ESG Outlook Report
Man Group, an international hedge fund company, releases an ESG outlook report, analyzing the factors that may affect the development of ESG in the future, and proposing potential investment opportunities.
This report includes five ESG themes, including regulatory policy, economic impact, climate change, biodiversity and emerging markets. Man Group believes that these themes will become the focus of the ESG outlook.
Evolution of Regulatory Policy
2023 will be an essential year for the evolution of ESG regulatory policy. The European Sustainable Financial Disclosure Regulation (SFDR) will come into force, requiring enterprises to provide detailed sustainability disclosures. The US Securities and Exchange Commission will also publish a series of disclosure rules related to climate and human capital. In Asia, the China Enterprise Reform and Development Society also releases the first ESG disclosure standard.
In addition to the new policies, regulatory pressure continues to increase. SFDR has reduced more than 300 funds from Article 9 to Article 8, and Morningstar also cancelled the sustainability label of more than $1 trillion ESG funds. Regulators are developing new standards to clarify these basic ESG concepts.
The regulation of ESG-related financial instruments may also continue to tighten. For example, the KPI indicators of sustainable linked bonds are being strengthened. The International Capital Market Association (ICMA) has released KPI documents to help each industry determine the most important sustainability theme.
Impact of Real Economy
The rising interest rate level, frequent climate disasters and soaring commodity prices have affected the development of ESG since last year. The negative effects of these short-term crises on the economy have led many economies to choose to slow down the development of ESG. Their impact may also continue in next years.
At the same time, the current situation of inflation and wage spiral may make the social dimension of ESG more widely concerned. Research shows that in companies with relatively comfortable working conditions, the probability of supply chain problems is lower, which is very instrumental in the current environment. Therefore, besides traditional environmental factors, social factors may become the most potential part of ESG outlook this year.
Adaptability to Climate Change
Since 1970s, the negative cost of extreme weather has increased eightfold. With the increasing frequency of climate-related disasters, climate adaptation will become an important challenge for the development of society. At present, the global annual funding gap for climate adaptation is between US $160 billion and US $340 billion, which may be a new direction for subsequent investing.
The recent COP27 meeting set up the Loss and Damage Fund to provide subsidies for the negative impacts of climate change to developing economies. On this basis, insurance companies can play a greater role in providing funds to the affected subjects to help them strengthen their adaptation to climate change.
Development of Biodiversity
After the approval of the Global Biodiversity Framework at COP15, biodiversity is becoming an emerging area for investors. At present, the annual investment required to protect global biodiversity is about $ 900 billion, while the current financing amount is about $140 billion, which means huge investment opportunities.
Investment in biodiversity can be made from the following perspectives. Investors can choose companies that have the most direct impact on biodiversity. For example, the company’s business comes from resource exploitation, but it uses emerging technologies to maintain biodiversity. Investors can also choose companies that provide solutions for the restoration of biodiversity and companies that gradually reduce their dependence on natural resources.
Progress in Emerging Markets
Although Europe has maintained a leading position in ESG development, there has been a lot of progress in emerging markets. China is setting its green bond standards in accordance with the global standards. Singapore, Hong Kong and other regions are actively preparing for regional carbon markets.
Although there is no unified ESG reporting system, many emerging market economies have begun to adopt internationally recognized standards, such as Task Force on Climate-Related Financial Disclosures (TCFD). The exploration of relevant framework and carbon market means that the development of ESG in emerging markets is accelerating.
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