Improving transparency in capital markets

A sustainable world needs sustainable finance.  This requires investors who are willing to accept that sustainable finance is the way to generate long term returns and to grow prosperity for the planet.  The demand for such finance will be huge over the coming years, driven largely by the needs of developing and emerging markets.  Estimates vary, but the IMF reported that these economies must collectively invest at least $1 trillion in energy infrastructure by 2030 and $3 trillion to $6 trillion across all sectors per year by 2050 to mitigate climate change by substantially reducing greenhouse gas emissions. In short, private finance must at least double by 2030, at a time when investable low-carbon infrastructure projects are often in short supply and funding of the fossil fuel industry has soared since the Paris Agreement.

Such demand can only be satisfied first, if private sector investors work in partnership with the public sector and secondly, if they have the right information at the right time to invest their capital in sustainable developments.  Currently such data is fragmented and not standardised. Investors can find it hard to judge accurately the ESG profile of an issuer and the ESG impact of a green or social bond.     

However, this is not just about climate – it’s also about a more inclusive and socially responsible society.  It is about having a real impact not just on the environment (vital though that is), and it is about having a positive impact on society as well.  Sometimes the S and the G of ESG may seem to be subordinated to the needs of the environment, but if we want a more socially inclusive and just society, workplace and community initiatives are just as vital.

To a large degree, all aspects of ESG are investor led – if investors avoid funds, projects and/or companies because of ESG concerns, then consequently capital will be re-allocated to those areas which have the most positive impact on the environment and society.  So, what do investors expect and need, for this reallocation of capital to become effective?  Put simply, they need consistent, accurate, relevant, and timely ESG data.  And the problem is with the proliferation of reporting standards and regulations globally, together with the quality and consistency of ESG data that is available in some markets.  At its simplest, and as a starting point, good corporate governance will now mean open and transparent corporate governance; what was previously only reported to senior management or to boards will now need to be available to all. Investors will need to be reassured that all aspects of a corporate are consistent with ESG principles.  The EU is taking a big step forward here with the finalisation of its Corporate Sustainability Directive which will ensure over time the delivery of consistent and comparable sustainability information. This directive quite rightly puts the responsibility on corporates to disclose extremely detailed information each year. But other global markets are less developed and that puts at risk the sustainable financing needs of developing and emerging markets in particular. 

As a financial market infrastructure, Euroclear has an important role to play in fostering better communication and engagement between the issuers and investors which we serve. We see barriers (particularly in developing economies) to the issuance of sustainable securities such as insufficient local capital market depth and a high cost of accessing international markets.  The cost of debt issuance in these local markets must be reduced and liquidity improved.   In addition, we see that unstructured information on the demand side leads to complexities in making informed investment decisions.  We believe, with our partners Greenomy and Impact Cubed that we can begin to assist neutrally with the flows of the information which investors need.

The threats to our planet and our way of life are very real.  To combat them requires immense investment from us all over the coming years. Companies, through their management and board, are leading the agenda and efforts on ESG.  And the only way in which we will attract investors to commit capital is to disclose increasingly honest and objective data about our activities and our impact on the planet.  Transparency must now be the key foundation stone for us all.

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Lieve Mostrey is Chief Executive Officer of Euroclear group.

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