Academic research reveal that strong governance mechanisms have helped diminish default risk and lower bond yields. Barclays also recently discovered that investment-grade bonds with higher ESG scores outperformed those with low ESG scores over the past 8 years.
Following the Paris climate agreement, institutional investors and retail investors are beginning to show greater interest in aligning portfolio exposure to a low carbon economy.
Consequently, “in 2016, we may see utilities increasingly spin off renewable assets from legacy generation assets as investors seek exposure to the low carbon energy assets of the future,” Lee said.
For instance, with a new generation of investors, the younger demographics are more apt to favor companies that address to social and environmental responsibilities. These investors will also be prone invest in companies that follow ESG principles as a way to align investment goals with their individual values and philosophies.
More recently, even large pension funds have banded together to pressure industries into fundamental changes. For instance, some large state pensions have dropped coal and energy companies in favor of more environmentally friendly investments. Pension funds have also pushed for changes in boardrooms and targeted governance problems in individual companies.
Max Chen contributed to this article.