Green Finance Advisor of Friends of the Earth (HK)
2022 has so far proved to be upsetting for investors with investment returns firmly in negative territory year to date with little prospect of recovering. Faced with the possibility of slowing growth and the threat of inflation as a result of geopolitical events, it is worth taking stock of where we stand with sustainable investing. One of the biggest challenges to face sustainable investing has been the sudden spike in energy prices this year as a result of military action in Eastern Europe. The result of the spike is that all of a sudden capital expenditure into fossil fuel capacity suddenly looks quite attractive again, since the resulting product can be sold for a very handsome profit at today’s high prices. This is a direct challenge to developing enough renewable energy capacity to tackle climate change that had largely benefitted from nearly a decade of low energy prices, which made investing in renewable energy capacity a more lucrative investment than fossil fuels.
However, the trend in sustainable investing that has taken hold is unlikely to be derailed because of the likely temporary elevation in fossil fuel prices. Environmental Social & Governance (ESG) investing has gone from being on the fringe and a nice to have to become a standard in investment due diligence of most large institutional investors. Product offerings has also gone from limited and rigid negative screen fund offerings to a broad swath of ETFs covering multiple segments and highly customizable mandates, catering to investors from retail to sovereign wealth funds. Moreover, private capital has also taken on sustainable investing with enthusiasm, with impact investing becoming a core component of an investor’s private investment allocation.
As I have written previously in this blog series, the future of sustainable investing still requires smart and appropriate regulation, not only to standardize reporting, but also to make sure ESG reporting is not just a matter of delivering qualitative compliance (which may actually have little real-world impact with issues such as climate change), but being measurable for quantitative impact.
The US Securities & Exchange Commission (SEC) has recently proposed legislation that would require companies to report on climate-related targets and goals. Currently, only one-third of public companies in the US report this type of data, the new regulations will require businesses to look at future risk and material impact, internal governance of climate-related risk, and emissions. However, to put in context of the slow pace of ESG regulations, the issue was first raised with the SEC in 2003, which is almost 20 years ago.
This welcome development with the largest capital market in the world needs to be put in context with developments in other parts of the world. Europe is still leading the charge in ESG reporting with the EU having already legalized binding emission targets and that foreign subsidiaries must comply with EU ESG laws. Canada also has mandatory climate disclosure requirements by 2024 for specific sectors (Pendoley, K. H., 2022).
In a world increasingly trending towards
regionalization, we must not allow geopolitics to obstruct mankind’s common
goal of survival in the face of climate change. More must be done not only to
regulate ESG reporting but also achieve global adoption of common standards,
such that regulatory arbitrage is not possible for less than scruple companies
to shed their responsibilities as a global citizen. We as advocates and
interested parties of green finance, must continue to petition our local
regulators to participate in forming international reporting standards and to
rally support of our local communities for adoption of ESG reporting at this
juncture where sustainable investing is seemingly at a cross road.
- Pendoley, K.H. (2022), ESG Leaders: Voice Your Opinions on SEC Regulations & Reporting Consolidations, Chartered Alternative Investments Association