Key developments and deals in sustainable finance that have taken place over the past year
By Belmont NewsBeat
The year 2021 was a big win for sustainable finance. In the US alone, the year secured a net of US$69.2 billion inflow of sustainable funds, a six calendar year high in a streak. The previous year also saw a record high number of 121 new ESG funds coming to market, as compared to the 71 in 2020.
In November 2021, the world also saw some steps forward at the 26th UN Climate Change Conference in Glasgow (COP26), where nations gathered virtually and physically to review progress made since the 2015 Paris Agreement, and discuss what further actions could be taken to manage climate change in the future. One of the pluses from the conference was renewed focus on transitioning to net-zero carbon emissions for the private sector, albeit critics say the commitment is not enough to prevent base temperature rise more than 1.5 degrees Celsius above preindustrial levels.
In China, the world’s largest emitter of carbon emissions, says it will peak carbon dioxide emissions by 2030, and achieve carbon neutrality by 2060, by taking more measures to restructure its industry and energy mix in a greener way. As such, more green finance stimulus packages by the government are expected to facilitate the green upgrade. The country will guide and leverage more financial resources to low-carbon and green transformation projects through its macro policies, including monetary and credit policies and mandatory disclosure of green finance-related information. By the end of 2020, China’s outstanding green loans reached nearly 12 trillion yuan (US$1.85 trillion) according to some reports.
Increased regulatory oversight
Throughout the world, regulators are tightening the grip on ESG reporting, as it is the basis of minoring, measuring, and taking actions. But the reporting standards are as complicated as they are confusing. And although people are working together to create a universal set of reporting standards, each industry has its own uniqueness – metrics important to a food manufacturer may not be evenly so for a financial service provider.
Concurrently, on financial ESG porting, focus is increasingly given to TCFD – Task Force on Climate-Related Financial Disclosures. In Hong Kong, the Stock Exchange of Hong Kong has published a guidance on climate disclosures to facilitate TCFD-aligned reporting, less than one year before the last guidance on ESG reporting came into effect.
Looking over to Europe, the first delegated act of the EU Taxonomy Regulation on sustainable activities for climate change adaptation and mitigation came into force on 1 January 2022, and the second delegated act is in progress to address the remaining objectives. This has been a long waited and meaningful step forward – the classification system will cover industries that generate about 80% of all greenhouse gas emissions in the EU if fully aligned.
Challenges to adoption
While 41% of issuers surveyed in HSBC’s 2021 sustainable finance and investing survey say they need a lot of financial help and investment to meet their sustainability goals, as much as 41% say the main reason of them holding back from pursuing ESG investing is a shortage of expertise or qualified staff. In Canada, a survey by Deloitte also suggested that the nation is also facing a shortage of sustainable finance talents. Canada’s Toronto Finance International believes that the shortage could have a very negative impact if the industry doesn’t focus on it today.
With increasing demand for ESG disclosure, there has also been an increase in private organizations that come up with standards that companies can voluntarily use. But with ESG standard-setters — such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), the World Economic Forum’s International Business Council (IBC) and others — it may have created an unintended consequence: confusion in the marketplace.
The industry is increasingly aware of the more and more sophisticated greenwashing than taking actions. Earlier last month (February 2022), research house Morningstar has trimmed its list of European funds that it recognizes as sustainable by 27% because they “aren’t delivering on their stated environmental, social or governance goals”. Funds slashed had a combined assets of about US$1.2 trillion.
The road ahead
We will continue to see inflow of capital towards ESG funds. A survey conducted earlier last year of 300 asset managers in the US, UK, Germany, and France found that fund shops expect their ESG assets to grow from about 26.7% of their wider AUM to 43.6% in five years. A report from Broadridge Financial Solutions believed that assets in ESG funds, ETFs and institutional mandates could reach US$30 trillion globally by 2030.
In November 2022, Nations will convene in Egypt for COP27 to continue discussing climate issues and to report the actions they have taken to mitigate climate change since COP26.
Russia’s war against Ukraine may propel European countries, who heavily rely on Russia for energy, to speed up their clean energy transition or resort to traditional fossil fuel in the short term.
China will continue to embrace ESG while people will see continuous development and growth in corporate disclosures, data quality or industry adoption. Chinese corporates are at a defining juncture given the pace at which measures have been taken by regulators, investors and exchanges in ESG in recent years. These firms can enhance their ESG disclosures through greater board-level commitment, integration of ESG factors into business strategy formulation and better management of ESG risks and opportunities.
In discussing ESG in the VUCA (volatility, uncertainty, complexity, and ambiguity) world, communications is a critical function and it is imperative we don’t fall into the trap of “greenwashing”. As practitioners, it is important we are knowledgeable and continue to learn about client industry, products, technology and policies. A good pitch to the media cannot be achieved without sufficient understanding of the client or the product. Along with this, the overall media landscape continues to evolve and is sometimes polarized so new ways of management and thinking are required. A good grasp of media relationships remains important even in the era of social media. Knowing who’s responsible for covering the ESG/sustainable finance beat, or new independent media titles established by veterans that feature sustainable finance insights can be helpful in telling the story.
Further, in our view, there is a need to utilize the ever-evolving technology and social media platforms. More institutions are opening an official WeChat account in the hopes of reaching a broader audience, particularly in Hong Kong and mainland China. The interactive service functions have allowed more innovative ways for brand communications or product marketing. For example, in February 2022, CSOP Asset Management launched its first-ever metaverse themed ETF. And it did this through a press event on Roblox, an online platform featuring avatars.
In all, we believe competent communicators should have the ability to deal with complex issues and possess critical thinking in support of client business goals. Communications has the ability to be both a bridge and a channel for positive and educational messages – to promote the common good towards a greener and brighter future.