Thwing Eastman: ‘reports of ESG’s death greatly exaggerated’

Reports that environmental, social and governance (ESG) investing is dead “have been greatly exaggerated”, the global ESG editorial director at MSCI has said.

Meggin Thwing Eastman, speaking at MSCI’s ESG Trends 2023 webinar, suggested that new frontiers in ESG regulation, the increased focus on renewable energy and “even simply the amount of debate and criticism that’s being generated” around ESG prove this it is still important to investors.

She explained that some of these themes are identified in MSCI’s ESG and Climate Trends to Watch Report, which highlights the expanse of emerging ESG and climate issues that will affect financial risk considerations for institutional investors. MSCI is a global provider of equity, fixed income and real estate indexes, multi-asset portfolio analysis tools, and ESG and climate products.

Thwing Eastman said: “Over the last winter, various commentators have started floating the idea that ESG is somehow dead or is on the way out at least, but, in a riff on Mark Twain, I think the rumours of its demise have been greatly exaggerated. And the trends that we've highlighted in the report are good evidence of that.”

Increased regulatory focus

One of the biggest trends identified in the report was an expected increase in adoption and consultation on regulation in 2023. Global ESG regulation is set to expand next year with new requirements for private businesses to report on climate impacts.

Simone Ruiz-Vergote, MSCI’s global head of ESG and climate policy, said: “Next year, we are bound to see a step change in sustainability reporting. What was mostly voluntary and nice to have so far will be formalised, binding and detailed. We will get a yardstick for comparing sustainability performance.”

She also highlighted that because of regulations across the US, Europe and globally through International Financial Reporting Standards, sustainability reporting could become a legal requirement in 2023 for over 80,000 companies.

This sentiment was echoed by Rumi Mahmood, MSCI’s vice president for ESG and climate fund research. He said that the increased focus on ESG regulation over recent years has been “spearheaded by the EU’s Sustainable Finance Disclosure Regulation”, which imposes requirements for more transparent reporting.

“Other major market regulators are now following suit. So, in the coming year, we'll be watching the emergence, convergence or divergence of ESG fund labelling as disclosure regimes unfold globally.”

“Australia, Hong Kong and Singapore, for example, have provoked a lot of client interest and provided guidance to standardise disclosures on the integration of ESG factors in the investment selection process,” he said.

However, Mahmood outlined that the increase in reporting could lead to the emergence of a multitude of disconnected regional standards for ESG fund classification, which would be a challenge for an investor in pursuit of a common ESG objective.

‘Scramble’ towards energy transition

Another major ESG trend identified in the report is the increased focus on the energy transition and investing in solar and wind.

Chris Cote, MSCI’s vice president for ESG and climate fund research, outlined that the war in Ukraine “has set up a scramble to remake Europe’s energy mix at record speed”.

“Collectively, 80% of their [US and European utilities’] capital expenditures, or around $80bn will be directed either toward adding more wind, solar and other renewables to the grid or towards adding more power lines and other network components that make up that grid.

“$80bn for renewables and networks powers over the $10bn these utilities plan to spend on fossil fuel and nuclear assets over the same period,” he said.

Other trends identified in the report include changing governance standards, the impact of industrial action and changing working conditions as well as a turning point for green bonds as an asset class.