• The ESG backlash was evident in 2022
  • But investors keep pouring money into ESG funds
  • Here’s a list of issues MSCI ESG Research will be looking at in 2023

In 2022, ESG was put under the spotlight as regulators around the world upped the ante on greenwashing and stricter climate target disclosures.

As a result, there was a widespread backlash on ESG when investors began to question the merits of putting money into sustainable funds.

At the World Economic Forum in Davos a couple of weeks ago, ESG investing made headlines as bankers and asset managers lamented the state of sustainability efforts.

Larry Fink, CEO of Blackrock said: “The attacks are now personal. They are trying to demonise issues.”

Bank of America chief Brian Moynihan added that global definitions on ESG issues were vital to “align capitalism with what society wants from it.”

“Without that definition, without that convergence, what you had is everybody defined it their own way. Somebody would think this issue’s important, or this way to talk about it is important,” he said.

But despite all the opponents and anti-ESG initiatives, demand for ESG-themed funds continued to prove strong.

Looking ahead in 2023, the MSCI ESG Research team have given investors what they think will be the ESG and climate trends to watch this year.

 

Market conditions could test investors’ commitment to ESG

In 2023, MSCI says it will be watching whether investors will give companies the benefit of the doubt on their climate plans in these challenging market conditions.

According to MSCI’s study, investors in 2021 and 2022 have approved all of management-sponsored climate strategies, mostly by large majorities.

However, the average proportion of votes against went from 3.1% in 2021 to 9.6% in 2022.

Many of these dissenting investors may have opposed climate strategies that they felt were not ambitious enough.

With more climate votes scheduled for 2023, MSCI says it will be watching whether or not this dynamic will hold.

 

Will boards help improve emissions trajectories?

Investors are increasingly showing themselves willing to challenge board directors on their companies’ climate performance.

This includes scrutinising climate risk management disclosures or emissions-reduction plans.

In 2023, MSCI says it will be watching whether climate-focused boards are able help their companies stand up to scrutiny.

Boards that include climate-savvy directors may be better able to build support for emissions targets, compared to those that don’t.

These factors could help companies respond to questions from investors about their approach to climate change.

 

Regulators turn their gaze to ESG funds

For much of the past decade, ESG-oriented funds have operated with limited regulatory guidance, but that looks to be rapidly changing.

Spearheaded by the EU’s Sustainable Finance Disclosure Regulation (SFDR), regulators around the world are beginning to clamp down hard on greenwashing.

In 2023, MSCI says it will be watching for changes in ESG fund names and labels as unfolding disclosure regimes hold fund managers to stricter account.

Australia, Hong Kong and Singapore, for example, have provided guidance to standardise disclosures on ESG factors in the investment-selection process.

For investors, all this would mean better-informed decisions.

But it could also lead to the emergence of a multitude of disconnected regional standards for ESG, which is the opposite of what investors want in the first place.

 

Will banks be ready for climate stress test regulations?

An increasing number of regulators across the world are requiring banks to conduct climate-risk stress tests, with more likely to follow.

In 2023, MSCI says it will be watching which banks can rise to the challenge of developing climate-risk models to meet the demands of regulatory climate stress tests.

With or without net-zero targets, coming regulations mean that banks need to quantify the exposure of their balance sheets to climate-related risks going forward.

Analysing the climate-related data and shortfalls exposed by climate stress tests will be paramount to banks this year, according to MSCI.

 

Cutting deforestation

Despite COP26 commitments to halt and reverse forest loss, 2021 saw tree-cover loss of 25.3 million hectares globally, an area larger than Great Britain.

The Amazon forest alone lost an area equal to the size of Northern Ireland.

In addition, the summer of 2022 saw a wave of wildfires around the globe, burning down millions of hectares more.

In 2023, MSCI says it will be watching which companies with high deforestation exposure can improve their due diligence and supply chain monitoring programs.

Based on MSCI’s current analysis, the level of preparedness does not appear to be high.

For example, only 12% of listed food-products companies and 18% of food retailers had disclosed a deforestation policy, while the numbers for auto components were only 3%.

Complying with new regulations may therefore require significantly more effort on the part of companies.

Firms that have been thinking of deforestation as an issue for somebody else, or perhaps for someday down the road, may have to get a handle on it and in a hurry, says MSCI.

 

Mining old electronics to fuel new energy

In the last four years, China and the EU have strengthened their guidelines on the circular treatment of materials and waste, including electronic waste (e-waste).

In September last year, the US followed suit, passing a bill specifically on recycling electric-vehicle (EV) batteries.

In 2023, MSCI says it will be watching which companies up their efforts to mine secondary metals from e-waste.

Efficiently extracting metals from e-waste could reduce dependency on mining, including in regions prone to conflict and poor labor practices. It also means fewer emissions.

In addition to precious metals like gold and copper, e-waste also contains critical metals commonly found in many types of rechargeable batteries.

Turning e-waste into a viable source of secondary metals could help meet rising demand for clean-energy technology, including EVs and energy storage solutions.

Cobalt may be a bellwether for these efforts to mine e-waste, and recycling programs could reduce the projected 2040 demand for mined cobalt by 35%.

But necessity is always the mother of invention

A dwindling supply of clean-energy metals, combined with tightening regulations, may be the catalyst needed to push e-waste recycling into the next phase.

 

Can blockchain help monitor supply chains?

Modern-slavery regulations that require companies to identify human-rights violations – such as child labor, forced labor or human trafficking – are either in effect or pending implementation in several jurisdictions like the EU, Canada, US, and Australia.

Consumers meanwhile have been exerting more pressure by including ethical considerations in their purchasing decisions.

In 2023, MSCI says it will be watching pilot projects that use blockchain for supply-chain transparency and traceability.

Blockchain can offer a potential tool for this thorny issue, through a decentralised, immutable record of all supplier transactions.

For example: Walmart Inc. has partnered with IBM to track pork products in China in a farm-to-table approach.

Unilever adopted SAP SE’s GreenToken blockchain technology to source 188,000 tons of palm oil, and Ford Motor used the technology to track cobalt mining.

So far, these pilot projects have been relatively niche, and solving traceability challenges will require much broader adoption.

MSCI does not expect to see the challenges of supply-chain transparency solved overnight, but instead will be watching for signs of a much-needed turning point.

 

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