ESG Watch: Despite setbacks, green finance ends 2022 in good health

U.S. President Joe Biden holds out his pen to U.S. Senator Joe Manchin (D-WV) as Senate Majority Leader Chuck Schumer (D-NY) and U.S. House Majority Whip James Clyburn (D-SC) look on after Biden signed "The Inflation Reduction Act of 2022" into law during a ceremony in the State Dining Room of the White House in Washington, U.S. August 16, 2022. REUTERS/Leah Millis

December 22 - If 2021 ended on an optimistic note following the relative success of the COP26 climate conference in Glasgow, that optimism was dashed pretty early in 2022, when Vladimir Putin invaded Ukraine. The war precipitated a global energy crisis and called into question the value of environmental, social and governance issues in the face of naked aggression and geopolitical upheaval.

Meanwhile, a backlash against ESG gathered pace in the Republican states of the US, with figures such as Florida Governor Ron DeSantis, as well as other states such as Texas and West Virginia, accusing asset managers of pursuing ideological goals through their use of ESG to assess risks.

But ESG factors kept rearing their heads throughout the year, to highlight just how important they have become. It was a year of climatic extremes: record temperatures were seen from the Pacific north-west to India and Siberia, while fully one-third of Pakistan was flooded by devastating rainfall, and floods also affected regions from Nigeria to Brazil to northern Europe.

Even though the surge in energy prices brought a short-term return of coal-fired power in some markets, it has also turbo-charged efforts to replace fossil fuels, with renewable energy, storage, efficiency and demand-management measures. The normally downbeat International Energy Agency said that the world is now on course to install more renewable energy capacity in the next five years than it did in the last two decades, at a rate much faster than it expected even 12 months ago.

Secretary-General of the United Nations Antonio Guterres speaks as he attends the COP27 climate summit at the Red Sea resort of Sharm el-Sheikh, Egypt November 9, 2022. REUTERS/Mohammed Salem

Partly, it’s the war; partly it’s the impact of all those weather events on public opinion and government willingness to act. Partly, it’s because the infrastructure for the energy transition is slowly falling into place.

Perhaps the most stunning and most far-reaching development of the year was the passing of the Inflation Reduction Act (IRA), which provided a $369 billion boost to clean energy markets in the U.S., as well as electric vehicles and new technologies such as hydrogen and sustainable aviation fuel, and which could, according to Schroders, cut US emissions by 40%.

On the regulatory side, the SEC unveiled its plans for climate disclosure rules, based on the recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD), while in the UK TCFD disclosures became mandatory for companies. The EU continues to roll out climate-related rules on everything from buildings to product design and what constitutes a green investment (the EU Green Taxonomy). Meanwhile, Goldman Sachs reports that in Asia, demand for climate reporting is increasing from governments, investors, and consumers. TCFD-aligned reporting is set to become the norm in markets such as Hong Kong, Singapore, New Zealand, Malaysia, Taiwan, and Japan.

Where once renewables foundered on the cost and energy security aspects of the energy trilemma, now they are not just the cheapest and most environmentally friendly form of energy, but helping to boost energy security as well.

Meanwhile, the International Sustainability Standards Board (ISSB) continues to codify the requirements for sustainable investing and operations. It has issued standards on General Sustainability-related Disclosures (IFRS S1) and Climate-related Disclosures (IFRS S2), and the latter will be incorporated into the disclosure framework of the CDP.

At the same time, ever-increasing amounts of data are becoming available, along with the tools to interpret them, giving companies fewer places to hide. These tools range from satellites detecting methane leaks to new anti-greenwashing rules from regulators such as the SEC in the US, the UK’s FCA and the Monetary Authority of Singapore.

That means that there is greater transparency about how, if at all, investors and companies are addressing the energy transition, and it is harder for them to avoid being held to account for failing to change their behaviour.

And if COP27, the UN climate conference held in Sharm-el-Sheikh in November, was for the most part underwhelming, it did deliver a landmark deal addressing loss and damage in the least developed countries, as well as a $20 billion deal to phase out coal in Indonesia (technically, this was announced at the G20 meeting, but with COP27 very much in mind). This was followed by a $15 billion scheme to cut coal use in Vietnam, and India is looking at these Just Energy Transition Partnerships as a model for its own coal sector.

A worker carries a plastic bag as he walks in a coal stock pile port near Cilegon habour of West Java province June 27, 2008. Indonesia, an archipelago of 17,000 islands, is the world's largest thermal coal exporter and offshore coal loading has been the preferred way of shipping coal from remote mining areas to overseas buyers or major industrial centres on the main island of Java. Picture taken June 27, 2008. REUTERS/Dadang Tri (INDONESIA)

Following hot on the heels of COP27 was COP15, which was confusing in many ways: hosted by China, but located in Canada and two years late due to COVID-19, it was all about biodiversity, not climate. The international meeting was overshadowed not just by its climate counterpart but also the football World Cup.

Yet it produced a deal that almost 200 countries will work to “halt and reverse” biodiversity loss by the end of the decade, as well as a target to conserve 30% of the world’s land and 30% of the ocean by 2030.

COPs are often assessed a success or failure in the immediate aftermath, but they are better seen as part of a process that defines a direction of travel. Until COP15, nature had not even been on the road; in future, it will be a key driver of investment and business decisions.

“Those not already assessing and disclosing their risks, impacts and dependencies, will need to get ready,” said Eva Zabey, executive director of the corporate coalition Business for Nature. “This is recognition from governments that business as usual is economically short-sighted, will destroy value over the long term, and will no longer be accepted.”

It was easy to be gloomy about ESG in 2022. For much of the year, it felt like a concept that was under attack. But that was a tribute to its strengths as an investment tool and the threat it presents to vested interests. Despite some setbacks, ESG goes into 2023 in good health.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Sustainable Business Review, a part of Reuters Professional, is owned by Thomson Reuters and operates independently of Reuters News.

Mike Scott is a former Financial Times journalist who is now a freelance writer specialising in business and sustainability. He has written for The Guardian, the Daily Telegraph, The Times, Forbes, Fortune and Bloomberg.