The year 2021 was the breakout year for ESG investing, with a record US$650 billion going into ESG-focused funds globally, accounting for 10% of worldwide fund assets.

Companies that are rated highly for their sustainability efforts have delivered record gains, boosted by growing awareness in investments focused on ESG issues.

But many predict the ESG boom has just started, and will continue its rapid momentum well into 2022 and beyond.

Here are eight trends in ESG investing that experts have predicted for 2022.

1.   Investor interest in ESG investments will accelerate further

ESG issues are set to become even more important in the years ahead.

According to a survey by fund manager Schroders, 94% of global investors (91% in Australia) said they were conscious of sustainable investing and ESG-aligned investment opportunities.

Around 57% of global fund managers said they would be willing to move to a sustainable portfolio with the same risk and diversification characteristics as their current investments.

Europe, which is considered to be the most advanced market for ESG investing, is seeing a preference for active management.

Australia is still behind Europe, but 2021 saw a record US$3 billion of inflows to ESG funds into the country.

2.   Social issues will become more prominent

Schroders also believe that investors will be increasingly aware of the ‘S’ in ESG, with social inequality and fostering resilient communities top of investors’ mind.

More than half of global asset managers said that social issues had become more important to them during the pandemic.

Events that highlighted social justice issues such as the George Floyd incident are expected to bring more funds into the ESG sector.

3. Scrutiny over ‘greenwashing’ will ramp up

Greenwashing refers to the potential for funds to overrepresent the extent to which their practices are environmentally friendly, sustainable or ethical.

Regulation is expected to get tighter, with the US SEC and ASIC pushing for ever greater ESG disclosures from companies and funds.

Shareholder activism will play a big part in ensuring companies abide by their ESG statements.

We’ve already seen Australian activists and environmental groups like Market Forces voicing their demands at AGMs, requesting the big four banks to abide by their 2050 commitments and stop funding fossil fuel projects.

4. Bifurcation of the market

Experts are also anticipating a bifurcation of the market where the rigorous process to eliminate greenwashing would lead to certain companies standing out from others.

2022 will see funds accelerate toward companies that genuinely engage in ESG issues, and out from those that are just window dressing.

5. Growth in Biotechs

The life science industry has experienced massive growth over the last two years, and that’s expected to continue in 2022 and beyond.

The industry is gradually moving toward a model of customised therapies for specific patient populations, and away from the R&D efforts of big pharma.

According to Dr Anita Gupta from the Johns Hopkins School of Medicine, it will be increasingly difficult for big pharma and biotech companies to manage the execution of these programs in-house.

Going forward, biotech companies will need to tap into partners that could provide them with a streamlined production process, and socially responsible products.

6. Biodiversity and food

Biodiversity and food availability on Earth is under threat, and in a 2019 UN report, scientists warned that 1 million species – of an estimated total of 8m – face extinction.

But awareness is on the rise, and the desire to do more with the resources we have will drive investments into companies that operate in this space.

Water tech, green metals, and agricultural companies are some of the stocks that could see investment inflow in 2022.

7. Consolidation in the energy sector

Experts are betting that agreements arising from last month’s COP26 summit will drive more investments into the global warming space.

The push for renewable power and the phasing out of old energy sources like coal are going to be a persistent theme in 2022.

Experts predict further consolidation within the fossil fuel sector, with M&A activities expected to surpass record levels seen in 2021.

8. Green bonds to explode

Another major trend for 2022 will be the explosion in green bond issuance, according to experts.

Greece, Denmark, and France are just some of the countries that will ramp up national borrowing through the issuance of sustainability linked bonds.

The streamlining of reporting and regulations across Europe and Asia as a result of COP26 will only support the market dynamics and the flow of funds into this investment category.

 

ESG interview with Murray Ackman, Credit Analyst at Pendal Group

Ackman has previously worked within the NGO sector, where he gained first-hand experience in many social projects which include training women in Bangladesh and rural India.

He joined the Pendal Group as a fixed income credit analyst, and explains to Stockhead about the rapid growth in green bonds investing.

 

What trends will we see in green bonds investments in 2022?

“We’re seeing two big changes in fixed income.

“The first is impact bonds. Impact bonds have a social or environmental outcome, while still paying coupons, like a vanilla bond, and the credit risk is with the issuer rather than any underlying projects.”

They’ve just grown and have gone gangbusters as we had a record year last year, around US$9 billion, and it’s more than doubled in 2021.”

“This is just going to keep growing. We’re finding such demand for these types of bonds that perform really well on the secondary market, because everyone wants to get a slice of it.”

“The second trend we’ll see in 2022 will be a new class of bonds called sustainability linked bonds.”

“They’ve been around in Australia for maybe six to nine months, in Europe for maybe four years.”

Explain what a sustainability linked bond is

“These are bonds which are tied to a particular target. Let’s say a corporate says it wants to reduce its emissions by X per cent by a particular time.”

“And if they don’t make that KPI, they have to provide an extra coupon payment to the investor.”

“For impact bonds you need underlying projects, but a sustainability linked bond is open to everyone who wants to improve their environmental footprint or social outcomes.”

How do retail investors get involved?

“The main way for retail investors to get involved is to invest into funds like the ones Pendal manages.”

“We manage two bond funds, and one of them has around 60% of its holdings in these types of impact bonds at any given time.”

“Without investing in such a fund, it’s very difficult for a retail investor to try and hold to the 40-50 bonds generally required to have that diversification.”

 

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