Sustainable finance trends 2022

Biodiversity risk

Deforestation in the Amazon. Image: luoman, Getty Images

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.

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

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

Corporate engagement and shareholder action

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.

Demonstrating impact through sustainable investment

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.

Author

Mariana Wheatley, Altiorem’s head of operations and marketing

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