A CHALLENGING REGULATORY LANDSCAPE
Regulation is one of the key challenges for market participants. The rise of ESG (Environmental, Social, and Governance) has led to increased scrutiny and the need for greater transparency to avoid malpractices like ‘greenwashing’ (i.e., the practice of making false or misleading claims about the environmental benefits of a product or service). Recently, we have also noticed several instances of so-called ‘green bleaching’ (i.e., the practice of purposefully deciding not to claim the environmental benefits of a product or service in order to avoid the reporting obligations that come with making such claims). Several financial companies have been reclassifying previous Art. 9 products as Art. 8 to avoid all necessary reporting and disclosure requirements.
As sustainable investing continues to grow, we can expect to see greater regulation in this area, which may continue to impact how companies approach ESG investing and the claims they make about their sustainable activities.
SECURING THE FUTURE: FROM PROMISE TO ACTION
As the world works on its energy transition, energy security and safety has come to the fore. And it’s not just climate change that has pushed on this transition. As Russia’s war in Ukraine drags on, it has offered additional incentives for countries to accelerate their own energy transition to ensure their national energy needs are met. Commitments from major countries like the US, EU, Japan, South Korea, India, and China have been unprecedented in their efforts to transition to renewable energy sources and reduce greenhouse gas emissions. Many have pledged their support for Net Zero efforts. As of today, 80% of the global population and 91% of global GDP are covered by these commitments. But it’s not just Net Zero commitments that are shaping the future of sustainability. In the US alone, USD 370 billion will be spent on energy and climate-related initiatives. Similarly, the Fit for 55 program and Repower EU aim to double the amount of renewable energy used in the EU by 2030 through increased projects and energy efficiency measures. This opens up a large number of investment opportunities.
Still, even with the most ambitious scenario of achieving net zero emissions, the goal of limiting the rise in global temperatures to under 2C is not guaranteed. To make this ambitious scenario a reality, a substantial amount of funding is required with estimates ranging up to USD 4 trillion by 2030.
It’s clear that urgent alignment of economic, climate, and security priorities is needed. The recent COP27 summit was a prime opportunity for progress in this area, but unfortunately, the outcome was disappointing.
CHINA AND THE GLOBAL TRANSITION TO SUSTAINABILITY
From the bottlenecks in key commodities, to geopolitical tensions and fragmented supply chains, the road to clean energy is fraught with obstacles.
China seems unavoidable on this road. Indeed, it is currently dominating the clean transition, particularly in the realm of solar panel technology. However, their leadership comes with its own set of challenges, including questionable human rights issues.
The transition should not simply be a tradeoff, where we temporarily focus on the ‘E’ of ESG, to the detriment of the ‘S’ & ‘G’ factors. A sustainable transformation with a focus on ESG should ensure that all three elements are considered in equal measure. By reaching out and actively engaging with companies and sovereigns, and by leveraging their expertise, financial companies can play an important role in guiding key entities on their ESG journey.
SOCIAL RESPONSIBILITY: THE UGLY DUCKLING
The “S” in ESG – that is, the principle of social license to operate – is often considered the ugly duckling of the bunch. But make no mistake, it is just as important as its environmental and governance counterparts. In fact, it is directly linked to environmental issues, as air pollution is the number one killer worldwide. In addition, climate change is also having a profound effect on the global economy, leading to rising energy and food prices, which put pressure on worker conditions and pay. This, in turn, increases the risk of recession and could have severe consequences for the labour market.
This complex issue must also be understood in the context of ongoing demographic shifts. As baby boomers (a third of the global workforce) retire, they are leaving the labor market faster than they are being replaced by younger generations. This is a problem that requires a comprehensive solution regarding the expertise and experience gap, and we might do well to look towards the Scandinavian model for inspiration, which tends to be more intergenerational.
CAPITAL ALLOCATION AND THE COST OF NET ZERO
It is evident that the transition to net zero emissions carries a cost for certain sectors and activities. We have seen a shift in the allocation of capital as a result of climate action.
Nevertheless, investment in environmental, but also more broadly, ESG products continue to support the sustainable trend.
The perceived underperformance of ESG stocks year-to-date is also a hot topic at the moment. This is not necessarily a reflection of the viability of the ESG market, but rather a question of sector allocation in combination with ESG premia and the real yield increase.
It is clear that “green/sustainable” issuers are trading at a premium, with some commanding a 40% price increase. The use of labeled bonds is also on the rise, although this comes with its own set of challenges, including the need to avoid greenwashing. Even so, we are convinced that there are still many opportunities to be found for those willing to look.
