In 2021 ESG was one of the fastest growing investments. This is also the result of the current climate and health crisis, as well as by more transparent and systematic ESG reporting and disclosures.
2021 was called the year where the climate crisis will be solved. One of the key events to make this happen, was the United Nation Climate Summit COP26 organized in Glasgow in November 2021. The summit was attended by over 100 heads of State. World Leaders convened by the United Nation were asked for strong commitment to reach Zero-Net Emission by 2050, to slow-down global warming to 1.5 C as compared to pre-industrial period. This effort failed, and current commitments (based on the available carbon budget) will result in a temperature increase of 2.9 C by the end of the century. The real winners of the summit were the private sector and capital markets which will play a prominent role in addressing climate and societal risk. They will do this through Environmental, Social and Governance (ESG) investments, with an increased focus are around renewables and sustainable energy, particularly in the EU and in the US.
As addressed in my previous article on ESG, “over the last 24 months, ESG stocks have outperformed the market and have shown they can better withstand bear market conditions. Furthermore, ESG focused companies are more resilient during periods of high risk and high market volatility such as the recent COVID-19 pandemic”. The year 2021 was characterized by a boom in sustainable and impact investing, with ESG funds alone bringing in $120 billion. The year was also defined by increased divestment from companies and sectors not living up to their environmental commitment. This year also witnessed increased scrutiny by the regulators particularly in the financial sectors to ensure that investors are not exposed to new risks. By December 2021, a total of over 1500 institutions representing $39.2 trillion in assets worldwide had begun or committed to a divestment from fossil fuels. This represented approximately US$ 15 trillion which left the hydrocarbon sector for reputational risk reasons. This divestment can be interpreted as a moral disassociation with companies and sectors that profit from investments that contribute irreversible damage to the global environment and society.
For better or worse, the COP26 ended with a clear impetus for ESG investment. In other words, ESG represents the “path of least resistance” for corporations and society at large to play a tangible climate-mitigation role. On the negative side, ESG will inevitably trigger more “Green-Washing”, the process of providing misleading information about how a company's products are more environmentally sound as companies try to claim their green credentials. Greenwashing is essentially an unproven claim to manipulate consumers into believing that a company's products are environmentally friendly.
In 2022, we’re going to see ESG investing mature and be better defined supported by data-driven, transparent solutions that allows investors to invest in a way that expresses their values while preserving and increasing their capital. Then there’s what happens in the regulatory world. The European Union gained a substantial first mover advantage in terms of regulatory and disclosure standards, which should start to take shape towards the end of 2022. The United States is following suit propelled by the Build Back Better bill, which I anticipate will be approved by the end of Q2 of 2022 representing a huge boom for ESG investments. It is important to differentiate that while in the EU it is a “top-down” policy driven agenda, in the US it is a “bottom up” driven by asset managers, banks, and the broader private sector. In terms of financial markets, there is unlikely to be a single regulatory standard that can fit all. These standards will still take time to materialize and will unlikely be available until early 2023. The good news is that both the EU, the US financial regulators, as well as over 60 Central Bankers are aligned to coordinate ESG regulation to ensure transparent frameworks are established.
Conclusions: For the first time ever “the geopolitics of climate” seem to be aligning and the public, private sector and capital markets agree that we are facing a major crisis and that sustainable investment and green finance is the “low hanging fruit”. This is witnessed by the 2021 demand for sustainable investments, which for the first time surpassed traditional financial products. Investors, especially after the 2020 Covid crisis, are investing in companies that are more accountable, make a positive change, and mitigate their environmental and societal negative impact. In other words, corporations that demonstrate a high ESG performance are also likely to be highly valued in the stock market. The ESG market is as hot as crypto right now and is bringing together the climate excitement as well as new technology innovations.
Andrea Zanon is an international ESG, technology and finance advisor who has advised 20 countries on climate strategies and over 100 corporations in impact investment and resiliency