ESG Investing

ESG Investing

After a watershed year for sustainability, with broad progress at a governmental and corporate level, more investors are asking about ‘green’ credentials and applying their values when choosing a portfolio.

The COP26 United Nations climate summit provided a clear impetus for governments, corporates and financial institutions to demonstrate a commitment to reducing their carbon footprints and tightening disclosures. The integration of sustainability into business models and strategy also continued apace as pressure increased from investors on corporates to show they had a clear path to net-zero carbon.

So what will progress look like for sustainability in 2022?

Sustainable investment

In October 2021, the UK Government set out its ambitious plans to make the UK “the best place in the world for green and sustainable investment”. In addition to work on a UK version of the EU taxonomy, a classification system to define which economic activities count as environmentally sustainable, new rules will require financial services firms and corporates to report consistent information on sustainability.

Existing disclosure requirements will be streamlined under the new regime with requirements added, such as the reporting of environmental impact. As the UK’s regulatory policy rapidly evolves, the total value of assets invested in sustainable finance is surging with sustainable assets expected to reach $50 trillion by 2025, according to Refinitiv. This is more than a third of total global assets under management.

“What is exciting to see is the influence investors have on the way business are working. It’s becoming the norm to have Corporate Social Responsibility goals to improve their own ESG credentials.” – Craig Melling, Head of Investment.

Data quality

Data is the main ingredient in investor disclosures and the regulations that cover them. Improving the quality and reliability of sustainability data is a major in focus in 2022 to ensure the integrity of disclosures, regulatory compliance and managing climate risk.

Addressing the problem of ‘green-washing’, or the selective disclosure of a product’s environmental performance, is a critical objective in 2022.

Corporate responsibility

This year will also be one in which companies must begin to tackle the question of how to gather data from their broader supply chains. In order to reach net-zero carbon, companies must take account of the carbon footprint of their supply chain – so called Scope Three data.  Identifying the source of emissions more broadly and how to bring them down will be critical in the global effort to halve emissions by 2030.

In Environmental, Social and Governance (ESG) investing, most attention to date has fallen on the environmental part of the ESG equation.  The social and governance aspects are likely to be more in focus in 2022. The recent global corporate tax deal – which commits 136 countries to a global minimum corporate tax rate of 15% by 2023 – is a starting point for companies to look at the impact of their activities beyond climate risk and speaks directly to governance.  It is also evident that social considerations are to the fore, such as minimum pay and worker conditions.

“It’s vital that asset managers help to advance investor confidence around ESG investing. As the market grows, we need to focus on solutions that give investors what they expect.” – Craig Melling, Head of Investment

Impact of the Pandemic on Sustainability

The events of the past two years have exposed inequalities at many levels and this has provided a wake-up call to stakeholders that private financing can do more to address the climate crisis.  Many communities and socio-economic groups had difficulty in accessing vaccines and treatments, and there was increasingly apparent evidence of the financial exclusion many people face. The financial advice industry has an important role to play in addressing financial exclusion.

Final thoughts

Despite all the progress made on the sustainability agenda last year, it is clear that the pace of change and degree of commitment has to increase from here in order to avoid the worst effects of climate change.  Where 2021 was notable for raising the profile and the level of discourse, the hallmark of 2022 must be a step-change in action and delivery on sustainability at all levels.

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.

Richard Gillham

Financial Planner

Richard joined Progeny in January 2021, following more than 20 years in investment management, primarily with Legg Mason.

Learn more about Richard Gillham