This year Verizon, the American telecoms group, embarked on a $1bn experiment: in February it became the first telecoms company in the US to issue a "green" bond, or a security that raises funds for sustainable business.
You might have thought this exercise would incur some cost for Verizon's treasurers, given that green finance has traditionally been a cumbersome endeavour. Not so. Verizon's $1bn green bond attracted such frenzied investor demand that it was eight times oversubscribed, making it the most popular security Verizon has ever sold. Indeed, funding costs were slightly "cheaper than a brown bond [or normal security]", says Jonathan Fine of Goldman Sachs, an underwriter. That is remarkable.
Just a lucky accident? Perhaps. Verizon benefited from being one of the first such corporate issuers. However, the rest of the market is taking note of this attractive pricing.
"We expect to see more issuers tapping into the green bond market," predicts another underwriter, Andrew Karp of Bank of America Merrill Lynch.
This illustrates a bigger point: 2019 looks as if it will be the year when environmental, social and governance considerations are moving out of a specialised niche into the mainstream. Financiers and chief executives are realising that it can sometimes be more costly to ignore ESG issues.
There are several factors driving this. One is that ESG accounting and audit systems are improving.
This progress should not be overstated: there are still so many competing ESG standards that it is hard even to measure the sector's size. (The Global Sustainable Investment Alliance, for example, estimates that ESG assets now total $31tn — but JPMorgan thinks that "true" ESG investments are only worth $3tn.)
But that data fog has created an entrepreneurial opportunity which legal, accounting, data and ratings groups are trying to fill. And as audit systems improve, this is persuading more mainstream investors and issuers to get involved. It is also making it easier for outsiders to track which companies are ESG-compliant.
This, in turn, is fostering a second shift: scrutiny of companies is now rising to a level where business and finance executives fear that it is more risky to ignore ESG issues than embrace them.
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This matters. When the ESG movement first emerged in the previous century, it was primarily driven by a tiny minority of investors who wanted to promote positive social and environmental change. Swedish pension funds were a case in point.
These proactive "do-gooders" are still influential, particularly since wealthy western millennials are increasingly embracing the idea of impact investing. B
ut what is really driving the sector's growth now is a larger group of executives and financiers who want to avoid harm — whether to their own reputations, or the wider world. ESG, in other words, is not longer just a campaigning cause; it is also a risk management tool.
That is partly because last year's #MeToo movement has shown the power of unexpected explosions of social media protest. It is also because a new army of shareholder activists is campaigning over ESG issues.
However, a third factor is that political and regulatory risks around the issues that ESG tackles are growing. Three dozen central banks recently declared that they will consider environmental factors when regulating the banks.
European regulators are starting to impose tough environmental rules, not just on companies but their funders too.
At best, this is now forcing company boards and investment committees to contemplate a future of increasingly onerous ESG-linked rules. But it could also, at worst, shrivel the value of some corporate assets and investor portfolios if they are linked to, say, carbon emissions.
"We have seen a dramatic increase from clients in their request for proposals to pitch for ESG issues," says Scott Mather, chief investment officer of US core strategies at Pimco.
"Even if clients are not wanting an ESG portfolio as such, they want metrics — they want to know."
This shift towards risk management dismays some ESG purists, since it has enabled cynics to complain that the market is mere virtue-signalling. But history shows that revolutions occur when the majority of society feels that the risks of standing on the sidelines have become bigger than the risks (and costs) of getting involved. ESG might now have reached that tipping point.
If so, environmental reformers may yet have some reason to cheer. And investors need to contemplate a second lesson of history: when revolutions occur, values also change unexpectedly, creating unwitting winners and losers.
This year Verizon has been a surprise beneficiary. Others will not be as lucky. Executives ignore that at their peril.
Written by: Gillian Tett
© Financial Times