A rash of allegations of sexual harassment and assaults at UK public schools and universities is rapidly becoming a serious issue for potential investors in the institutions’ private placements.
Meanwhile, a slew of accusations about workplace conditions at the European Investment Bank, and a second tragic death by suicide in seven years, clash with its reputation as a leader in environmental, social and governance (ESG) matters and a pioneer in the socially responsible bond market.
What can the capital markets do about it? Ten years ago, the answer would have been ‘nothing’. Conduct and employment issues like these were simply not a matter for investors, except where the reputational risk was so severe it threatened asset prices.
In that 10 years, sustainable investment funds have grown well over tenfold. Similarly, the canon of ethically themed securities has proliferated from the EIB’s first Climate Awareness Bond in 2007 to all manner of products, including green, social and transition bonds, sustainability-linked loans and bonds, and even green repos, as market participants strive to green the full range of institutions’ investment operations.
Debt investors care much more about where their money goes to than they used to. Thanks to labelled instruments that carry ethical reporting requirements, they are also getting used to being able to check whether issuers are keeping up to scratch.
Typically in the sovereign, supranational and agency bond market, that oversight focusses on how ESG bond issuers use the money investors lend them.
But SSA bond investors should be just as concerned with borrowers’ internal behaviour. This goes right across ESG issues: environmentally sustainable operating practices; a culture aligned with the investors’ ethical standards; and a governance structure that ensures transparency and accountability when things go wrong.
As ethical funds grow in scale, so will the influence they can exert by threatening to divest or withhold participation in future funding exercises.
But if investors have already got to the stage of demanding green repos, so that they can make their portfolios completely ethical, then surely they should do more to ensure the institutions moving their money around operate spotlessly.
Ethical investment is a means of improving corporate culture — something that seems sorely needed across the Street — but it won’t be easy.
Lending to the UK’s public schools and universities is not an especially profitable, large or exciting business. Therefore, the small number of interested investors have outsized influence. By raising pointed questions with issuers, they could make their expectations keenly felt.
But exercising a comparable degree of influence over investment banks and multilateral lenders is a far greater challenge. The EIB, for example, attracted a $10bn order book for its bond issue on Tuesday, indicating it has no problem sourcing investors. Its role as one a founder of the green bond market means it’s likely to remain a staple of any high grade ESG-themed portfolio.
An added drawback is that bond issuers do not get invited to an AGM, limiting the scope for collective protest or questioning. Corporate shareholders can show up and air their grievances, but there is no comparable way for bondholders to voice their opinions. In fixed income, the only way to express a view is by buying and selling.
But there are signs of progress. Barclays’ decision this week to pull out of underwriting a deal funding private prisons in Alabama shows how the importance of ethics in capital markets is growing.
There have also been limited improvements in working practices at investment banks, after complaints by 13 junior bankers at Goldman Sachs about overwork became public in March.
Everyone has a part to play. Asset owners must give asset managers sincerely ethical mandates. Asset managers must advocate boldly and loudly, expressing any ethical concerns to issuers and divesting where appropriate.
Issuers must ensure they apply, with transparency, the same sort of values in house that they claim to be keen to promote in the world through their lending.
The sell-side must become more selective of its customers and the activities it finances. It must also get its own house in order when it comes to how it treats staff.
There’s no point deluding ourselves that the finance industry will become a paragon of virtue overnight. But the growth in ESG finance has shone an uncomfortable light on how those in and around capital markets operate. Now it’s time to address those double standards.