The ESG Review: 2023 shaping up as a year of reckoning for ESG

The noise level around the validity and viability of ESG investing has been cranking up all year.

As we near the turn of it, the volume around the need for proper clarity and action seem to be increasing too.

This week has been a couple of major declarations, with the CEO of the Norwegian Sovereign Wealth Fund telling the Financial Times that not only would the fund vote against companies in which it invested but without a clear net zero target, but that it will become increasingly vocal on ESG factors with all businesses, and seek to maintain a foothold in those companies as a long-term investor. Its influence could be profound.

Meanwhile, planned regulation by the European Securities and Markets Authority (ESMA) has left asset managers facing the stark prospect of having to reclassify funds that do not match up to new ESG criteria, with one estimating that less than a fifth of its current funds would meet the watchdog’s threshold for sustainable investments. Bloomberg reported on around $4 trillion being at stake.

So not so much a day of reckoning, as a potential year of reckoning, as the financial sector may adopt a far more cautious approach to what it badges as ESG, and a sharp focus on clearly-defined, acute ESG performance kicks in as short-term priorities continue to be called into question by the Ukraine war and spiralling living costs.

The ESMA’s proposed rule changes will mean funds having to move from ‘promoting ESG characteristics’ to needing ESG-related words in their names and having at least 80 per cent of holdings in investments that actually meet that description.

Adding more weight to the regional reforms that are beginning to severely sharpen the pencil on ESG’s value and mechanics, the European Banking Association announced a new sustainable finance roadmap. It represents a “sequenced and comprehensive approach over the next three years to integrate ESG risks considerations in the banking framework and support the EU’s efforts to achieve the transition to a more sustainable economy”.

Politically, the environmental aspects of ESG, and greenhouse gas emissions in particular, are likely to be the main battleground. The European Union is seeking to increase pressure on China to cut emissions by imposing new tariffs on steel and concrete imports. And the G7 nations have struck a deal to fund Vietnam’s efforts to transition away from coal.

With that going on, the UK’s decision to give the go-ahead to its first new coalmine in decades is likely to stir further criticism.

Sandbagged and side-swiped in 2022, the indications are that ESG is going to be able to gain greater traction in 2023, and see more long-term change commitments despite (we hope) short-term crises.

The ESG News Review is written by Steve Earl, a Partner at BOLDT.

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