Three trends to know about sustainable investing
The sustainability revolution has begun. What trends will characterize sustainable investments in the coming years The in-depth analysis by Stephanie Maier, Global Head of Sustainable and Impact Investment at GAM Investments
The sustainability revolution has begun. Investors are increasingly taking into account the serious risks related to environmental, social and governance (ESG) factors, and thousands of companies are committed to achieving ambitious goals in the coming decades.
Here are the three notable trends that will continue to characterize sustainable investments in the coming years.
Revolutionary rules
The pace and scope of regulatory interventions on corporate disclosure, on the redirection of capital flows, on sustainable finance more generally and now, more and more often, on sustainable investment products will continue to characterize the scenario in which we operate.
In 2021 alone, there were over 200 interventions on a global scale, including new regulations and revisions. Among these, for example, the EU Directive on corporate sustainability reporting (CSRD) and the European Regulation on sustainability reporting in financial services (SFDR) which introduced new reporting requirements relating to ESG factors, respectively for companies and for investors. Let's not forget the United Kingdom training of the Climate Financial Reporting Task Force (TCFD) for large companies and the proposals for climate reporting put forward in the United States by the Securities Commission (SEC) with the aim to intervene more proactively in this area.
In our opinion, the introduction of these regulations was favored by the recognition that private finance plays a decisive role in the management and solution of the main problems related to sustainability. If we want to build a sustainable net zero economy, the organizations that participate in this process will have to have abundant capital at their disposal. In the short term, we expect stricter regulations on ESG data and rating providers, and efforts to harmonize and optimize corporate reporting will also continue.
The net zero boost
The second trend that, in our opinion, will characterize sustainable investments in the long term is the net zero push to zero carbon emissions. We know that decarbonisation is essential to avoid the most catastrophic consequences of climate change. We see that many governments and even private finance are already moving in this direction. About 20% of the 2,000 largest companies in the world are committed to achieving carbon neutrality in one way or another. However, we must not underestimate the difficulties in achieving these objectives, especially given the fact that financial systems have been destabilized by the war and the surge in inflation which aggravate other important problems, such as energy security and accessibility.
In order to hit climate targets, according to the IEA, investments in clean energy will have to triple to around $ 4 trillion by 2030. Initiatives such as the Glasgow Financial Alliance for Net Zero (GFANZ), a coalition of financial institutions with assets worth $ 130 trillion are already contributing to the transition to net zero. However, more collaboration between investors will be needed to mobilize large amounts of funding, and investors will have to take responsibility for achieving the agreed objectives.
Companies are increasingly being asked to present valid climate transition plans for a low carbon future. So far, over 30 climate proposals submitted by management have been voted on during the general meeting season, more than last year. Investors, like us, have a duty to examine proposals in detail and attend shareholders' meetings if they feel they are not sufficient. In the UK, following an announcement made at COP26, the Treasury launched the Climate Transition Plan Task Force with a view to setting a standard for climate transition plans. Efforts will be made, particularly over the next two years, to agree on the optimal characteristics of a transition plan.
The transition from transparency to accountability
The third trend that, in our opinion, will characterize the scenario of sustainable investments in the long term is the transition from transparency to the demonstration of responsibility. This applies to both the financial sector and business as stakeholders – consumers, employees, supervisors and civil society in general – expect companies to address their environmental and social responsibilities specifically.
To give an example, more than 13,000 companies in Asia and China, which correspond to approximately 64% of the global market capitalization, in 2021 published data through CDP on climate change, water safety and deforestation. This is a 37% increase from 2020. It is an important step forward on the transparency front, but now companies must also demonstrate that they know how to take on their responsibilities. Most companies today inform us about how certain issues such as climate affect the business, but the new regulations are likely to require companies to outline the impact of their business on the climate as well. In EU terminology, it is the transition from a univocal approach, focused on risks for the company, to a dual approach whereby companies must disclose not only the ways in which sustainability affects the company but also, a fundamental aspect , what is the impact of the company on the environment and civil society.
Undoubtedly the sustainable revolution has begun but, as each of these trends highlights, the transition to a more sustainable world will be anything but simple. We need to collaborate and participate collectively in the transformation phase, but we must also be well aware of the challenges that await us.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/tre-tendenze-sugli-investimenti-sostenibili-da-sapere/ on Sat, 17 Sep 2022 05:21:21 +0000.