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Where We Expect ESG Investing to Go in 2022

ESG Comes into Sharper Focus

One of the positive and enduring legacies of the COVID era may ultimately be the mainstreaming of ESG issues. From the outperformance of ESG indices to the S&P early in the pandemic to the recent COP26 conference, the urgency of ESG issues has moved squarely to the fore of the conversation on Main Street and on Wall Street. From our vantage point in the asset management industry, we expect increased attention on ESG issues on the part of investors, shareholders, and regulators to only intensify. 

As we gaze ahead to 2022, what this likely means is that these key stakeholders will be applying more pressure to asset managers, wealth managers, and corporates to “walk the talk” — in other words, holding them accountable for the sustainability claims they are making. Offsets will likely rise in their importance vs. divestment agendas. At the same time, we also expect the hangover effect from the lingering pandemic to affect countries’ sustainability agendas differently. Those countries that are recovering more slowly will likely need to adjust objectives like net zero commitments. Against this backdrop, here are five sustainability trends we expect to play out in 2022.

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1. Measurement Gets Real

How to measure sustainability, which has been less of a focus for many investment firms, will become more critical but also more difficult. There are a myriad of ESG measurement tools out there, Kiplinger’s recently ranked nine of them, and the lack of standards has been a persistent challenge for the ESG products in the equity markets. Yet the available data still lags behind the demand for more accurate and more types of measurement[DP1]. Increasingly asset managers are being asked to report on data that corporations do not yet publish, and this is going to remain a challenge in the near-term.

We are going to see investors asking for harder numbers and metrics delivered in more meaningful and familiar ways.

The other issue is that investors are increasingly questioning the usefulness of ESG data. What does an ESG score really mean anyway? We are going to see investors asking for harder numbers and metrics delivered in more meaningful and familiar ways. For example, investors understand carbon emissions, so it will be more helpful for them to get a hard number tied to an entity’s carbon emissions rather than an ESG score.

2. Rise of ESG Thematic Funds

Investors are becoming more sophisticated about ESG investing, and as a result there will be a move away from generic ESG funds, which are also ripe for greenwashing, towards more specific thematic options such as gender parity or low carbon.

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3. Regulatory Regime Will Increase Focus on ESG

Europe has shown real leadership on the regulatory front on a range of issues, but particularly with respect to greenwashing and investors’ disclosures. In the US, the Biden administration has sought to roll back some of the proposed ERISA guidance, with proposed amendments to broaden the notion of fiduciary duty to include ESG factors. We can expect the regulatory regimes across both continents to scale efforts with an increased push on a host of issues from better measurement to greenwashing to marketing oversight.

4. Further Evolution Away from Traditional ESG Equity Investing

Much of the talk about the need to scale ESG investing ignores a fundamental hurdle: currently you can essentially only find ESG options for one part of your book. The large majority of ESG fund offerings remain long-only, equity-centric portfolios. What’s more, the narrow focus of the current offerings also raises the prudent investor assessment of risk-return. Whether equaling or underperforming their benchmarks, most ESG offerings carry full exposure to procyclical equity beta risk. Their portfolio construction limits ESG investor governance ideals as it limits institutional investors’ ability to achieve a high level of diversification in its ESG-conscious capital allocations. We’ll expect to see more investors push their investment managers for additional sustainable options. We believe pensions, in particular, will come under greater pressure to develop a multi-asset approach to ESG investing.

5. All Eyes on Europe

Without question, the US attendance at COP26 signaled their intention to recommit the country to the global climate agenda. But expectations are muted as to how much the US will be able to accomplish given political winds at home. Therefore we can expect the private sector to be driving much of the sustainable agenda in the US rather than the policy makers. In the meantime, expect Europe to continue to fill this void. Not only have they led for years on the governance front, but also on the regulatory front. Look for continued evolution of the Sustainable Finance Disclosure Regulations (SFDR) and ongoing enforcement actions to clamp down on greenwashing and boost accountability.

François Chevallier-Gravezat, Portfolio Manager at Welton Investment Partners, leads the Machine Learning Strategy and Risk Platform team and focuses his research on machine learning in systematic trading, including data acquisition and processing, trading signal development, risk management, and algorithmic execution. He has also spearheaded a number of ESG-related innovations at ... Read more
Purva Chhabra aids in the systematic integration of ESG research and analysis into Welton’s investment philosophy. She is responsible for building the firm’s fluency on ESG issues to effectively incorporate the information into Welton’s ESG focused programs. Purva is also a Trader on the Trading Operations & Oversight team where ... Read more
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