Sustainable investing: 3 key trends

Sustainable investing: 3 key trends

Advertisements

Advertisements

Transformational politics, the net zero imperative and the shift from transparency to accountability: the transition to a more sustainable world will be far from simple.


©Keystone

The sustainability revolution is underway. Investors are increasingly taking into account the material risks associated with environmental, social and governance (ESG) factors, and thousands of companies have pledged to achieve ambitious goals over the coming decades. Three key trends will continue to drive the sustainable investing landscape for years to come.

1. Transformational policy

We believe that the pace and scale of policy interventions we have seen in corporate disclosure, redirection of capital flows, sustainable finance generally and, increasingly, sustainable investment, will continue to shape the landscape in the future.

In 2021 alone, we have seen over 200 new or revised policy interventions around the world (see chart below). Examples include the EU’s Corporate Sustainability Reporting Directive (CSRD) and Sustainable Financial Reporting Regulation (SFDR), which impose new ESG reporting requirements on companies and investors, respectively. . There is also the UK’s planned adoption of the Task Force on Climate-Related Financial Disclosures (TCFD) framework for large corporations and the climate disclosure proposals presented in the US by the Securities and Exchange Commission (SEC) to approach this area much more proactively.

Cumulative number of policy interventions

One of the key drivers of this policy wave, in our view, is the recognition that private finance is essential to managing and addressing key sustainability challenges. If we are to build a sustainable zero-interest economy, capital must flow at scale to the entities that are building that future.

In the short term, we expect tighter regulations on ESG data and rating providers, as well as continued efforts to harmonize and improve corporate disclosure.

2. Net zero imperative

The second trend that we believe will drive long-term sustainable investing is the “net zero” imperative. We know that decarbonization is essential to avoid the worst consequences of climate change, and we are already seeing governments, as well as private finance, moving towards this goal. About a fifth of the world’s top 2,000 companies have now committed to zero emissions in one form or another. However, the challenge of implementation should not be underestimated, especially with financial systems destabilized by a context of war and runaway inflation, exacerbating the equally important challenges of energy security and affordability. .

To meet critical climate goals, investment in clean energy must triple to around $4 trillion by 2030, according to the IEA. Initiatives such as the Glasgow Financial Alliance for Net Zero (GFANZ), a coalition of financial institutions representing $130 trillion in assets, are already beginning to invest in the transition to net zero. However, investors will need to collaborate more with each other to mobilize finance at scale, and be accountable for achieving agreed targets.

Companies are increasingly called upon to demonstrate the existence of robust climate transition plans that support a low-carbon future. The AGM season has already seen more than 30 management-backed “Say on Climate” votes – already more than last year. Investors like us have a duty to review these plans and make their voices heard at shareholder meetings if they are not comprehensive enough. In the UK, following an announcement made at COP26, the Treasury launched the UK Transition Plans Task Force with the aim of developing a benchmark standard for climate transition plans. Developing a common understanding of what an appropriate transition plan looks like will be a key objective, particularly over the next two years.

3. Moving from transparency to accountability

The third trend that is expected to drive the long-term sustainable investing landscape is the more general shift from transparency to accountability. This applies to both the financial sector and businesses, as a wide range of stakeholders – consumers, employees, regulators and society as a whole – increasingly expect companies to address their social and environmental impacts. in a more targeted and detailed way.

To cite just one example, more than 13,000 companies, representing around 64% of global market capitalization, disclosed data through CDP on climate change, water security and deforestation in 2021. This represents a 37% increase since 2020. As positive as it may be to see this significant increase in disclosure, the next step is for companies to demonstrate greater accountability. For example, while most companies report on how issues such as climate affect their business, the new rules are likely to require them to also report on their impacts, i.e. how whose activities affect the climate. In EU terminology, this marks the shift from a simple ‘materiality’, focused on business risk, to a ‘dual materiality’ perspective, which requires companies to disclose not only how how sustainability issues affect their operations, but also, and crucially, how their operations impact the environment and society.

It is therefore clear that the sustainable revolution is underway, but as each of these trends underlines, the transition to a more sustainable world will be far from simple. It is imperative that we collaborate and collectively engage in this time of transformation, but also be aware of the challenges ahead.

Leave a Comment

Your email address will not be published.