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Sustainable Investing: The Outlook for 2022

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What You Need to Know

  • Sustainable investing is an integral part of achieving a net zero world.
  • SEC could promulgate new rules on disclosures by asset managers ad public companies in 2022.
  • Also, global sustainability standards could be forthcoming.

Sustainable investing, which set new records for global and U.S. asset flows through the third quarter this year, is expected to accelerate in 2022 and beyond as demand by institutional and retail investors grows along with offerings from global asset managers.

“Investing with a sustainable lens is foundational today,” said Kunal Kapoor, in his keynote at the start of Morningstar’s annual conference in September. 

Underpinning that foundation is climate change and the risks it poses to the global economy, financial markets and individual companies during what many hope to be a transition to a net zero world where carbon emissions equal the amount of carbon removed from the atmosphere.

Through the third quarter global sustainable funds amassed almost $4 trillion in assets including more than $330 million in U.S. sustainable mutual funds and ETFs, which is almost twice the level of a year ago, according to Morningstar. 

Net flows into U.S. sustainable funds grew to $56 billion in the period as 74 new sustainable funds launched – three-quarters of them equity funds.

“The net-zero transition isn’t simply about reducing carbon; It’s a business model transformation akin to the Industrial Revolution,” wrote Michael  Jantzi, founder of Sustainalytics, a Morningstar affiliate which provides, analytical environmental, social and governance (ESG) research, ratings and data to institutional investors and companies, in a recent report.

“Grappling with it is part of fiduciary duty… Investors are adopting ESG (environmental, social and governance factors) as part of the transition to a net-zero world.”

Addressing Climate Change, Other Issues

Their investments are spurring companies to address not only climate issues but issues that  impact workers, customers, communities and cline, according to Jon Hale, Morningstar’s Global Head of Sustainability. He expects the influence of sustainability considerations on financial reporting, oversight, risk and regulatory frameworks will grow. 

Indeed, the SEC is considering more stringent disclosure requirements on environmental, social and governance (ESG) issues by asset managers and by public companies, which could be adopted next year, and has already increased its reviews of both

In the meantime, under Chairman Gary Gensler, the agency has been asking money managers to explain the standards they use for classifying funds as ESG environmental, social and governance-focused, according to Bloomberg News. It has also requested dozens of public companies to provide more information about how climate change might affect their earnings or operations,  he Wall Street Journal reported.

The SEC has created a Climate and and ESG Task Force in the Division of Enforcement to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules and to analyze disclosure and compliance issues relating to the ESG strategies of investment advisers and funds. It has also created a new position of Senior Policy Advisors for Climate and ESG.

Asset managers have been adding ESG funds for their lineup in response to investor demand, some for the very first time.  Schwab chose an ESG strategy when launching its first active ETF in mid-November, the Schwab Ariel ESG ETF (SAEF).

The ETF invests in attractively valued small and mid-cap equities  “with strong management, healthy balance sheets, and a favorable environmental, social, and governance (ESG) backdrop,” according to its prospectus summary.

“We look at ESG as another form of personalized investing,”  said Malik Sievers, head of ESG strategy at Charles Schwab. 

The SEC is not the only government agency enhancing its approach to sustainable investments. The DOL next year is likely to finalize new rules on ESG investments that make it easier for 401(k) plans to choose investments based on environmental, social and governance (ESG) factors. The rule, which has already been proposed, undoes a Trump era rule that did just the opposite.

Catching Up to Europe

The U.S. lags many European countries on ESG disclosures by public companies and  “2022 will be an important year for the U.S. to catch up a bit,” said Betsy Moszeter, chief operating officer of Green Alpha Advisors, an investment advisory firm specializing in sustainable investing.

Beyond government regulators and individual asset managers and companies addressing climate change and other sustainability issues is the need for standardization of terms and measurements pertaining to sustainability issues. 

Advancing Standards

“Getting to standardization and the harmonization of standards, which has eluded the  [asset management] industry, will be huge,” said William Burckart, president of The Investment Integration Project (TIIP), an applied research consulting firm whose mission is to help investors understand how healthy environmental, social, and financial systems can benefit their portfolios. 

That standardization goal is expected to advance in 2022 due to the consolidation of several separate standard-setting entities: the merger of the Sustainability Accounting Standards Board and the International Integrated Reporting Council into the Value Reporting Foundation (VRF) and, by June 2022, and the consolidation of the VRF and Climate Disclosure Standards Board (CDSB) to from the new International Sustainability Standards Board (ISSB).

The ISSB is focused on developing a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs.