ESG investing: The U.S. will ‘run its own race in 2022,’ SMBC Head of Sustainable Finance says

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Aaron Franklin, Head of Sustainable Finance at SMBC, joins Yahoo Finance Live to discuss the outlook and prospects for Environmental, Social, and Governance (ESG) investing, which emphasizes investing into socially conscious and sustainability-minded efforts, heading into 2022.

Video Transcript

Well, the ESG trends has certainly been gaining steam here over the past two years in the United States. And companies are trying to integrate it into all kinds of operations, including how they finance operations. Aaron Franklin is joining us now. He’s Head of Sustainable Finance at SMBC. Aaron, thanks for being here. So first of all, just give us sort of a big picture view of what sustainable finance means right now. I imagine your job has evolved quite a bit over the past few years. So what does it entail? How should we think about what sustainable finance is?

AARON FRANKLIN: Sure. Thanks for having me. The way to think about it is corporate finance transactions– bonds, loans– where you incorporate a connection between the financing and sustainability, this generally has meant one of two things. First, is that you’re talking about how the money’s going to be spent. And this is where you have things like green bonds. And the other more recently developing innovation is that the financing costs actually shift depending on how the issuer or borrower does on sustainability-related metrics. That’s the kind of corporate finance version of sustainable finance as opposed to the kind of retail, asset manager side of sustainable investing.

And what is the pipeline of deals looking like into next year?

AARON FRANKLIN: Well, it is– it’s going to be another busy year. 2021 was a huge growth year across sectors, across geographies, different products being innervated. We spend a lot of time with our clients trying to come to grips with how this market works dealing with pressure from various stakeholders to show strong ESG performance.

So we’re going to see a lot of folks who started paying attention to this in the past couple of years who have developed a strategy, developed the right disclosure and are now going to be ready to come to market. We’ll see folks in all sorts of different sectors, probably some more harder to abate sectors, you know, sectors where it’s not just good performers but those who are trying to move in the right direction, even if they have a bigger ESG impact.

And Aaron do you feel like– when you’re talking about things like green bonds, is there– there’s always the question of accountability, right? And sort of real, realness for lack of a better word, of various ESG efforts. Because of the financial linkage here, is this an area where there is real accountability more so than just sort of making promises in a company’s annual letter, for example?

AARON FRANKLIN: Well, that’s a great question. I think this– this year has seen tremendous improvements around the way that the market understands accountability, verification, the procedural elements of this. But it’s important to note also that what’s driving ESG improvements, climate transition, it’s a million different things. Stakeholders from equity investors, employees, regulators are all pushing companies to really change their operations, invest have a plan for how they’re going to deal with the changing world.

You know, finances is a way to communicate that to show real commitment around that. But it’s not financing that’s pushing everybody to do this for, you know, part of it and a part of emphasizing that. But, we wouldn’t want to go so far as to say that it’s driving the whole thing.

And Aaron, is Europe ahead of the US in terms of what you do?

AARON FRANKLIN: Well, it is– it’s not a good question. And it’s a very common narrative to point to Europe with their green spending plans, targets, their taxonomy of what business activities can be called green. But I’d frame it a bit differently, that the United States is really poised to go on its own journey and run its own race in 2022. It’s a lot less of a policy-driven market in the United States and a lot more driven by what asset managers need to see, what banks need to see and how companies can differentiate themselves. That’s distinguished from the European approach of having a bit more of a top-down, did this comply with the definition of sustainability.

Aaron, thanks for being here. Obviously, ESG are going to be a big focus. We’ll see what those numbers end up being in 2022 after a big 2021. Aaron Franklin is Head of Sustainable Finance at SMBC. Thank you.