffeisenbank Austria, the Croatian subsidiary of Raiffeisen Bank International AG, participating in a private placement of 200 million euros.

RBA has become the first bank in Croatia this year to establish a sustainable bond framework, enabling it to issue sustainable and green bonds in accordance with the guidelines of the International Capital Market Association for sustainable bonds. The new issuance is the first sustainability bond ever issued by a bank in Croatia.

– RBA’s investment in bonds serves two strategic goals of the EBRD in Croatia – strengthening local capital markets and developing a green economy. The share of EBRD investments in green projects in Croatia has more than doubled in the last four years, to over 60 percent of annual investment. The bank’s green portfolio in Croatia now ranges from wind farms and insulation to sustainability financing instruments – stated Victoria Zinchuk, EBRD Director for Croatia.

Issuance of Bonds

In addition to that bank, green bonds were reportedly to be issued by some public and private energy companies, and there was speculation about names from other industries, but in the end, the first corporate green bond was issued this summer by the company Meritus poslovanje or M+ Grupa, which allocated bonds worth 40 million euros, or 300 million kuna, in a public call for subscriptions related to sustainable business to qualified investors in July, which was also the targeted issuance amount.

In that issuance of securities for the Croatian capital market, M+ Grupa committed to reduce its carbon emissions by 25 percent and increase the representation of women in management teams to 51 percent. If the set sustainability goals are not met, investors will receive an additional 0.75 percentage points along with an interest rate of 4.25 percent.

The main goal of financing through the issuance of green bonds is to raise funds for investments in projects that the issuer intends to implement to make its business socially responsible. The company Meritus intends to invest these funds in reducing greenhouse gas emissions by at least 15 percent and increasing the representation of women in the management teams of M+ Grupa to at least 47 percent by the end of 2024.

Room for ‘Greenwashing’

The entire ESG hype does not come without challenges, as the combination of increasing demand for ESG investments and the rapid development of the market creates a large space for greenwashing. This term is inspired by the idea of whitewashing – adding fresh white paint to the outer surface to cover up all the flaws and create a false impression of something new or cleaner.

In other words, something undesirable or incorrect is attempted to be presented as legitimate or acceptable, most often by concealing or falsifying. In short, claims that some ESG framework is being respected can be manipulated quite easily, all with the aim of attracting capital that is eager for green and willing to look the other way if the shades of green are a little darker. Thus, it is difficult to say that all such investments are a guarantee of what they represent.

Otherwise, investing in ESG is the fastest-growing asset class in the world, and thousands of new funds that invest exclusively in sustainable companies open every year. Investors have become initiators of change, followed by governments and large financial institutions.

Indeed, there is already a large number of studies showing that companies that respect ESG standards have better returns and lower risk in the long term. By 2025, environmental, social, and governance assets in the fund industry, i.e., ESG funds could exceed a value of 50 billion dollars, reaching a third of the total global assets managed by funds, as suggested by data from the Bloomberg Intelligence (BI) ESG 2021 Midyear Outlook report.