From navigating new SEC regulations to setting net zero targets to managing an increasing divisive political discourse around ESG, 2022 has brought many new challenges to the field of sustainable investing and catalyzed new debates on where it is heading.
On December 6 and 7, sustainable finance and ESG investment professionals from across North America gathered in New York City for Responsible Investor’s 14th annual RI USA conference to discuss developments and best practices for hot-button issues from human rights and biodiversity to net zero and the role of Big Tech.
Some of the questions raised in the panels included:
- How big a threat is the anti-ESG backlash to progress in the US and are there opportunities to find common ground with the detractors?
- What are the implications and risks of the new SEC disclosure requirements for asset managers and asset owners?
- How are asset owners collaborating with asset managers to institutionalize and codify diversity across their portfolios?
- How should investors allocate more to emerging markets and what role can investors most usefully play in promoting energy transition and the achievement of the SDGs?
While ESG and sustainability have continued to gain momentum and we have seen an increase in target-setting and disclosure from companies, rhetoric is not always matched by action when it comes to following through on commitments. The rising prominence of ESG has also led to a politically motivated backlash, due to its focus on issues such as climate change and diversity, which some Republicans perceive as pursuing “wokeness” over fiduciary duty. This has led some companies to water down their ESG stances, as we’ve seen with Vanguard’s withdrawal from the Net Zero Asset Managers (NZAM) initiative.
Some other key insights to emerge from the conference include:
- While “ESG” as a term can be polarizing and some topics like climate change remain political lightning rods, people across the political spectrum often agree on the need to address individual ESG issues, particularly social and labor related issues. Reframing the issues without the ESG label could be a useful way to move beyond partisanship.
- Momentum has increased on disclosure of scope 3 emissions since the proposed SEC climate disclosure rules were announced back in March. While the new rules may face legal challenges, the robust regulations established in Europe and new norms by investors are expected to continue driving scope 3 disclosures for large companies in the US.
- Independent civil rights audits can be a useful tool in rooting out a company’s discriminatory practices. However, this can also increase the risk of “social washing,” especially as metrics for measuring social impacts lag behind environmental metrics and companies are often unwilling to disclose meaningful data.
- Emerging markets offer an opportunity to invest in high-growth companies at an early stage, especially in the green energy sector. Bonds for renewable energy projects can be a way to build infrastructure while subsidizing costs to consumers, providing profits to investors once costs come down while ensuring a just transition away from fossil fuels.
The conference concluded with a reflection on COP27 and a look to the future. Panelists were in agreement that while there were important discussions on blended finance and the just transition, there has not been enough concrete progress on net zero goals and limiting global median temperatures from rising by more than 1.5°C is increasing unlikely. The coming year will be an important one for investors to accelerate green financing and ensure the companies they invest in are operationalizing their net zero action plans to create a measurable impact.
It was clear that while the drivers behind ESG will continue to increase, there remains a lot of work to be done to ensure ESG integration creates measurable value for investors and a meaningful impact on social and environmental challenges.