Wrapping up 2022 and welcoming 2023

13 minutes read

 

The Green & Sustainable Hub (GSH) is delighted to present its best wishes for 2023 and takes the opportunity to draw lessons from 2022.

Before starting the new year, we looked back on the most important milestones within the green and sustainable finance landscape.

2022 was not only rich in terms of incoming regulation but also densely packed with ambivalent market developments, inflation spiral fed by geopolitical shocks. Taking a step back and pause, to identify drivers, constraints, and trends.

We finally identified 4 major developments:

      1. A tangible eruption of greenwashing beyond reputational scandals and risks;

      2. A global regulatory push in sustainable finance outside Europe;

      3. International progress on biodiversity and shift from wishful thinking to actual tools;

      4. Sustainable finance sensitivity to adverse market developments and geopolitics.

We’ll stay on the watch to follow the evolution of these trends into 2023. In the meantime, we wish you a pleasant year and even better read-through.

Yours,

Natixis CIB Green & Sustainable Hub

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1. A tangible eruption of greenwashing in finance beyond reputational risks

From mere reputational risks to litigations and financial regulators’ crack down

“Sustainability” kept gaining traction. Yet, it has simultaneously caused deceit and a concrete rise in greenwashing scandals, probes and lawsuits. Misrepresentation or misleading statements are not newborn tendencies nor are reputational risks, but greenwashing litigations and accusations are very new and becoming real (HSBC advertising posters removal, Goldman Sachs AM settlement with the SEC[1]).

Prompted by increasing greenwashing allegations, a broader consensus has emerged amongst regulators, arguing that vague terms used by funds to market themselves as “green” need to be pinned down and precisely defined. Opaque methodologies or obscure sustainability criteria weighting to inflate sustainable assets amounts are also under scrutiny. As such, financial watchdogs have been honing disclosure requirements and launched search warrants or raids.

A telling illustration of this is the Securities and Exchange Commission (SEC)’s current “war on greenwashing” in the United States. The regulator published disclosure rules in May 2022, designed to integrate ESG dimensions within investment products and thereby repress misleading claims made by ESG funds managers (see our article here). As stated by Commissioner M. Peirce “a key impetus for today’s rule making is a legitimate concern about the practice of greenwashing by investment advisers and investment companies.”[2]

In the UK, the Financial Conduct Authority (FCA), has published a consultation in October to propose new restrictions on investment managers using “ESG” or “green” labels with 3 fund labels to distinguish different types of “sustainable” investments; those labels are mirroring the European Article 8 and 9 fund classification. Funds regulated by the FCA will be given a year to comply once the rule is brought into force in 2023.

In the EU, a clarification on the definition of the term “sustainable” is eagerly awaited under the Sustainable Finance Disclosure Regulation (SFDR) for 2023. Financial sector was indeed deeply mobilized on its implementation but struggled to use harmonized definition of sustainability, whereas in the first place the regulation aimed at fighting the greenwashing risk. 

In Australia, the Competition & Consumer Commission (ACCC) announced to increase scrutiny on green marketing in Sep 2022. Additional disclosure requirements on sustainability marketing and terminology were added into Corporation Act. The authorities launched consultation on mandatory climate-related financial disclosures for large listed companies and financial institutions in Dec 2022. In Hong Kong, the Fund Manager Code of Conduct was amended to mandate TCFD-aligned climate reporting from fund managers in 2022.

With financial regulators toughening their stand and whistleblowers increasingly holding firms accountable, a system of “checks and balances” made of innovation, reputational and legal streams is progressively seeing the day. It imposes some self-restrain from market participants and encourages consistency and proportionality between labels, adds and products or practices. Conversely, sometimes arbitrary accusations and legal insecurity can stymie climate action and lead to “greenhushing” (eco-silent). To address and prevent this growing greenwashing risk, 2022 has witnessed different initiatives arising from market actors or regulators. For instance, the International Capital Market Association (ICAM)’s work on SLB KPI registry to discipline SLB issuances (see our article here) should help enhancing clarity and integrity on the market. The European Securities and Markets Authority (ESMA)’s work on ESG rating agencies to better grasp the structure and the data provided, or its very recent consultation on funds’ names using ESG or sustainability-related terms also aim at supervising the greenwashing risk.

 

2. A global regulatory push in sustainable finance outside Europe

A regulatory drive across the globe, testifying of actors’ ambition to go beyond mere disclosure and sustainable finance’s internationalization

The EU has walked the talk on regulations and climate-policy.

Benefiting from its first mover advantage, the EU has reaffirmed its green policy pioneer position. On the regulation side, 2022 began with the Delegated Act of the Taxonomy Regulation Article 8’s entry into force, requiring financial and non-financial companies to provide further information to investors about assets’ environmental performance, to increase transparency[3]. The European Supervisory Authorities (ESA) brought further clarification on their Regulatory Technical Standards draft, under the SFDR, in April 2022 : details were specified for the content and presentation of information related to the “Do no significant harm” (DNSH) principle as well as information’s presentation linked to sustainable investment objectives’ mentioned in pre-contractual documents, websites and periodic reports[4].

Beyond disclosures clarification, the EU pursued new climate-related actions on all fronts, on the policy side with the European Green deal and fit-for 55 package led by the Commission, but also on the monetary side, with the ECB’s climate-change actions entering into force (See our article “ECB to decarbonize its corporate bond purchasing and collateral framework from intent to almost immediate action”, available here).

The ECB instilled new measures to introduce climate change considerations in its monetary framework, by gradually tilting its holdings towards issuers with “better climate performance”, “measured with reference to lower greenhouse gas emissions, more ambitious carbon reduction targets and better climate related disclosures[5]”.

Amongst the “Fit for 55” initiatives figure the Carbon Border Adjustment Mechanism (CBAM) and the EU Emissions Trading System (EU ETS) reforms (See our article here). Furthermore, the European parliament voted to ban the sales of new internal combustion engines within the EU from 2035 onwards, to cut carbon-dioxide emissions[6].

Against a backdrop of fuel poverty caused by inflation, the social disruptions which can be caused by a faster transition caught stakeholders’ attention. All these new climate policies justified the creation of a Social Climate Fund, dedicated to a fair transition and established to specifically address “the social and distributional impacts on the most vulnerable arising from the emissions trading of buildings and road transport”[7]. The environmental transition’s social dimension has therefore been tackled this year and the terms “fair” or “just transition” have become increasingly adopted and debated, especially during the COP27.

Meanwhile in the United-States, the publication of the Inflation Reduction Act including $369 billion in funding to tackle climate change marked the year 2022. The Securities and Exchange Commission (SEC) also has taken up the subject in climate-disclosure matters. It proposed both new climate-related disclosure requirements for public companies [8] as part of the issuer rule, and rules to enhance disclosures by investment advisers and companies about ESG investment practices [9]. These should bring enhanced transparency on the market, while the SEC proposal for rule changes to prevent misleading or deceptive fund names [10] should help to fight against misleading marketing practices.

However, these new regulatory developments are by no circumstances solely limited to the US and Europe.

On the contrary, and for instance, five new taxonomies were published throughout the year across the globe (in order: Indonesia, South Africa, Colombia, Sri Lanka and Georgia). Singapore Green Finance Industry Taskforce (GFIT) published the version 2 of Green and Transition Taxonomy for public consultation, while Singapore Ministry of Finance (MoF) published the Green Bond Framework in June 2022 to allow easier access to green project financing. Conversely, in Europe, there is a bit of fatigue. The European Commission’s decision regarding its own taxonomy’s potential extension and the creation of a social taxonomy is awaited for 2023 (See our article “Extended Taxonomy: acknowledging in betweenness to soften elitism”, available here, EU Social Taxonomy Proposal : simpler and meaningful but half-way through, available here) [11]. With the forthcoming European Elections in 2024, we do not expect major foray and initiative.

Whilst a ‘global’ taxonomy will probably not see the day soon, these frameworks use commonly shared principles (for instance the ‘DNSH’ principle, science-based criteria). Their adoption, publication and drafting have sparked discussions on greater alignment across markets, leading to cooperation on a “Common Ground Taxonomy”, released in June 2022. (See our article ‘Updated Common Ground Taxonomy’, available here). We can expect greater standardization and metric mainstreaming for the coming years, across countries.

 

3. International progress on biodiversity and shift from wishful thinking to actual tools

2022’s international negotiations and the advent of biodiversity: from theory to an international political agreement and the mainstreaming of metrics

Despite ambivalent results and controversies, the COP27 also reached another key agreement for the sustainable finance landscape, the creation of a Loss and Damage Fund that aims to provide financial assistance to nations left most vulnerable to the impacts of climate change. 2023 only will tell how the fund will be operationalized, with what precise means and for whom, to enable a “fair transition”.

On a global scale, 2022 marked a watershed for biodiversity. Regrouping representatives of over 188 governments, the COP15 resulted with the adoption of the Kunming-Montreal Global Biodiversity Framework (GBF), which includes a target to protect 30% of Earth’s lands, oceans, coastal areas and inland waters by 2030.

To go in further details, read our article “Climate is dead, long live biodiversity… COP15, a kick-start to biodiversity mainstreaming” available here.

 

4. Sustainable finance sensitivity to adverse market developments and geopolitics

Sustainable finance has not remained impermeable to adverse market developments and geopolitical dynamics. Indeed, the “sector” being critically exposed to energy-price fluctuations, the war in Ukraine affected, if not reshaped, investors and governments’ sustainable finance practices alike in the long and short term.

On the short term, previously avoided high carbon-emitting sectors became attractive financially. Markets participants witnessed a change in the equation: whilst demand for sustainable stock dwindled on the one hand, increasing energy needs and security fears bolstered the appeal of oil & gas sectors on the other.

For instance, equity ESG funds saw a 60% inflow slowdown to $9.4 billion in March, compared with inflows of $24.4 billion in the prior April. Unexpectedly, vanilla stocks and bonds were outperforming the socially responsible ones[12].

On the long term, the Ukraine war has accelerated the clean energy transition. Energy supply fears have paradoxically played both for and against sustainable finance. By prompting a race for countries to strengthen their energy security, governments have added policy weight to renewable energy investment programs, to limit their reliance on imported fossil fuels – a telling illustration is the RePower EU plan. An IEA report highlights that global renewable power capacity is expected to grow by 2400 gigawatts over 2022-2026, either the entire power capacity of China and 30% higher than originally forecasted growth amount[13]. This conflict marked a clear watershed in the development of domestically produced renewable energy.

Beyond market trends, the war profoundly altered ESG investors’ behaviors altogether when it comes to country risks and exposure, by highlighting the shortcomings of ESG data or “ESG-washing trends” on the matter. If several specialized ESG research houses downgraded Russia on the “G” and “S” dimension after the invasion’s start; it did not anticipate geopolitical fault lines. Ratings methodologies have therefore been questioned and scrutinized: do they sufficiently incorporate political risks, autocracy risks, measures on human freedom, risk of international sanctions ? How did they “miss”? Financial actors might increasingly rely on complementary political risk data in 2023, with heightened imperatives for human rights due diligence to identify and mitigate risks. Geopolitics and green finance might become more closely intertwined in the next years, equally important concerns such as strategic autonomy, inequalities narrowing, decarbonization and biodiversity protection will have to be married.

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With these trends set in action, 2023 has several promises to deliver on and multiple obstacles to overcome. At Natixis, we’ll be on the look-out for the EU’s publication on the technical screening criteria for the 4 non-climate environmental objectives, the UK’s taxonomy’s drafting advances, the ECB’s additional actions to strengthen its green monetary policy and much more… We will continue to accompany client transition, frame our products to further include sustainability and develop advisory solutions for tailor-made strategic approach. We’ll be wary of greenwashing, remain critical and analytical in our endeavors, refine and try to operationalize our understanding of climate adaptation, carbon credits, biodiversity, and their subsequent metrics and related financial products

In the meanwhile, we wish you a pleasant year ahead and look forward to working with you, navigating the sustainable finance landscape one step at a time.