Amid growing ESG regulation around the world, interest in disclosure obligations and fund names and classifications is expected to only ramp up in the coming year, according to research.
As observed in MSCI’s annual ESG & Climate Trends to Watch Report, which analysed more than 30 emerging risks that would impact global investors and firms in 2023, regulators around the world are following the lead of the European Union (EU), which imposed requirements on improved transparency for ESG funds through the Sustainable Finance Disclosure Regulation (SFDR).
“In 2023, we’ll be watching for changes in ESG fund names and labels as unfolding disclosure regimes hold managers to stricter account. Australia, Hong Kong and Singapore, for example, have provided guidance to standardise disclosures on the integration of ESG factors in the investment-selection process,” the report stated.
Last week, the Australian Government announced its commitment to a Sustainable Finance Agenda and a consultation on a mandatory climate-related financial disclosure. This would require more information and transparency from businesses and large financial institutions on their response to climate change and the transition to net zero.
The Australian Securities & Investments Commission (ASIC) also had greenwashing as a top priority in 2022, issuing three infringement notices to Vanguard who ultimately paid $39,960 in compliance with the notices on 1 December.
In the EU and Canada, regulators had sought to classify sustainable funds with more extensive ESG integration requiring more disclosure.
The report noted: “The US has taken tentative steps with a similar but not directly comparable proposal, a significant move for the world’s largest fund market (representing over 60% of global fund investments). If these collective proposals take effect, they could see US$3.6 trillion of sustainable investments (8% of global fund assets) subject to oversight.”
Other jurisdictions with proposed or active regulation for ESG funds, as outlined in the report, included Singapore, India, Taiwan, and New Zealand.
“For investors, [disclosure regimes for ESG funds] could mean better-informed decisions. But it could also lead to the emergence of a multitude of disconnected regional standards for ESG-fund classifications, a challenge for investors in pursuit of a common ESG objective across jurisdictions,” the report stated.
Green bonds
It also highlighted how such regulation could affect the rising popularity of green bonds which retreated by just 1% during the first half of 2022 compared with the second half of 2021 despite inflationary pressures.
“In 2023, we will be watching whether green bonds can maintain a credible growth path in the face of rising interest rates, lower spread premiums and growing concerns about greenwashing.
“Since the first major launch of green bonds in 2007, they have been on a rapid upward trajectory, growing from a total issuance of USD 37 billion in 2014 to USD 578 billion in 2021.”
However, the report also pointed out that this period of popularity might be on the decline.
“The honeymoon period may be starting to wane, as yield spreads of green bonds have remained lower (eight basis points on average) compared with conventional bonds. In addition to lower yield spreads, investors may also be weighing the credibility of green bonds — and specifically the ‘greenness’ of the activities they are funding.
“Without a widely adopted, standardised framework, issuers have had some flexibility in the labeling of their bonds. Between January 2021 and September 2022, of the more than 600 bonds we assessed, approximately one in five fell short of explicit green-bond criteria, with some even going so far as to fund fossil-fuel generation or transmission.”
