ESG Club


SUSTAINABILITY – WHAT TO LOOK FOR IN 2023?


Alexander Bernhardt is global head of sus- tainability research at BNP Paribas AM


Environmental, social and geopolitical crises made 2022 an eventful year, with much of the focus on energy (security) and extreme weather events. We also saw advances on climate spending, biodiver- sity and sustainable finance regulation. The wider sustainability field will contin- ue to hold investor attention in 2023.


Implications of the energy crisis While it was uncertain what impact the energy crisis – fuelled by the war in Ukraine and the rapid post-pandemic economic rebound – would have on net- zero commitments, it’s clear that it has started to push down carbon emissions. Carbon Brief has estimated that the Euro- pean Union’s CO₂ emissions from energy use dropped by 5% during August, Sep- tember and October compared to the same period in 2021. This may be attributed to rising fossil fuel prices that have forced households and industries to reduce electricity and gas use. The energy crisis is also driving an accel- eration in installations of renewable power – the world is now expected to add the same amount of renewable power in the next five years as it did in the previous 20, according to the International Energy Agency (IEA). This build-out would be some 30% higher than the level of growth the IEA forecast in 2021. Government policies should contribute to this. The EU’s REPowerEU plan is to cut reliance on fossil fuels and speed up the energy


transition. The US Inflation


Reduction Act includes $369bn (£305bn) of incentives to boost clean energy sup-


plies and investment in green technology. Moreover, countries including Taiwan and India set up carbon pricing schemes in 2022. The scheme with the highest average carbon price remains the EU Emissions Trading System (ETS), where prices hit a high of more than €95 (£84) per tonne in 2022. Longer term, ETS pric- es are expected to rise, with projects indi- cating potential for €150 (£133) this year. Finally, EU negotiators reached a provi- sional agreement on a Carbon Border Ad- justment Mechanism (CBAM) that would impose a carbon price on imports of cer- tain emissions-intense goods. As the im- plementation of the CBAM gets closer, it is likely other countries will introduce such pricing schemes to avoid the tariff.


Biodiversity Biodiversity loss has the potential to do unprecedented economic damage. The World Economic Forum estimates $44trn (£36trn) – more than half of the world’s GDP – depends on nature. Encouragingly, 2022 saw a growing focus on biodiversity-related investment in re- sponse to investor demand. This trend will likely accelerate, particularly after COP15. The market for biodiversity prod- ucts is predicted to be worth $93bn (£76.8bn) by 2030, up from $4bn (£3.3bn). To help plug the financing gap to protect nature, the UN has advocated the use of a new instrument – biodiversity credits. Last year, the announcement of Nature Action 100, a collaborative initiative simi- lar to Climate Action 100+, focused on in- vestors engaging with companies in sec- tors driving nature loss. To help measure exposure to biodiversity risks,


the Taskforce on Nature-related Financial Disclosures (TNFD) is develop-


PI Partnership – BNP Paribas AM


ing a framework. This should allow finan- cial institutions to incorporate nature-re- lated risks into strategic planning and asset allocation decisions. The TNFD rec- ommendations are due in September.


Sustainable financial regulation In 2022, regulators focused on ESG. The US Securities and Exchange Commission proposed new climate-disclosure rules for listed companies. The rules may boost shareholder activism as investors seek more information from firms on their cli- mate-related operations and targets. Financial regulators are also increasingly clamping down on greenwashing. Europe,


asset managers continue


In to


clarify fund classifications under SFDR. Additionally, environmental campaigners and individuals are using legal action to force governments and companies to strengthen their climate commitments. The number of climate lawsuits filed globally has more than doubled since 2015, according to the London School of Economics. Furthermore, climate-vulner- able groups, such as indigenous groups, small island communities and youths are likely to play a more active role in climate litigation in 2023.


What we can expect this year: – Downward pressure on carbon emis- sions as costs are internalised and scruti- ny on net zero commitments intensifies. – For investors, measurement and man- agement of nature-related dependencies, risks, impacts and opportunities is increasing in importance; biodiversity is catching up with climate. – Increasing sustainability-related regu- lation in key jurisdictions will drive closer scrutiny of outcomes driven by sustaina- ble investment strategies.


For professional investors. BNP PARIBAS ASSET MANAGEMENT UK Limited, “the investment company”, is authorised and regulated by the Financial Conduct Authority. Registered in England No: 02474627, registered office: 5 Aldermanbury Square, London, England, EC2V 7BP, United Kingdom. www.bnpparibas-am.co.uk This article is issued by the investment company. Investors considering subscribing for the financial instruments should read the most r ecent prospectus or Key Investor Information Document (KIID) available on the website. Opinions included in this article constitute the judgement of the investment company at the time specified and may be subject to change without notice. This article does not constitute or form part of an offer or invitation to subscribe for, underwrite or purchase an interest in any strategy. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial investment. Past performance is not a guide to future performance.


Issue 121 | March 2023 | portfolio institutional | 39


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