The business of financing areas that could generate returns and do good for the world is not going away, but it is taking a different form.
In 2023, the market for investing in non-financial gains took a turn, most notably through the re-embracement of fossil fuel firms. Despite efforts by environmental advocates to halt the financing of oil and gas projects, global banks have been pushing back.
«Traditional energy companies are hugely important to the global economy, they are hugely important to Goldman Sachs. We are all going to continue to finance traditional companies for a long time,» said Goldman CEO David Solomon during a US energy security summit in September. «We recognize there needs to be a transition over time but that transition is going to take time.»
«When we think about clean energy, these are business models which are quite new and sensitive to interest rates,» commented Markus Müller, chief investment officer ESG at Deutsche Bank's private banking arm, adding that sustainability funds should include traditional energy shares. «Investors are looking for traditional companies that have capex in renewables. They prefer the transition than to exclusions.»
Asia Lag
Backlash in the US has undoubtedly played a significant role in the reversal, such as the decision by the state of Florida to pull out pension funds from investments that take into account social, political or ideological interests. But within Asia, there are also signs of a weaker outlook.
According to a recent EY report, 65 percent of companies across industries in Asia Pacific will maintain or reduce spending to address climate change in the coming 12 months, with excessive costs cited as a key driver. A 2023 survey by law firm Morrison Foerster found that 90 percent of the general partners it surveyed have made no recent changes or implementations to ESG policies.
Even politicians are less optimistic. According to a «Reuters» report citing a speech by China’s special climate envoy and COP28 representative Xie Zhenhua in September, it is «unrealistic to completely phase out fossil fuel energy.» Xie cited issues such as the existing technological shortcomings of renewables in areas such as energy storage.
Greenwashing Spike
On top of softer financial demand and a weakened net-zero outlook, there are also continued worries about false or misleading claims about environmentally friendly financial products, commonly known as greenwashing.
According to ESG data firm RepRisk, the financial services industry recorded 148 cases of greenwashing in the 12 months ended September 2023. This is 70 percent higher than the previous 12 months, when 86 cases were recorded, with European financial institutions accounting for the majority at 106 cases.
Separately, the European Banking Federation said that RepRisk’s report counted allegations of greenwashing rather than verified claims.
Rebranding Underway?
Even the brand for investing in non-financial impact is undergoing changes. Cultural and political developments, particularly in the US, have played a role in the shifting perception of terms such as ESG.
«Given the anti-ESG sentiment, some funds have moved away from associating with ESG but have instead called themselves thematic. This was noticeable in our findings, especially in North America, when participants were asked about their approaches to ESG,» according to a July 2023 HSBC survey.
«I'm not going to use the word ESG because it's been misused by the far left and the far right,» added BlackRock CEO Larry Fink at the US-based Aspen Ideas Festival last June.
Sustainable Tailwinds
Despite the challenges, there are still tailwinds to drive further adoption of sustainable finance.
According to a St. James’s Place survey, around half of investors in Hong Kong and Singapore had an increased interest in sustainable investments, with 84 percent of the wealthiest prioritizing ESG factors. Banks also have an interest in maintaining flows, with around $3 billion generated from green financing fees by the world’s largest banks in 2023. Asia-focused HSBC and Bank of China were among the top five generators of green financing fees last year, at $94 million and $89 million, respectively.
«Different economies are clearly at varying stages of their transition, with numerous technologies, resources, and capacity across regions. But the long-term decarbonization trend is clear,» said UBS in an investment note.
