Last year, we continued to see the changing needs of investors, including an increasing focus on seeking to address real-world problems, which led to a new wave of ESG research and data that moves beyond third-party ratings.
And third, we should strive to not make trade-offs in innovating ESG research where, perhaps, regulation and end-investors have yet to catch up.
Other efforts around a cross-border adjustment tax and the consolidation of carbon credit verification schemes should push the carbon price up further.
The near-term risk here is volatility; large inflows into these stocks have pushed up prices, such that forward earnings expectations look to be somewhat inflated.
Investors need to do the work to find tomorrow’s winners, which may not look ‘green’ today and, for that reason, may not enjoy the same level of price valuation as some of the incumbents.
Not only is disclosure important for investors to make the right capital allocation decision, but disclosure that’s aligned with the EU Taxonomy will drive capital flow into green assets from this year.
At the same time, about 20% of global greenhouse gas emissions are contributed by activities that harm biodiversity, such as deforestation and land degradation.
Blue bonds, for example, is a new opportunity for countries that have abundant biodiversity to gain access to new capital or debt relief in exchange for conserving biodiversity.
In terms of identifying investment opportunities, the sectors highly dependent on biodiversity, which collectively generate about 15% of global GDP, are food and beverage, agriculture, and construction.
Investors really need to take a step back and change how they view and use ESG data.
We, for example, use complaints data from NGOs, which allows us to create signals to forecast future controversies.
This includes analyzing the geographic location of specific product components to understand, for example, how much of the cotton that’s used in producing a t-shirt is actually sourced from controversial cotton farms with a higher precision rate.
New technologies such as satellite imaging allows us to not only understand where exactly these emissions are coming from but also gives us more real-time or short-term fluctuations information such that we can make more in-time investment decisions.
And lastly, gaining a better understanding of biodiversity will provide fertile ground for new investment solutions, especially in sectors like food production, consumption and construction.
In addition to green bonds, the rise of social and blue bonds presents a new way for investors to allocate capital beyond just the corporate bond market.
Well planned timber production also provides a steady yield and can be an important source of material for sustainable construction.
2022 is going to be a year where we will likely find ourselves operating amid much confusion and noise.