Sustainable finance trends 2022

Upon reflection of the past year and in anticipation of the year ahead, there are a few notable sustainable finance trends that Altiorem expects to shape the finance industry in 2022. As a sustainable finance library, Altiorem has access to insights such as the most popular articles that our members are searching for and reading. Applying this data from 2021, Altiorem saw that the most popular research articles were on integrating environmental, social and governance (ESG) into investment processes, the rise of sustainable investing, transitioning to a low carbon economy and the integration of the Sustainable Development Goals (SDGs) in company reporting and investment decision making.

Our members are mostly finance professionals working in financial services and investment management globally, including Australia, United Kingdom, Europe and the United States. Taking from our member insights and analysing themes in the broader sustainable finance industry, Altiorem has identified four key trends in 2022 including; biodiversity risk, stranded assets, shareholder activism, and corporate impact.

Deforestation in the Amazon. Image: luoman, Getty Images

A business as usual scenario is forecast to result in a catastrophic loss of nature and biodiversity, hitting food and agricultural sectors the hardest due to their heavy reliance on nature, and threatening the global supply of commodities such as timber, cotton and crops.

The issue is highly relevant to Australia, with the highest rate of mammal extinction in the world and 90 critically endangered and 167 endangered species.

Investing in companies reliant on biodiversity exposes shareholders to transition and physical risks. Transition risks include new policies that could limit a company’s activities, and physical risks occur when nature dependent supply chains are disrupted due to environmental degradation. Companies with operations and supply chains dependent on nature are expected to increasingly report on their transition and physical risks.

Sustainability reporting remains largely climate change focused. ASX listed companies in the agricultural sector like Elders and Costa Group Holdings Limited release annual sustainability reports on climate change measures such as carbon emissions. However, the recent Taskforce on Nature-related Financial Disclosures (TNFD), is seeking to provide a framework for business and financial institutions to assess, manage and report on their relationship and impact on nature.

This year should see more ASX companies reporting on their biodiversity risks as well as the positive impact they have on biodiversity regeneration.

Stranded fossil fuel assets are investments that stop earning an economic return due to the shift to a low-carbon economy.

With more than 130 countries making net zero pledges by 2050, new research estimates that half of global fossil fuel assets will be worthless by 2036.

This is already impacting the Australian energy market, a report by the Institute for Energy Economics and Financial Analysis (IEEFA) found that AGL Energy Ltd (ASX: AGL) has lost over 70% of its market value, which is a $12 billion loss for shareholders. While AGL invests in renewable energy, its continued investments in coal-burning power stations make it Australia’s biggest polluter.

Coal-fired Power Station. Image: Xijian, Getty Images

Australia is the world’s largest exporter of coal and liquefied natural gas. However, with an increasing number of countries with ambitious 2030 targets, the Reserve Bank of Australia (RBA) warns that after 2030, the global demand for Australia’s coal exports will rapidly decline. As reflected in Altiorem’s popular research on transitioning to a low carbon economy, the global shift towards action on climate change is increasingly local, with the majority of Australians agreeing that the Government’s main priority for energy policy should be reducing carbon emissions and 78% supporting a net-zero emissions target for 2050. International energy market shifts along with mounting public pressure to reduce carbon emissions will likely increase the risk of fossil fuel assets becoming stranded in the years ahead.

The global trend of shareholder activism is expected to continue and is increasing in Australia.

As of 26 November 2021 twenty-six ESG shareholder resolutions have been put forward to companies in the ASX200, the majority of which relate to action on climate change and involve the energy sector.

Analysis of shareholder ESG resolutions put forward in listed Australian companies between 2002 and 2019 found that resolutions are increasingly being supported and have been effective in influencing change within companies.

The Australasian Centre for Corporate Responsibility (ACCR) is a shareholder advocacy organisation focused on how listed companies manage climate change, human rights and corporate governance. In July 2021, ACCR filed a shareholder resolution to AGL Energy on the disclosure of alignment with the Paris Agreement goals consistent with a 1.5°C pathway urging the company to take urgent action to decarbonise. The resolution received 52 percent of shareholder support and while these resolutions are non-binding, it nonetheless sent a strong message to the board that the majority of shareholders want action on climate change.

Climate change is not the only area shareholders have expressed a collective and transparent view via shareholder resolutions, social issues such as labour rights, human rights and stopping the destruction of Indigenous heritage sites have seen shareholder activism. Shareholder resolutions will continue to provide shareholders a means to engage and influence a company on ESG issues, visit ACCR and Market Forces to stay up to date on ASX shareholder resolutions.

As sustainable investment grows, so does the demand for understanding the impact that investments have on people and the planet. While historically, what was known as ethical investment strategies focused on avoiding harmful industries such as tobacco, increasingly approaches like sustainable and impact investing seek to achieve verifiable positive outcomes.

According to the 2021 Responsible Investment Benchmark Report, Australia’s responsible investment AUM increased by $234 billion to $1,918 billion in 2020. Funds with leading responsible investment practices increased their AUM by 30%.

The rest of the market has seen an 11% reduction in AUM, demonstrating the shift towards responsible investment practices such as actively engaging with companies to improve their ESG practices and seeking sustainability outcomes.

Reflected in the data on Altiorem’s most popular research articles, the integration of the SDGs in company reporting and investment decision-making should continue to grow this year. Companies will increasingly measure the impact of their output against international frameworks like the SDGs and TNFD to demonstrate positive social and environmental impacts through investments in education, healthcare, renewable energy and forest regeneration.

These trends show that sustainable investing is clearly here to stay, however care must be taken as there are many exaggerated claims — known as greenwashing — with regulators in Australia and overseas expressing concerns at the claims of both investors and companies. Tools like Responsible Investment Association of Australasia’s Responsible Returns tool and Altiorem’s free online library can help give investors the information they need to understand an area of investing which has become too important to ignore.

Mariana Wheatley, Altiorem’s head of operations and marketing

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