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Foreword
Rethinking the macro landscape
Reframing globalisation
Redefining sustainability
2024 Market Outlook Redefining sustainability
The ESG investible universe is offering more differentiated opportunities, riding on the push for greater transparency and reliability in ESG data and definitions. Improved green and transition taxonomies will pave the way for more ESG offerings that meet investors’ climate objectives.
The Environmental, Social and Governance (ESG) landscape is moving away from definitions and products which address terms like ESG, Sustainability and/or Climate in a broad-brush manner. Progress is being made towards developing standards that serve as a basic guideline for sustainability-related data and disclosures. A better understanding of the risk and value drivers in the ESG context would lead to more realistic pricing of ESG assets, and in turn influence company valuations.
Thus far, the market and regulatory focus has been on defining companies in terms of green assets or carbon emissions reduction. The disadvantage with this method is that it will sideline companies that are on a journey towards climate transition. With many developing countries still heavily dependent on fossil fuels, there is growing recognition that the transition to clean energy must be gradual as well as just.
SIGNIFICANT INVESTMENT OPPORTUNITY AS ASIA TRANSITIONS TO GREEN --------------- The move to define ESG elements in a clearer manner is consequential for Emerging Markets (EM) and Asia; many ‘brown’ or high-carbon emitting industries form a significant base of their gross domestic product. The International Energy Agency predicts that EMs will require significant public and private investments of around USD 2 trillion 2 per year going forward to transition to clean energy through 2030, to achieve net-zero emissions by 2050. The available opportunity set of pure green investments is more limited in Asia compared to developed markets. In the Asian investment universe, capturing a company’s progress in areas like energy efficiency, natural gas as a transition fuel, and using low-carbon materials is a crucial step in identifying early transition
A CONSTRUCTIVE PUSH FOR CLEARER ESG DATA AND DEFINITIONS --------------- The ESG practice is trending towards greater distinguishment of exact ESG elements which can act as differentiators when assessing both impact and risk-adjusted returns. This is a welcome development for investors who can now look for investment opportunities in previously mispriced ESG assets. Less ambiguity implies that ESG risk and opportunity signals will be easier to identify both on a sector and market basis. This encourages investors to develop their own ESG “house view” via proprietary analytical tools. Such tools allow investment teams to consider information which third party ESG
Investors and asset owners who help companies decarbonise in a practical and sensible manner can minimise negative social and environmental impact.
ratings providers may not offer a uniform assessment of. It can include forward looking ESG data such as exposure to specific climate transition opportunities and/or significant actions taken by companies to develop climate solutions. Such an approach could result in an investible universe that differs from how climate transition is currently defined by the broader market.
winners. Many companies in EMs and Asia were sold off as investors sought only pure green stocks, resulting in a big investible universe of attractively valued companies with good growth and return potential.
2 Source: https://www.iea.org/reports/scaling-up-private-finance-for-clean-energy-in-emerging-and-developing-economies/executive-summary
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