Should finance brace itself for a $3 trillion tsunami of green bonds?
Gartner's Melanie O’Brien predicts that 30% of total debt capital markets funding will be directed towards net zero initiatives by 2026
The majority of public companies will update their investment methodologies to include sustainability metrics as a key part of their return on investment (ROI) analysis by 2026, Net Zero Investor was told.
In fact, the shift from viewing sustainability solely as a source of risk management to a new driver of returns will be transformative for many companies, according to a leading finance analyst.
Many organizations have evolved from a purely risk-oriented approach to environmental, social and governance (ESG) concerns and have begun to optimize their programs to burnish their reputation and actively attract customers, investors and talent, said Melanie O’Brien, VP analyst, research, in the finance practice at technological research and consulting giant Gartner.
The next stage in this evolution is to drive sustainability transformation by making ROI a key focus of their net zero strategies, the group stated.
“Many CFOs have already experienced positive returns from placing an emphasis on sustainability and through small-scale, green capital investments,” explained O'Brien.
She made the bold statement that “60% of public companies will have updated their investment methodologies to include non-financial information related to sustainability by 2026, which will facilitate longer-term and transformative sustainability investments.”
Embracing sustainability as a driver of returns
O’Brien said that traditional investment methodologies often overlook the value of nonfinancial and intangible benefits when considering investment returns.
Progressive organizations that are embracing sustainability as a driver of returns have begun to update their investment criteria in a similar fashion to how leading organizations assess the nontangible benefits of their digital investments.
Organizations that can account for the enterprise value of their sustainable investments, connect them to broader corporate strategy and show clear benefits to the organization will likely be seen favourably by investors and other stakeholders.
One way this is already being made tangible is in the debt capital markets, as organizations partially mitigate the challenges of a higher interest rate environment by issuing green, net zero or ESG-linked bonds, which receive more favourable discount rates than their conventional equivalents.
Adjusting investment methodologies
To further accomplish financially aligned sustainability goals, O'Brien expects CFOs to adjust their investment methodologies in key areas, including assessing their geographic portfolios for opportunities to divest businesses that conflict with stated net zero objectives.
She further predicts that 30% of multinational organizations will streamline geographies and subsidiaries due to sustainability regulatory requirements by 2026.
Also, ensuring that investments which demonstrate clear non-financial but significant benefit to the organization are considered equal to projects with financial returns is key, O'Brien argued.
Moreover, she also pushes for tolerating a longer cash back period of six-to-10 years instead of the current two-to-three year period, aligned with strategic objectives and potentially by balancing longer term sustainability investments with additional more aggressive short-term investments.
Finally, companies should leverage current frameworks and accounting models that have been established to support the growth in organizations calculating the value on intangibles, O'Brien concluded.