Issue date: 2022-03-31
1. ESG (environment, social, governance) investing has entered the mainstream
According to analysis by Bloomberg, ESG assets soared to an unprecedented $37.8 trillion by the end of 2021 and are predicted to grow to $53 trillion by 2025, which would be a third of all global assets under management. This rise is mirrored by a growing interest in ESG more generally.
As seen from above, the number of Google searches of the term “ESG” has grown exponentially in the last couple of years. That escalating interest is reflected in demands on investment managers.
There are no ifs and buts about sustainability anymore. It is now all about how you do it, how you implement it, and how you report on what you have done. This is why we expect an intensifying debate on what a robust sustainable investment process should look like. This underpins the investment we have made over many years in research, analysis, active ownership and information systems.
The connection between investment returns and sustainable outcomes is becoming deeper and stronger. Companies’ licenses to operate, the sustainability of their business models, and the returns to their investors are increasingly interconnected. How companies impact societies and the environment is not just an academic question, it is an increasingly tangible issue. Carbon pricing, plastics, minimum wages, tax avoidance – these are all factors that are translating into corporate financial statements, not just social costs.
2. ESG priorities to watch – including climate change, biodiversity and natural resource constraints
Climate change has long been a focal point for sustainable investment and is undoubtedly, a critical concern. But exponentially increasing pressure on finite environmental resources is exposing cracks across a spectrum of environmental dimensions, bringing a wider range of natural capital issues into focus.
The UN’s COP 15 summit – the biggest biodiversity summit in a decade, which is focused on drawing up a plan to slow and reverse damage to nature – is due to reconvene in April this year in China after Covid-19 delays. We will be watching for a Paris-style agreement for nature considering how dramatic the increase in human impacts on the environment has been since the 1970s.
Last year’s COP 26 climate summit in Glasgow underlined the growing expectations on the private sector to pick up the mantle of action. So it is now companies rather than governments making commitments around sustainability issues such as carbon emissions, deforestation and methane.
For example, a growing number of companies – more than 1,000 including Schroders – have adopted climate action targets through the Science Based Targets initiative (SBTi) in line with the Paris Agreement goals to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.
3. Increasing regulatory scrutiny globally hitting all parts of the value chain
While companies’ sustainability practices and ambitions are becoming subject to greater scrutiny by asset managers, the sustainability practices of asset managers themselves are coming increasingly under the regulatory lens.
Sustainable finance regulation keeps evolving at a dizzying pace and 2022 will be no different to last year. Indeed, one pattern that we see is that what used to be a predominantly EU phenomenon is increasingly “spilling over” to other regions, and most notably Asia. At the heart of this is transparency and the robustness of sustainability claims.
ESG data and rating providers are not off the hook either. There are increasing calls for further transparency in ratings methodologies and better management of conflicts of interest. Concerns have also been voiced by European and global regulations, such as the International Organisation of Securities Commissions (IOSCO), around the increasing concentration in the market and the lack of consistency in ESG ratings. The most hotly anticipated development in this space is going to be the output of the recently launched International Sustainability Standards Boards by the IFRS Foundation.
Source: Schroders, March 2022
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