As predicted by some experts, Environmental Social and Governance (ESG) investment will become the “new-bottom line”. The ESG and broader climate finance is propelled by a combination of recent catalyzers, namely, climate regulation becoming more forceful; climate crisis and its economic impact skyrocketing and overall coordination among ESG stakeholders improving.
The Green Deal in Europe and the Build Bank Better bill in the US, represent the two biggest global catalyzers for the 2022 ESG investment momentum. Furthermore, the Security and Exchange Commission (SEC) and the US and EU Central Banks taking climate risk more seriously, will position ESG investment as the greatest value generation opportunity in 2022.
New Compliance and Disclosure Risk
With this positive investment momentum around ESG, Greenwashing will accelerate as well as companies try to tap into the “green branding potential”. Greenwashing is the corporate process of providing misleading information about how a company’s products are more environmentally sound. In 2022 the war on greenwashing will take center stage as many established corporations and start-ups position themselves as ESG front-runners. With demand for clarity over corporate brands’ values, and transparency, ESG companies will have to demonstrate their “green credentials” and expect a much deeper level of scrutiny from the regulator as well as from investors and consumers. Although some of the corporate environmental claims might be real, companies engaged in greenwashing tend to stretch their green claims or the benefits to fully leverage the sustainability and impact branding. This market externality will inevitably create opportunities for more innovative corporations and more genuine products which have integrated decarbonization and sustainable practices in their investment strategies and operations. Emerging technologies, such as the decentralized ledgers, space tech, robotics, and artificial intelligence will play an increasing role in cross-checking corporation’s ESG claims, generating a new wave of fintech innovation linked to sustainability and green growth.
New ESG financial trends and products
In 2021 alone, ESG funds raised approximately $120 billion propelled by more regulation and disclosure clarity as new companies take a more strategic interest in ESG. In 2022, the increase of ESG investing is likely to continue at an even faster pace. A key catalytic event is national governments and central banks getting more serious about their decarbonization targets and climate risk mitigation procedures. In 2022 we will also see climate finance products reaching unprecedented demand and offering. New sustainable product launches will happen across finance ranging from green and resilience bonds, green mortgages to green bank accounts with sustainability features, new green crypto currencies as well as ESG focused DEFI (Decentralized Finance) platforms. The demand for new ESG financial products will also be inflated by an overwhelming interest from millennials and Z generation. More than 60% of these younger consumer expressed interest in investing in companies that take ESG seriously.
What is happening in the startup ecosystem?
Andrea Zanon, an ESG Executive and Investment Advisor who has developed climate strategies for over 20 countries and Ministers of Finance and who advises global financial institutions and corporations how to build resilient strategies and investment plans, comments:
“Climate tech investment will accelerate at an unprecedented rate. Investment in tech to mitigate climate risk grew to $88 billion as reported by PWC in 2021 leading up to June 30. This represents an over 200% increase from the previous year. According to the same source, in 2021 every VC dollar invested, 14 cents were allocated to climate tech startups. The average deal size increased to approximately $95 million, and the sector prioritized were food tech, mobility, and finance. While the 2021 startup investment was of more opportunistic nature with limited climate mitigation impacts, in 2022 we will see a shift toward projects that make our economy less carbon intensive particularly in agribusiness, energy and waste management”.
A November 2021 IFC (the private sector investment arm of the World Bank) report estimates that emerging markets will also play a large role in catalyzing climate investment over the next decade. The research conducted across 21 emerging-market economies representing 50% of global emissions and based on existing climate policies and investments commitments, indicates that by 2030 we will have $23 trillion in opportunities for climate-smart investments. If we add the $ 130 trillion committed from the Glasgow Financial Alliance for Net Zero towards financing the greener energy transformation, we get an extremely promising decade of climate relevant investment ahead of us. Let’s only hope that these ambitious commitments convert into deployed capital investment.