Goldman joins banks exploring green equity as new ESG asset

The head of sustainable finance at Goldman Sachs Group Inc. says the Wall Street firm is now experimenting with green equity, adding its weight to a new category of climate-friendly assets.

“We are seeing movement, just in terms of actual labeled product,” John Goldstein, who runs Goldman’s sustainable finance group, said in an interview. “When and where and how would we get to actual green equity, I think we’ll see.”

Thirteen years after the world got its first green bond, some corners of the financial industry are now working on creating a market for green stocks that meet measurable climate metrics. The new asset class would give investors chasing environmental, social and governance goals a new place to put their money, and potentially direct some capital flows away from debt markets.

Goldman recently worked on a private equity placement that involved getting a window manufacturer the necessary designation to issue green shares, which “was an important step in that direction,” Goldstein said.

“I think it’s an open question of how this is going to emerge, but I think that is why that made a really good early case,” he said.

Green equity appears to have made its debut in Sweden, where one of the country’s biggest banks says it was the first to shepherd a deal to market. Adapting procedures for green bond issuance to accommodate share sales, Swedbank has now done three such deals. Its chief executive, Jens Henriksson, says the bank moved ahead on its own in the absence of global standards.

“You need to take steps forward,” Henriksson said. “We think it was a good solution and we think it worked well. But of course it will have its weaknesses and competition will bring out the strongest here.”

Swedbank’s green equity clients:

• Sweden’s K2A got the first green label back in May 2020. The real estate company, which makes apartments out of wood, has since seen its shares rise about 70%. That compares with a gain of around 45% for the OMX Stockholm 30 Index.
• Swedish property company Platzer was the second stock to go green. Since getting the designation in November, its shares have gone up about 16%, largely in line with the index.
• On May 6, WastBygg, a Swedish construction company, became the third Swedbank client to get a green label. Its shares have since slid around 7%, compared with a roughly 2% drop in the index.

Other banks in the Nordic region — where a much larger chunk of total bond issuance is green than in the rest of western Europe or the U.S. — are also working on designing green equity programs.

SEB, the Swedish bank that helped usher in the first-ever green bond back in 2008, is “quite” far into talks to develop a framework, according to Christopher Flensborg, head of climate and sustainable finance at the Stockholm-based lender.

“We are looking into this, and I’m sure everybody else is looking into it as well,” he said. “We are quite hopeful of finding a model which is going to be scalable and which can be replicated. This is about to kick off, and to be frank, applause to Swedbank for taking the move and working with their clients.”

COMPLEX ORGANIZATIONS

SEB has been trying to resolve issues tied to larger, complex corporations. Part of the challenge lies in figuring out how to prevent a green stamp from limiting a company’s options to buy and transform dirtier assets, Flensborg said. Another is incorporating polluting companies to encourage their transition. He says a possible solution is to come up with a color palette of designations, much like credit ratings.

Once such teething problems are sorted out, Flensborg says he sees the market for green equity “booming.” That’s because the global transition to a green economy means companies will need to prove they’re on the right side of history if they’re to attract investors, he said.

“If they have labeled investments, it’s easier for them to communicate to their stakeholders what they’re doing and why they’re doing it,” he said. “If it’s unlabeled, it’s going to be difficult to box it.”

Jacob Michaelsen, the head of sustainable finance advisory at Nordea Bank, says green shares will function a bit like sustainability-linked bonds, whereby funds raised are channeled into general operations. That makes them less straightforward than green bonds, which fund specific projects.

The Nordic region’s biggest bank has also been thinking about how to label shares green “for a good while now” because companies are asking for it, Michaelsen said. But Nordea hasn’t yet settled on an approach. Most businesses pursue a variety of activities, so the challenge is figuring out “how do they go about saying they are green equity” in their entirety.

DEBT DOMINATES

The ESG market has been dominated by fixed-income products since SEB underwrote the World Bank’s first green bond more than a decade ago. This year, ESG debt issuance may hit $1 trillion, according to Bloomberg Intelligence. Investors are also pouring money into ESG exchange-traded funds, with inflows climbing for a 49th straight week.

Meanwhile, regulatory scrutiny is growing. The Securities and Exchange Commission is looking at ESG-labeled ETFs now, and says it won’t tolerate weak documentation and inconsistent application of criteria.

Michaelsen at Nordea says ESG ratings by third parties or the European Union’s new taxonomy on sustainable activities may provide some guidance on how to go about identifying green companies and labeling their shares.

“It’s clearly something that we — and I would suspect most of our peers — are spending more and more time on,” he said.

At SEB, Flensborg says banks will probably introduce a variety of different frameworks, as was the case with the green bond market. In time, standardization will follow, in part because of regulatory pressure.

“We will eventually need that,” he said. “But before you have that, you will need to create something.”

Goldman’s Goldstein says the broader political environment means demand for ESG assets is likely to pick up.

“If we look back at 2020, which was a pretty remarkable year for sustainable investing in ESG, all of that really happened with U.S. federal policy as a fairly pronounced headwind,” he said. Now, the U.S. “is a tailwind.”

[More: Hot sector of ESG investing is cooling fast]

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