RBC Capital Markets’ Sustainable Finance Group identified three key themes that it believes will define progress on ESG matters in 2023:
- The evolution of the sustainability disclosure landscape: RBC Capital Markets anticipates that a global baseline for sustainability disclosures, expected to be finalized by the International Sustainability Standards Board (ISSB) in 2023, will bring about a renewed emphasis on the concept of financial materiality and the interplay between sustainability and financial value creation.
- A great reset for ESG integration and sustainable finance: As market participants become more sophisticated and regulatory frameworks become increasingly stringent with regards to what qualifies as a sustainable investment, RBC Capital Markets believes that heightened attention to quality and integrity will help temper greenwashing concerns and drive further innovation in the sustainable finance market.
- A growing market for transition finance: The rise of energy independence as a critical national security priority, paired with growing recognition that some of the most impactful opportunities for decarbonization and value creation can be found within the highest-emitting sectors of the economy, will lead to an increased focus on projects that do not currently align with a pure “green” framework but that ultimately will be instrumental in helping to reach net-zero by 2050.
Responsible Investment Association of Canada1
- Expectations for future industry growth in responsible investing are moderating compared with high levels expected in past years.
- Mistrust/concerns about greenwashing is the top deterrent to growth; lack of standardized frameworks ranks second.
- Climate change leads all other issues as a key driver of responsible investing growth, followed by investor demand for ESG/impact.
- Innovations in the supply chain.
- Changing governance.
- Responses to regulation.
- Work life changes.
- New frontiers in measurement and transparency.
- Emergence of new investments: lab-grown commodities, greening steel and industrial real estate, and investing in carbon emission.
- Turning points for ESG assets.
- Expect Europe to gain significant ground. In the U.S, where the conversation around ESG and climate has become politicized, progress is slower.
- The need for climate data and analytics will grow quickly, driven by the EU action plan and the reporting requirements for the task force on climate related financial disclosures.
- Concerns about greenwashing (the misrepresentation of ESG product characteristics) will start to recede as regulators act. Europe is well on its way to tackling greenwashing through the EU action plan and providing a taxonomy that clearly sets out what makes an investment green.
- The great wealth transfer continues, bolstering the popularity of sustainable investing for individuals. Inheritors of wealth are increasingly considering their personal values as they make investment decisions.
- Investors are pushing for new ESG products, but demand for ESG investments outstrips supply. While 88% of institutional investors surveyed want asset managers to be more proactive in developing new ESG products, only 45% of managers said that they are planning to launch new ESG funds.
- Anticipate ESG assets under management reaching US$34 trillion, or 21.5% of all assets by 2026, outpacing the industry as a whole.
- 8 of 10 U.S. investors plan to increase their allocations to ESG products over the next two years.
- Barriers include complex and inconsistent regulation, along with the need for improved transparency on ESG products.
- ESG has broadened objectives and fiduciary duties.
- To attract new investment, managers need to differentiate their products and demonstrate ESG performance.
- E, S and G must be balanced as part of a just transition.
The responsible investing landscape, definitions, expected frameworks and standards are maturing. There is potential for ESG to be integral in the generational wealth transfer, especially with younger investors who are interested in understanding how to align their investments with their personal interests.
Regulatory guidance/requirements show signs of confidence as the strengthening of sustainability disclosure requirements and increasing standardization of sustainability data will be a strong driver for the responsible investing industry.
Amid increasing scrutiny over greenwashing, organizations are being more selective about how they define what investments they say are considered responsible investing. Greater awareness of ESG factors, including climate change, are translating into demand from investors for products and services to address or consider ESG issues. Continued adoption within this space is likely to occur in the years to come, especially as the great wealth transfer continues.
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