Yesterday, Barclays pulled out of a US Municipal Bond financing transaction that would have enabled the State of Alabama to construct two new corrections facilities via US detention facilities operator, Core Civic.
Barclays decision came after investor pressure persuaded them that they should review their policies for the financing and underwriting of debt in this rather contentious area. ESG conscious investors, ourselves included, of course, are applauding this brave decision by Barclays to put their conscience before profit, but they are not the first to do so. Other banks and many asset managers have excluded Core Civic and others from portfolios for several years. Just over two years ago, we wrote about JP Morgan withdrawing financing to this sector on social grounds and what this might mean for the cost of borrowing for firms that fall behind standards expected by ESG conscious investors.
After a year of headlines dominated by the global pandemic, it is good to see ESG considerations back to the fore once again, especially with US investors, who have been slower to embrace ESG than other parts of the world. However, under President Biden's administration, we would expect the US to play catch up.
The main point of today's blog, though, is that ESG considerations should be part of ANY credit underwriting policies, and a failure to incorporate them could result in unwanted downgrades or even defaults if one were to take the lack of willing investors to the extreme. How would debt laden companies be able to refinance their maturities without willing investors?
Green bonds, and the benefits of sponsoring them, tend to dominate ESG commentaries. However, continuing to sponsor cheap financing for those companies that fall short of societal expectations will act as a more material driver of fund performance than green financing, given the likelihood that their debt and equity will underperform.
If this is not enough incentive, there is the reputational damage that goes alongside the continued sponsorship of such companies, as the press decides to name and shame those involved. This won't be the last that you hear about the Core Civic story.