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Despite conflicting signals on ESG sustainable investment thrives

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The focus on climate reparations is going to play a central role at COP28 in Dubai, where discussions are to be held on a Loss and Damage Fund for poorer countries – effectively who is to be held accountable for the economic losses created by climate change.

In this weekly round-up, we explore the highlights of sustainable finance.

The One Earth report explores responsibility where the Global North, through the industrial revolution and associated development, has been the source of over 90% of global emissions. Meanwhile, the countries of the Global South, where the majority of climate impacts are already being felt, are estimated to be responsible for around 8% of global emissions to date.

The ‘polluter pays’ principle means that responsible states or companies should internalise these external impacts and costs. States have historically been loathe to accept responsibility, as that opens up the question of legal liability. This discussion is going to be an important element of the 2023 climate negotiations, being held in Dubai and headline by the head of Abu Dhabi’s energy giant Mubadallah.

Is individual popularity of ESG investment in decline?

Research shows a fall in popularity of ESG investment but, overall, the response to the US backlash seems more like a shift in terminology. Concerns about climate and ESG are being discussed in broader terms, especially around nature, rather than focusing solely on CO2 footprint.

A survey from Charles Schwab shows that only 65% of investors now believe that ESG funds yield better returns, as opposed to 71% in 2021. Within the same time period, investors’ willingness to pay additional fees on these funds dropped by eight percentage points to 50%.

This agrees with findings from Michelmores earlier this year, which said that 23% of respondents found investing in sustainable assets less important than they did in 2019. The cost of living crisis obviously has a role to play but, once again, the issue of trade-offs between short term and long term return come into play.

There is clearly some belief that enough investors still care about the impact of their holdings. Schroders has just launched its Offset Share Class, which enables individual investors to offset the impact of their holdings. These share classes will be available as part of the Schroder International Selection Fund (SISF) Global Climate Leaders, focused on investing in companies which evidence ‘climate change leadership. To be viable, they will obviously only cover Scope 1 and 2 emissions, a point that Schroders makes clear in order to avoid accusations of greenwash.

Greenwash remains a major concern for corporates and investors alike. In New Zealand, the Government is also involved, with the Taxpayers Union warning that millions of dollars in low carbon subsidies will fail to have any impact on net zero emissions.

Bond market continues to thrive

In the past week, Australia Post has issued an AUD$100 million sustainability bond, while Swedish retail ICA Gruppen has announced that it has completed a green bond issue of SEK 3.5 billion (€310 billion) under the company’s Swedish MTN programme. The bonds of SEK 1.25 billion (€110 million) and SEK 2.25 billion (€20o million) were issued with tenors of three and five years, respectively, with fixed and floating rate tranches for both.

German real estate and mortgage banks Berlin Hyp is reported to have issued a €750 million green bond, while analysis from the Climate Bonds Initiative suggests that sustainable debt will outstrip green bonds this year. Overall the bond markets are lower, due to the energy and cost of living crisis, conflict and widespread inflation.

Yet Moody’s has forecast that green, social, sustainable and sustainability-linked (GSSS) issuance will reach $950 billion in 2023, of which $550 billion is expected to be green bonds, $150 billion in social bonds, $175 billion in sustainability bonds and $75 billion in sustainability-linked bonds. Europe retains its dominance in the market as a leader in sustainable finance, with roughly two-thirds of such bonds being issued in euros.

Research from Blue Mark suggests however that, while investors are continuing to increase their work on impact, focus remains on execution risk rather than the risks around impact itself. According to the analysis, only 24% of investors are assessing potential negative impacts of their investment.

Corporates continue to accelerate ESG and climate investment

No matter the public’s sentiment, funds continue to flow into climate and supply chain technologies. Resource management is going to become critical for the supply chain in many sectors, and last week saw electronics components group TDK launch a $150m startup fund. Morgan Stanley was also moving, with news of $500 million for its climate solutions fund. Announced in 2022, its 1GT climate fund is intended to facilitate the avoidance of 1 gigaton of CO2e by 2050 by investing in companies with more climate-efficient products.

In the US, forthcoming research from Revelio is set to show that jobs with ESG in the title are seeing a 20% premium in salaries. This highlights the growing importance of ESG awareness in corporate strategies, as well as the tight labour market for those with much needed knowledge and expertise.  Overall sustainable investment has grown to a universe of over $35 trillion and looks solid as a significant market trend for a long time to come.

Will the UK be building out a green infrastructure strategy

What’s interesting here is that, although the UK has not launched an equivalent strategy to the US Inflation Reduction Act (IRA) or the EU’s Green Deal Industrial Plan for the Net Zero Age (GDIP), it has announced that it will join the US’ Carbon Management Challenge.

The US Department of Energy has just announced an investment of $251 million to support 12 selected projects across seven states to build capacity in transportation and storage. Whether or not the storage of CO2 is going to become a means of continuing ongoing use of fossil fuels, this should provide further robustness to the UK’s plans.

Sunak also announced a $40 billion infrastructure plan at the G7 – if that were to include climate and sustainability considerations, it could prove an accelerator for change.

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