Around the world regulators are shifting interest towards sustainable finance, introducing a slew of new reporting mandates that can systematically promote more sustainable and transparent reporting for companies and investors.
With matters surrounding climate change and environmental impact now reaching deeper into financial markets and investor portfolios, policymakers want companies to have more accountability for their ESG (environmental, social, and governance) reporting structures.
While ESG investment opportunities and instruments enjoyed a banner year in 2022, the coming months will put sustainable finance to the ultimate test, as market interest swells, and global concern regarding climate change and environmental issues only become more amplified.
In the coming months, companies, investors, and regulators will need to collaborate their industry efforts to establish more sustainable finance standards in their respective jurisdictions said Nishant Tiwary, a climate change and energy transition expert, Jack McDonald Fellow in Investments and Finance Fund at Stanford and a John F. Kennedy Fellow at Harvard.
According to a PwC report, analysts estimate that at the rate ESG assets are growing, they can constitute 21.5% of total global Assets under Management in less than five years.
“While we’re seeing more policymakers introducing new ESG standards and reporting mandates, companies will need to remain compliant and investors accountable,” said Tiwary.
Nishant has worked on path-breaking initiatives and national investment strategies for programs in energy transition, infrastructure finance, and climate action to help promote more efficient project development for hydrogen, electric vehicles, and green energy.
New opportunities in sustainable finance are helping to shape the market of the future. While adoption has been fast and experiencing steady growth, a host of fresh trends will change the landscape and ecosystem for corporations and investors in the coming months.
Acceleration toward impact investing
Impact investing has already been underway for quite some time as investors change course towards environmental and social investment instruments. The understanding of impact investing is that it will promote more beneficial outcomes while generating financial returns.
According to Tiwary, he feels companies that have a strong sense of ESG-focused strategies could only benefit more from institutional investors who are willing to narrow the gap and risk their chances with a constantly growing sector in the circular economy.
In 2022, impact investing surged past the $1 trillion threshold according to the Global Impact Investing Network, and it’s more so unlikely that this trend will cease in 2023.
More dynamic climate strategies
In the face of ongoing energy concerns and affordability, companies will gradually adopt more dynamic climate strategies to help balance energy security. These efforts will be found in several regions across the world, but more likely in developed economies such as the U.S. and Europe where regulators have been introducing new laws that incentivize decarbonization efforts.
This could potentially see companies developing their own, but relatively small energy generation projects to help offset increasing costs, and meet climate commitments. These projects, which in proportion are funded by shareholders and investors, could help them turn to capital deployment for a carbon-neutralizing economy.
“There is a strong need, and a growing understanding among companies to develop more dynamic climate strategies. These will perhaps impact their near-term financial performance, but the long-term outcomes and results could present them with bigger financial interest coming from investors,” Tiwary said.
Emphasis on transparency
“The global economy requires global collaboration between heads of state, policymakers, and financial leaders if we’re looking to improve and shape the future of sustainable finance,” mentioned Nishant. The recent announcements at COP 27 related to climate and tech were another jump towards growing efforts that will help make reporting and ESG standards more transparent for individuals and more so for investors.
Mandating sustainable reporting globally can be a hard ball to juggle, considering the vast amount of jurisdictions and laws these mandates will encompass. While it’s possible, as we've seen with the EuropaCable Sustainability Forum, an initiative supported by the EU Commission - there should be emphasis drawn towards developing regions.
For sustainable finance to flourish, and work within the circular economy, it will be a crucial undertaking for companies and governments to promote more transparent reporting that can help form the basic infrastructure of the industry.
Growing investments in adaptation and resilience
The effects of climate change are experienced across the world, and while developed nations have handled these occurrences through state-funded programs and innovative project deployments, lesser-developed nations are experiencing increased risks related to environmental changes. According to the U.N. Office of Disaster Risk Management, the number of natural disasters could rise to 560 per year by 2030, an increase of 40% from 2015 if the trend continues.
“There will be a growing need for adaptation and resilience finance if smaller nations look to combat a growing number of climate risk disasters,” tells Tiwary. He goes on to say “new financial instruments including debt-for-climate swaps, concessional loans, equity, and grants will be at the forefront of resilience projects,” explains Tiwary, who is also United Nation’s Global Taskforce Member on digitization of electricity in Europe.
Bigger interest in dedicated adaptation and resilience bonds could also possibly see more growth, helping developing countries to balance their debt to financing losses, and shrinking revenues due to climate risks and disasters.
Companies Taking Charge In The ESG Ecosystem
While many companies are starting to initiate some form of ESG protocols and strategies, more common household names, including Nvidia (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT), Best Buy (NYSE:BBY) and Adobe (NASDAQ:ADBE), among others have captivated forward-looking ESG standards.
Across the facets of environmental, sustainability and governance, several corporate brands have managed to shake up their performance to build a reputable reputation for being ESG-focused.
Customer management software giant, Salesforce (NYSE:CRM) established a task force to help improve racial equality and spent more than $16 million on equal pay initiatives.
Another name is Idexx Laboratories (NASDAQ:IDXX), which launched a global whistleblower policy to ensure and support compliance with the company’s code of ethics. On top of this, it’s managed to reduce energy consumption per square foot by 15%.
Then there is LG H&H Co. (KRX:051900), Klabin S.A. (OTCMKTS:KLBAY), Indra Sistemas, S.A. (OTCMKTS:ISMAY) and Coca-Cola HBC AG (OTCMKTS:CCHBF), among others that have been ranked in the top one percent of the S&P Global ESG Score, according to the 2022 Corporate Sustainability Assessment (CSA) report.
While these companies are spread across several industries, bigger and more authoritative names could potentially lead the charge for other small companies that have only recently announced their ESG strategies. Instead of solely looking towards these companies as industry leaders, perhaps they can establish more standardized practices for the long-term of ESG models.
Climate risks and disasters remain perhaps one of the biggest concerns for countries around the world, more so in regions that experience slower economic prosperity. Yet, with government-led initiatives and lawmakers introducing palatable ESG standards, these could become drivers of sustainable financing.
While the market is still growing, and there is still a lot of room for opportunity, perhaps leadership should come from industry experts to divert efforts toward more profound and sufficient environmental, social, and governance that can support a unified and circular global economy.