Social issues are becoming more prominent a risk for ESG investors, regulators and others, according to a new report released Wednesday by Sustainable Fitch, an ESG research firm.
The report, ESG Credit Trends 2022, also predicts a stronger nexus between environmental and social issues as ESG integration progresses, along with disclosures and data.
"How these issues evolve in 2022 may reveal intensifying transmission mechanisms of ESG risks into potential credit risks," Marina Petroleka, global head of ESG research for Sustainable Fitch in London, said in the report.
Sustainable Fitch expects to see more sustainability and sustainability-linked debt issued in 2022 as investors combine climate and social objectives under single mandates. That will be spurred by the EU's draft social taxonomy being released in 2022 and a corporate sustainability reporting directive under development that is likely to include working conditions, DE&I and supply chains, the report said.
The rising importance of social issues to investors could manifest in several ways, including more emphasis on how investment strategies impact financing a low-carbon economy and at-risk populations, and more scrutiny of supply-chain issues, in addition to more issuance of sustainability bonds.
In 2020, issuance of social and sustainability bonds nearly tripled from the previous year to more than $250 billion, mostly driven by government pandemic bonds providing social support to industries and workers affected by shutdowns, the report found. By contrast, the green market bond market grew about 8% in the same period.
Bonds that finance green infrastructure can also be aligned to social objectives, the report noted. While the social bond market has been dominated by governments and related entities to support low-income housing and other social welfare activities, some portion of sustainability bonds are increasingly being used by corporates to address socially inclusive activities. Examples include bonds from Toyota Motor Corp., Pfizer Inc. and Kellogg Co. targeting disability, health vulnerability and food insecurity, respectively.
"We expect to see growth in (sustainability-linked bonds) with a combination of green and social targets for issuers that lack the dedicated assets necessary for a use-of-proceeds bond," the report said, along with a continued focus on diversity by investors and other stakeholders.
