ESG investing and sustainable finance
A niche area in the investment world, ESG investing has seen monumental growth over the last few decades. The past year saw an incredible increase in launching new products and funds, issuing green bonds, ESG-centric regulation, and corporate disclosures.
SEBI’s new Business responsibility and sustainability reporting (BRSR) guidelines will further push the disclosures, play a heavy role in corporate behavior, and help shape reporting standards for government and private sector companies.
Despite all this growth and adoption, the challenges ahead for global investors are becoming more and more nuanced. Three aspects of this topic deserve special attention
- Regulatory changes
- Demographic shifts
Looking ahead to 2022 as ESG moves further into the mainstream and ESG integration becomes more critical, it is more important than ever that ESG data and insights are included and integrated into the investment process.
The figures below highlight how quickly the issuance of Green, Social, and Sustainability-linked bonds has grown. The demand for such offerings is pushing for more and more supply.
This year alone, we have seen net-zero commitments from many global companies, and going forward, these commitments and investments represent some of the most significant opportunities for sustainable growth. Some of the critical steps include stronger commitments and action on moving away from fossil fuels and providing financing for developing nations to support their ability to adapt to a more sustainable future.
Climate litigation and implications
Climate litigation is becoming a more prevalent and accessible field of environmental law, with countries and corporations being held accountable for their climate mitigation efforts and historical contributions to the problem of climate change.
The use of climate lawsuits is on the rise. Until 2017, there were 884 climate litigation suits filed in 24 nations, with 654 of these cases filed in the United States. By 2020, the number of cases in 38 countries had nearly doubled to 1,550.
Fig 1: Total cases over time, US and non-US, to 31 May 2021
Fig 2: Regional distribution of cases
Fig 3: Number of cases around the world, per jurisdiction, to May 2021
As a result, lawsuit risk is becoming a bigger part of both physical and transitional concerns. This issue becomes even more critical to evaluate given the variable authenticity of the several net-zero claims being made.
So far, the cases have largely fallen into one or more of six key categories:
- Climate rights
- Domestic enforcement
- Keeping fossil fuels in the ground
- Corporate liability and responsibility
- Failure to adapt and the impacts of adaptation
- Climate disclosures and greenwashing
Global climate litigation trends
While each area has received extensive investigation, climate disclosures and greenwashing have received increased attention. Countries and corporations are increasingly being held accountable for their climate mitigation pledges and resulting environmental effects by investors and stakeholders due to increased awareness, accessibility, and disclosure requirements.
There are three key aspects that require consideration
1. The need to acknowledge climate litigation as an evolving and integral risk to investee corporation operations and investment growth.
2. The incorporation of litigation risk into assessments of climate-related financial risks and the integration of litigation risk into investment growth modeling.
3. Encouraging comprehensive disclosure to mitigate the legal risks as much as possible.
The changing intensity of climate change events not only represents a direct danger to investors' physical assets but also highlights the risk of and necessity for transitioning to a low-carbon economy. Adding the risk of potential legal action to these risks underscores how climate litigation is not just another dimension of physical and transition risk, but a separate risk to be assessed.
Not only for firms and investors but also for asset owners and managers, it is critical to address these situations and their interplay through more robust emissions data and diligent reporting. As investors, corporations, and countries plan and implement their own net-zero migrations, legal conflicts like this will only become more common in the coming years.
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