Sustainability scrutiny in the financial markets

Environmental, Social, and Governance (ESG) measurement, Corporate Social Responsibility (CSR) activities, and Socially Responsible Investing (SRI) are increasingly important considerations to manage growth and climate risks in the capital markets. From the Financial Stability Board of the Bank of England to recent pronouncements by Federal Reserve Chairman Powell, warnings of climate change risks to the financial system are driving voluntary disclosure policies and green/sustainable bond issuance frameworks. More than one-quarter of the $88 trillion of assets under management globally are now said to be invested in accordance with ESG principles; 1% of the 100 trillion bond market is issued as green bonds; and $3.8 trillion of outstanding US munibonds are being screened for ESG risks. While there is growing evidence of an association between ESG and CSR activities on security and bond pricing, comparatively little is known about the channels through which ESG – or its constituent components - may affect asset prices.  Despite these uncertainties and lack of benchmarking, investors are starting to view ESG data as becoming more important than credit ratings.  A ‘canary in the coalmine’ for future risk in the financial system and its constituents?  The argument that investment policies should emphasize these financial asset classes is closely tied to fiduciary responsibilities of performance risk. This research explores the impact of water risk – as a proxy for climate impact - on corporate share price premiums and financial performance of global indexes, and the impact of green investment intent and corporate ESG disclosure on bond yield spread (relative to 10-year treasury notes).

• climate action
• Peter Adriaens
• Center for Smart Infrastructure Finance
• Socially responsible investing
• School for Environment and Sustainability
• corporate social responsibility