Some industry participants think denying debt to companies could seriously move the needle when it comes to meeting the requirements of the Paris Agreement.
By the end of next year, €266 billion ($309.7 billion) in global corporate debt across 343 bonds issued by 147 companies is due to mature, according to data from University College Dublin's Michael Smurfit Graduate Business School, presented at a webinar Nov. 5. By 2025, €969 billion is due across 2,477 bonds. Just 34 of these bonds are green bonds, the data show. Figures relate only to companies targeted by investor initiative Climate Action 100+, whose partner organizations include Ceres and the Asia Investor Group on Climate Change.
If an investor can target primary capital and affect supply and demand dynamics, "the logic goes that it will have more of an impact in terms of driving up the cost of capital. Companies that find they are struggling to get access to capital or having to pay more for that access, may then start to take action," Ms. Ngo said.
For Mr. Erlandsson, the impact of investors denying debt "could be enormous — and I'm usually a very conservative guy." Although on one hand, Mr. Erlandsson objects to the terminology 'debt denial.'
"The real terminology should be 'stop supplying loans.' Investing in bonds is simply lending to companies. No one is forcing you to do it."
Calvert Research and Management takes a company-by-company and sector approach to investment, "but the cost of capital — the spread that company and that sector should be paying for not (aligning to the Paris standards) or taking that into account in their normal business standards is how we conceptually think about it," said Vishal Khanduja, vice president, lead fixed-income portfolio manager in Boston. Executives may choose to buy only shorter-dated debt or not at all. "It's become a way for us to vote on the company, by not participating in a certain issue," he said.
Calvert had $23.4 billion in assets under management as of June 30.
The concept of denying debt is one that, while nascent right now, could snowball.
"It could have pretty significant (impact) — the market could start pricing it in very slowly, but the moment it gets (to be a) more quantifiable impact on a company, then it can be very quick" in pushing the cost of capital higher, added Brian Ellis, portfolio manager at Calvert, also in Boston.
And coupling debt denial with increased engagement is even more powerful.
"In isolation, where we have seen divestment campaigns in equities, we have seen a modest impact on share prices and cost of debt," said Rory Sullivan, London-based chief technical adviser to the Transition Pathway Initiative, which assesses companies' readiness to transition to a low-carbon economy. "In and of itself, divestment may not be that significant. But when married to corporate engagement, public policy engagement and investors publicly refusing to invest when issuers come to market, the leverage and influence becomes much clearer. The call to 'deny the debt' may not change much, but if it becomes a philosophy beyond how you invest in debt, then it becomes more powerful."