- Given US voters care greatly about companies making a positive impact, all the partisan bluster between Democrats and Republicans may subside soon.
- Unless more substantial evidence renders the debate moot, the perceived conflict between fiduciary duty and sustainability is set to continue.
- On the whole, the SDGs are woefully underfunded. Given so much emphasis on investment in climate, are the SDGs fit for purpose?
With 2023 shaping up to be another crucial year for the development of sustainable capital and ESG, Capital Monitor outlines what we believe will be some of the most important influencing factors.
Our seven predictions centre on four key and interlinked influences on the capital markets: government policy, asset management, banking, and corporate capital expenditure.
America will be fine (mostly)
It is hard to look at the US and its approach to sustainability and be positive. As the rest of the world has developed transition planning, the US appears to have descended into partisan toddler squabbling.
But, under the bonnet, a great deal is happening. Last year, the Democrats both strengthened the Environmental Protection Agency redefining carbon dioxide as an “air pollutant” and, in September, the Senate ratified the Kigali Amendment to phase out the hydrofluorocarbons commonly used in refrigerators and air-conditioners. And, as part of President Joe Biden’s inflation reduction bill, a $369bn package of climate investments passed in the summer, the government will support homeowners with the purchase of electric vehicles and energy-saving appliances.
More to the point, despite the column inches devoted to partisan warfare, attacks on ESG are unpopular with voters on either side. In a December survey of registered voters and 18 congressional offices conducted by Penn State’s Center for the Business of Sustainability and communications firm ROKK Solutions, more than three-quarters (76%) across political lines agreed that companies should be held accountable to make a positive impact on the communities in which they operate.
The GCC is waking up to green
Long the laggard as far as ESG is concerned, global sales of new green, social, sustainability and sustainability-linked bonds in Gulf Cooperation Council (GCC) countries took off last year even as global issuance slumped 30%.
Total GCC green and sustainable bond and sukuk issuances last year hit $8.5bn from 15 deals, compared with $605m from six deals the year before. The region has gained from the attention of the Cop27 meeting in Egypt in November last year and ahead of the Cop28 meeting in Dubai this year, but there has been a sense of movement. The Middle East Investment Management Association, an asset management trade association, which launched in July last year, has made ESG investment a feature while in early November the Abu Dhabi Global Market (ADGM) published a consultation paper on a sustainable finance regulatory framework.
A line in the desert sand was drawn by Saudi Arabia’s Public Investment Fund which, in October, sold its debut $3bn green bond. The three-tranche offering, the longest of which went out to 100-years, was more than eight times oversubscribed. Last year was the first year in the region where issuance for renewable energy was higher than fossil fuel ($580bn to $530bn according to Bloomberg).
This year could be higher still.
The iconic electric vehicle will lose power
Electric vehicles (EVs) have been the poster boys of the middle classes and demand is likely to continue. Almost four in five (79%) of cars sold in Norway last year were fully electric, for example. But the boom may be over. First, in the form of taxes. Faced with shrinking pockets, governments have noticed the cost of encouraging the move away from petrol engines. Norway’s finance ministry has pointed out that tax exemptions for EVs cost $4bn in lost revenue last year.
It is not alone. Germany has cut EV tax breaks and British EV owners will have to pay vehicle excise duty, better known as road tax, from 2025. It is notable that EV sales slumped more than 60% in Denmark after it removed tax benefits for EVs.
Then there is the charging infrastructure problem – there simply aren’t enough charging stations. In Europe, for example, there are currently only 400,000 fast charging stations compared to 47,000 in the US, according to Swiss-headquartered technology company TE Connectivity. But the biggest problem will remain supply. US electric car manufacturer Lucid Motors, for example, cut its production targets in half last year because of what it called “extraordinary challenges in the supply chain and logistics”.
The battle between ESG and profits will escalate
The debate between fiduciary duty and sustainability is likely to continue. At the beginning of January, Sanjay Raja, senior economist at Deutsche Bank, called the global economic downturn as “the most well-advertised recession in recent memory”.
There is already a sense that companies are using this an excuse to cut or pause spending in their ESG investments and projects. A KPMG survey at the end of October last year found that 50% of the chief executives it polled are pausing or reconsidering their existing or planned ESG efforts over the next six months, and 34% have already done so.
But, while companies might be refocusing their attention, investors are not. A December survey from PwC found that while investors still focus on profitability, a significant number of their remaining priorities were ESG-related such as the reduction of greenhouse gas emissions, responsible supply chain practices as well as biodiversity.
Is focusing on UN SDGs a distraction?
Look at most large corporate websites for long enough, and you will find some reference to the UN Sustainable Development Goals (SDGs) and the lofty aims in place to support them .
The series 2030 targets neatly sum up some of the most urgent and critical human and environmental challenges we face today. In terms of raising awareness to those challenges, the 17 SDGs have proven extremely successful.
What’s been less successful is financing them. According to research published last September within Force for Good’s latest annual report, the total cost of achieving the SDGs has increased by up to 25% between 2021 and 2022, from $116–142trn to $134–176trn. The funding shortfall for the SDGS stands at around $135trn.
Dizzying numbers, indeed. And driven by what the NGO describes as systemic underfunding, high inflation, and emphasis on hitting net zero. Few would argue that finding ways to drastically reduce carbon emissions is not a worthy cause, but it has somewhat overshadowed all other SDGs.
Climate also doesn’t quite tally with other priorities. A survey conducted by Ipsos for the World Economic Forum in 2021 ranked the top SDG priorities for the global public. SDGs 2 (zero hunger), 1 (no poverty), and 3 (good health and wellbeing) emerged as the top three.
Many will argue solving the climate challenges we face will lead to improvements in other SDGs and therefore it is right to focus on the former. If so, it does rather beg the question – are the SDGs a distraction? Worse still, are they proving just an opportunity for good corporate PR without any meaningful impact at the end of it?
Make or break for sustainability-linked finance
Air France SA-KLM issued its sustainability-linked bond worth $1.07bn on 9 January, giving the European credit market its first major high-yield deal of its type. It’s also a first for the aviation sector.
As part of the deal, the airline company commits to reduce emission intensity by 10% by 2025 and by 30% by 2030, with a financial step up triggered if the targets are not met. Commentators remarked on the ground-breaking nature of the bond and the fact the step up clause comes with a notable financial penalty.
Hopefully, this is an auspicious sign of things to come for the nascent asset class. Given some of the negative headlines it attracted last year, there are legitimate concerns investors will think twice about sustainability-linked finance if issuers don’t take them seriously enough. For example, the recent agreed sell-off of coal assets by Singapore energy company Sembcorp to mitigate additional capital costs on its sustainability-linked bond caused concern given it sold the assets to a company it has a big financial interest in.
Moody’s seem bullish, mind. Global issuance of green, social and sustainability, and sustainability-linked bonds stood at $992bn in 2021. The credit agency has forecast that figure will hit a record $1.35trn this year, a 36% year-on-year increase.
ESG: Future of net-zero alliances to be further tested
In December last year, the Pennsylvania-based investor Vanguard, with $7trn plus in AUM, said it was pulling out of the vaunted Net Zero Asset Managers (NZAM) initiative, a collective of fund managers committed to reaching net zero emissions targets by 2050. The decision came shortly after noises emerged of major US banks threatening to do the same thing with the banking equivalent, the Net Zero Banking Alliance.
Questions have been raised that the nature of these influential groups could amount to illegal, cartel-like behaviour, something recently acknowledged by the $107bn pension fund Alecta to Capital Monitor, but more prominently espoused by US financial institutions who are facing huge political cross winds over climate.
Such ESG initiatives require consensus amongst members to have any real impact or influence, but tensions about the scope and reach of that influence could lead to more desertions. As Capital Monitor said recently, the departure of Vanguard should not be cause for despair but one of opportunity – it gives investors the chance to vote with their feet. However, if more big names were to leave NZAM or the banking equivalent, then the future of the net-zero alliance model could be in peril.