Today we’re going to look ahead to three key themes that will shape sustainable finance in 2023. And I’ll share some thoughts on the next 12 months from a handful of leaders in sustainable finance and investing.
But before we dive in, a pause for context.
In under two years, the Net Zero Asset Managers (NZAM) initiative corralled $66 trillion in assets under management (AUM) to commit to net zero. In that same time frame, international sustainable investor network Principles for Responsible Investment (PRI) saw its signatory base grow by over 1,000, bringing the group’s AUM to more than $120 trillion.
And asset managers globally are expected to increase ESG-related AUM to $33.9 trillion by 2026, up from $18.4 trillion in 2021.
The more trillions of dollars piling in to finance the clean economy transition the better, right? On the surface, yes. But where some see green ambition (albeit dwindling), others see "greencrowding," that insidious form of greenwashing wherein firms "hide behind an appealing group title in order to justify moving at the pace of the lowest common denominator." After all, atmospheric CO2 keeps steadily rising.
And the dissonance between finance leaders' proclamations of clean economy ambition and the wake-up calls from the public sector, civil society and the scientific community is seriously jarring.
For JPMorgan Chase CEO Jamie Dimon, who runs the world’s largest financier of fossil fuels, a policy against funding new oil and gas projects would pave "the road to hell for America." But for United Nations Secretary-General António Guterres, to not do so would keep us hurtling ever faster on the "highway to climate hell." Scientists had nothing to say on hell, but the International Energy Agency warned unequivocally that no new fossil fuel development and exploration should take place.
We talk of "bold commitments" in the sustainability space, but can a non-binding commitment qualify as bold? Is 2023 the year the pens get put down, the commitments’ ink dries and the finance sector starts getting to work on supporting the necessary "reset of the finance sector’s plumbing," as PRI CEO David Atkin put it to me?
I don’t know. But I know that veteran activist Bill McKibben is rallying the troops to cut up credit cards from the world’s four largest fossil fuel financiers, Citi, Chase, Wells Fargo and Bank of America, and that Bloomberg Green is hosting podcast conversations on the merits of property violence in climate activism.
The stakes are getting higher. So let’s dive into what’s at stake in the net-zero landscape, the evolving ESG political theater and investors’ focus on biodiversity and nature. To read thoughts from a few folks whose vantage I value on what’s in store for 2023, go to the GreenBiz.com version of this story here.
The net-zero landscape
Voluntary net-zero commitments sans legal ramifications have a limited ability to create change, and 2023 could see some asset managers leave pledges behind. The Net Zero Asset Managers initiative, for example, saw Vanguard pull its $8 trillion in AUM out of the group’s decarbonization commitment.
And, given legal concerns from primarily American banks in the Net Zero Banking Alliance, the Glasgow Financial Alliance for Net Zero (GFANZ) dropped its requirement for signatories to commit to the United Nations’ Race to Zero criteria, which held financial firms to a restriction on fossil fuel financing.
Voluntary net-zero ambition aside, 2023 should bring more thoughtful analysis of financial firms’ "political footprints," as Sen. Sheldon Whitehouse (D-Rhode Island) told our VERGE Net Zero audience last month. In a voluntary commitment paradigm, campaign contributions, dark money expenditures and trade association participation would provide better insight into how financial firms are, or aren’t, setting themselves up to take on net zero.
We talk of 'bold commitments' in the sustainability space, but can a non-binding commitment qualify as bold?
There is likely to be more focus in 2023 on the crucial — and arguably most important — text that undergirds commitments such as those under GFANZ. To paraphrase: These pledges are contingent on the implementation of policies that support a path to 1.5 degrees Celsius. If the rules don’t change, results won’t change.
We’ll see if the coalitions strengthen, fizzle, get a makeover or see a full exodus, but regardless of their form, how these net-zero ambitions get calculated should get more attention too: Are they based on carbon intensity versus absolute emissions? The oil and gas sector is majorly supportive of intensity targets. Given the sector’s past and present history of climate disinformation and inactivism, it’s fair to be suspicious of intensity targets’ value as far as atmospheric carbon concentration is concerned.
ESG political theater
If the dystopian drama series "Black Mirror" makes its way back onto Netflix, one could expect an "ESG in America" episode. The Texas state senate hearing last month with BlackRock, Institutional Shareholder Services and State Street on their use of ESG information in investments would serve as creative inspiration.
The 118th United States Congress may take on the project. With the House in Republican hands, we can expect a version of what we saw in Texas, but with better political actors, higher production value and a much larger and more engaged audience.
Yes, the use of ESG information to assess risk and long-term value is not itself political. But since the concept has been seized and politicized, and with surprising speed, it does exist as a political thing whether we like it or not.
Hopefully Team ESG doesn’t try to fight political theater with blunt and boring facts. If those with a stake in normalizing ESG concerns as part of investment practice wish to succeed, they’ll have to play politics a lot better.
For example, the State Financial Officers Foundation, a group made up of red state treasurers, many of whom have been pulling capital from asset managers that use ESG metrics, frame ESG as "a backdoor that progressives are using to invade our economy so they can advance their radical agenda," operating "by means of a shadow government."
Not true, but the message certainly pulls hard at the heartstrings.
Most of the ESG proponents and practitioners I spoke with during 2022 asserted confidently that the ant-ESG wave would be ephemeral — that it was political posturing, and that come the midterms it would recede. It felt reminiscent of the dismissive hubris that drove the "Trump will never win, it’s not possible" sentiment of 2015 and 2016.
Red state financial officers have already pulled about $4 billion from BlackRock, which pales in comparison to the over $133 billion the firm took in last year from American investors. But that doesn’t mean things can’t get worse, and Vanguard’s ditching of the NZAM initiative — which let it off the hook in the Texas state senate political theater — may not be an aberration.
On biodiversity and nature
It feels a little disquieting to frame a major moral crisis such as climate change into an investment opportunity, but that is in fact what climate change presents — the largest investment opportunity in a generation.
The GreenFin community is more aware than any that the path to transitioning investing-as-usual to tackle decarbonization has been a path with fits and starts. But it looks like tackling biodiversity issues in the investment industry may move more speedily, and there are a couple key reasons why.
First, of the more than 8,850 companies that received biodiversity-related questions from the disclosure platform CDP, more than 87 percent chose to respond on CDP’s first collection of biodiversity data. That’s a solid start on the voluntary reporting front. And, the International Sustainability Standards Board, which says its sustainability disclosure standards will be out "as early as possible" in 2023, is prioritizing biodiversity, ecosystems and ecosystem services.
It’s clear, and importantly clear to investors, that there is no viable path to decarbonization without major investments in natural capital, and COP15 delivered something of a path for investors to get moving.
The new Global Biodiversity Framework adopted by world leaders at COP15 in Montreal includes a requirement for large financial institutions to monitor, assess and transparently disclose their risks and impacts on biodiversity via their operations, value chains and most importantly, their portfolios, with the expectation to reduce negative impacts on biodiversity and increase positive impacts.
Easier written than done, but investors see the economic sense — to the tune of $10 trillion annually in business opportunities surrounding nature and biodiversity protection, per estimates by The World Economic Forum.
Finally, some thoughts (edited for clarity and length) on what’s in store for 2023 from a few folks whose vantage I value:
Alison Taylor — executive director, Ethical Systems
"It's interesting how similar the Democrat and Republican arguments [on ESG] are. Both sides are saying, ‘I am the responsible, rational capitalist, you are a partisan hack with a hidden political agenda.’ That’s because we are having a proxy battle about the future of capitalism. I’m hoping it results in a more grown-up and realistic conversation on what problems business can and cannot solve."
Elizabeth Harnett — senior associate, RMI's Center for Climate-Aligned Finance
"Firms will need to tailor high-level net-zero guidance to their own organizational structures and contexts. Enabling action and enhancing credibility across four pillars — sectors, geographies, asset classes and business units — can help banks with their net-zero strategy design, implementation and reporting."
Ken Pucker — senior lecturer, Tufts Fletcher School
"ESG investing is part of a long history of oversold, flimsily researched, win-win sustainability ‘solutions.’ It can deliver results, albeit in far fewer circumstances than advertised. That said, for investors committed to improving planetary welfare, climate transition, climate tech and blended finance are emergent, necessary, exciting and increasingly viable vehicles. Better to focus attention on how to expand these investments instead of debating how to regulate ESG investing."
Aniket Shah — global head of ESG and sustainability strategy, Jefferies
"Focus on climate policy implementation, not new initiatives. Governments have allocated over $1.2 trillion to the energy transition since 2020 … Many of the major initiatives needed to reduce emissions in the real economy now exist, and investors should focus on implementation."
Daniel Klier — ESG Book CEO
"Real progress is being made when it comes to ESG regulation … There is still a lack of harmonization in different jurisdictions’ frameworks, and it will get harder for investors before it gets any better. The use of technology will be vital for companies and investors to track compliance in the coming rush to ascertain what can be labeled as sustainable."