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ESG themes to watch in 2023

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When we created this newsletter in 2019, we had a lively debate about what to call it: something that reflected the (then) fashionable environmental, social and governance (ESG) agenda? Or a less specific term about business?

In the end, we went for the latter, picking “Moral Money” to invoke the spirit of Adam Smith’s classic The Theory of Moral Sentiments; we had a hunch that the ESG acronym might not be durable. Now, it seems that was a wise choice: in 2022 that ESG framework sparked a backlash that, as we detail below, is likely to continue in 2023.

But even as the “ESG” tag is contested, (almost) nobody is calling for a return to the “shareholder-first” capitalism of old. On the contrary, a world marked by economic pain, war, union strife and health risks is one where business is under increasing pressure to work with governments and wider society, for the greater good.

The ideas that Smith championed about the need to build social cohesion and trust — or a “moral” frame — are as crucial as ever. And while the Russian invasion of Ukraine sparked a scramble for fossil fuel supplies, investors are simultaneously dashing into renewable energy sources. Being “green” is now seen as an economic opportunity — not just a burdensome responsibility.

What does this mean for investors this year? Below we lay out some of the big themes to watch: from the key areas of action at top institutions, to the backlash assailing the ESG agenda, and the targets for serious flows of cash. As ever, we want to hear your thoughts — tell us what you think are the hot topics for 2023. You can reach us at, or just reply to this email. (Gillian Tett)

A is for action

This is a year when some of the world’s most powerful institutions will need to turn lofty words into action. Here are three key areas to watch:

1. Push for sustainability disclosures heats up

Emmanuel Faber, then-Danone  CEO, attends the official opening ceremony of the new Evian water bottling plant in 2017
Emmanuel Faber’s work to integrate sustainability standards into corporate reporting is part of a global acceleration on this front © Reuters

Emmanuel Faber, chair of the International Sustainability Standards Board (ISSB), won applause at COP15 in Montreal last month when he said his organisation wants to finalise its standards in the next few months.

Faber’s work to integrate sustainability standards into corporate reporting is part of a global acceleration on this front.

In Singapore for example, climate disclosures have become mandatory for financial companies listed on the country’s stock exchange.

In Europe, a proposal is under way for a directive on corporate sustainability due diligence (CSDD), which would force companies to pay more attention to human rights issues in their supply chains. EU negotiations to complete these rules are expected to start as soon as April.

But the biggest climate disclosure action of the year will be at the Securities and Exchange Commission in Washington. The agency has already uncovered gaps in companies’ climate-related reporting. Any rules the SEC adopts are almost guaranteed to be challenged in court; the fate of climate disclosures in the US could hang in the balance well into 2024.

Companies have complained that these disclosures will increase their financial reporting costs. That argument has underpinned the corporate community’s opposition to previous SEC rulemaking, but it does not hold water, says Marty Vanderploeg, chief executive of Workiva, which handles SEC reporting for companies.

“For the people who do not like regulation it is the first thing they pull out of the box: the cost,” he told me. “This is not more complex than collecting financial information.” (Patrick Temple-West)

2. Central banks step up climate scrutiny

Pressure is growing on central banks and prudential regulators to better protect the financial system from climate shocks.

In the US, expect a politically charged debate on the Federal Reserve’s draft climate principles this year.

The Fed’s proposed supervisory guidance covers banks with more than $100bn in assets and is open for feedback until February. It would see banks incorporate climate-related financial risks in their high level strategies and annual audits, as well as in stress tests and liquidity buffers. 

Across the pond, the European parliament’s Committee on Economic and Monetary Affairs is expected to vote later this year on whether to increase bank capital requirements for the most polluting assets. If the toughest proposals are accepted, this type of lending could be given the highest possible risk rating under the bloc’s Capital Requirements Regulation.

Meanwhile Masayoshi Amamiya, deputy governor of Japan’s central bank, recently said in a speech that the bank now saw responding to climate change as a central part of its mandate.

And in the wake of last month’s COP15 biodiversity summit, central banks globally may take a stronger stance on financial sector preparedness for risks associated with the collapse of natural systems such as insect life and coral reefs. (Kenza Bryan)

3. Multilateral development banks turn towards blended finance

Unless there is a way to incentivise non-western countries to reduce fossil fuel usage, there is little chance of preventing serious global warming — no matter how much action occurs in the west.

This could be addressed with blended finance, or using public or philanthropic funds to de-risk private investments. However, until now, groups such as the World Bank have moved at a snail’s pace with this concept, partly because of internal bureaucratic hurdles. Blended finance flows actually fell last year, according to the Convergence analysis group.

The European Bank for Reconstruction and Development, however, is one multilateral development bank that has been embracing this concept and plans to accelerate this in 2023.

Meanwhile, widespread frustration with the World Bank is sparking innovation around alternative frameworks. The Netherlands’s private credit fund ILX is developing platforms to enable big pension funds to co-invest with the leading MDBs in emerging market green credits. A team at Harvard Business School has proposed using Article 6 of the Paris Agreement to galvanise blended finance in the developing world, and expects to unveil a pilot project soon. The Rockefeller Institute is testing ways to use its funds to backstop private investments into green finance in Africa. Other foundations may follow suit. (Gillian Tett)

B is for backlash

Companies and other actors are operating in a fiercely contested political environment that will put corporate strategies under new strain. These are the key challenges:

1. Republican anti-ESG crusade rolls into a second year

Florida governor Ron DeSantis waves as he arrives for a news conference at Bill Baggs Cape Florida State Park, US
Florida governor Ron DeSantis, second from left. The state is almost certain to enact anti-ESG legislation in 2023 © AP

The looming conservative backlash to ESG investing was barely perceptible at the start of 2022. But after the SEC’s unprecedented proposal to require corporate climate disclosures, Republicans have ratcheted up their attacks on the sector.

On Tuesday for example, Kentucky’s state treasurer said BlackRock, HSBC and nine other companies had “boycotted” the fossil fuel industry and faced divestment later this year.

It is important to note that while it has grabbed headlines globally, the political backlash to ESG is concentrated in about two dozen US Republican states. Asia continues to embrace ESG investing, and in Europe, well, it goes without saying.

But the Republicans’ criticism of ESG is set to continue. Florida’s new state senate president said in December her state was almost certain to enact anti-ESG legislation in 2023. Florida’s governor Ron DeSantis is expected to declare a presidential run, and he will probably want to promote anti-ESG efforts as part of an anti-woke crusade.

The Republican attacks in Congress are less worrying. Though Republicans gained control of the House of Representatives this year, any anti-ESG legislation they advance is unlikely to survive in the Senate. House Republicans are certain to hold ESG hearings, but these hearings are mostly noise. The big bank chief executives have been hauled before Congress for years now, but these hearings never live up to the hype.

Political adversaries will continue to have a case against ESG as long as its returns continue to suffer. In US equity ESG funds, Apple and Microsoft are the top dogs, but both underperformed the S&P 500 in 2022. Tesla, another ESG darling, shed almost two-thirds of its value in 2022. (Patrick Temple-West) 

2. Expect more lawsuits amid fresh greenwashing scrutiny

While German asset manager DWS remains committed to ESG, its chief executive Stefan Hoops said last month, “you will not hear me use terms like ‘leader’ or ‘world class’.”

Hoops’s words reflect a gathering trend, as corporate leaders look to mitigate the danger from regulators and campaigners as they take aim at over-egged sustainability claims

DWS is an important case study. It is under investigation by German and US authorities over allegations that it exaggerated the extent to which it emphasises ESG factors into investment decisions. The outcome of this saga will set an important precedent.

Asset managers will also need to keep up with evolving regulations around fund names. Regulators in the US and the EU are pushing for rules that would force fund managers to show that the bulk of assets in an ESG-branded fund are in line with that claim. In the UK, similar rules are set to take effect in mid-2023.

The risks on this front are not limited to the financial sector. Consumer-facing brands from clothing retailer H&M to drinks giant Coca-Cola and airline KLM all faced private lawsuits last year over allegedly overheated green claims.

As corporate leaders look to dodge accusations of greenwashing, will they raise their standards, or lapse into counterproductive “greenhushing”, keeping their statements on ESG issues to a minimum? (Simon Mundy)

3. Beware of government backsliding

A Chinese invasion of Taiwan could do for 2023 what Russia’s attack on Ukraine did for 2022 — increase energy prices, push coal consumption to an all-time high and reduce opportunities for international co-operation.

While such a conflict is a hypothetical worst-case scenario, stubbornly bad inflation and growth figures — and the continued fallout from the war in Ukraine — will test the limits of governments’ budgets and ability to think long-term.

For many, good climate policy in 2023 will simply mean honouring promises made at last year’s climate and biodiversity summits.

In the US, some $370bn in domestic climate-related investments, unlocked by the Inflation Reduction Act, will continue to filter their way through the economy to produce heat pumps, electric cars and solar panels. 

The EU may retaliate by giving bigger subsidies to its own green industries, while continuing to speed up permits for renewable energy projects and tax carbon at its borders.

And new leaders in Brazil and Australia will show whether they are prepared to slow the destruction of tropical forests and abandon lucrative coal mining opportunities.

The first global stocktake by the UN on progress made since the Paris Agreement will conclude in November. Whatever happens, at least the global community will know where we stand. (Kenza Bryan)

C is for cash

Amid all the turmoil, investors will be looking to deploy serious quantities of cash to chase the hottest opportunities presented by the energy transition. Here are three important areas to watch.

1. Hydrogen piques venture capitalists’ interest

As I rushed through Heathrow airport during Christmas, I noticed a novel addition to the usual British Airways marketing: messages proclaiming that hydrogen would soon be powering aviation.

Although hydrogen adoption accelerated in 2022, the fuel is not ready for mass-market usage, and British Airways does not seriously expect to see hydrogen replace fossil fuels in planes for several years.

But the messaging illustrates two themes for 2023: first, it is not just speculative start-ups that are testing novel energy sources, but mainstream industrial and service groups too. See Andrew “Twiggy” Forrest’s plan to use hydrogen for metals and mining. Second, there is now serious money moving into this space, as venture capitalists scramble to find the next big thing. Private capital groups such as TPG, Brookfield and General Catalyst have all raised multibillion-dollar funds and Tom Steyer, the former US presidential candidate, hopes to follow suit in 2023. John Delaney, another former presidential candidate, is creating a green bank.

Some of this funding is jumping into hydrogen and wind. But money is also flowing to start-ups in the world of fusion energy, which got a boost last month after an American laboratory announced a breakthrough in this technology (although actual deployment remains years, if not decades, away). Another idea that is likely to generate rising excitement in 2023, following recent scientific breakthroughs, is using saltwater batteries instead of lithium-ion devices to store green energy. The race is on to find more brilliant ideas and to deploy the capital. (Gillian Tett)

2. Solar investment moves outside China

Employees with Ipsun Solar unload solar panels on the roof of the Peace Lutheran Church in Alexandria, Virginia
The massive inflow of funding to the US clean energy market will create a ripple effect globally © Getty Images

Roughly $1.7tn in investment will flow into the clean energy industry over the next decade thanks to the Inflation Reduction Act (IRA) signed by US president Joe Biden, according to Credit Suisse’s estimate. The massive inflow of funding to the US market will create a ripple effect globally, especially in Asia where many suppliers are located.

With persistent tension between China and the west, the idea to build suppliers of goods, such as solar panels, in friendly countries is gaining popularity. Speaking in Seoul in July, US Treasury secretary Janet Yellen pushed for “friend-shoring” to soothe troubled supply chains. Japan, Australia and Germany are also looking to reduce their reliance on China.

But this provokes another difficult question: how do we decide which countries are “friendly” or “trusted”? For instance, India, a rising renewable superpower, refused to join sanctions against Russia in the wake of the invasion of Ukraine. Vietnam, another manufacturing hub, has a history of alleged human rights violations. Simply excluding these countries isn’t an answer when we need global co-operation on climate change. But maintaining high ethical standards is also important.

The solar industry’s struggle to avoid components from the Xinjiang region, where China allegedly uses forced labour, has proved the difficulty of untangling an established supply chain. Massive investment opportunities outside China this year will provide a rare opportunity to reset those links. (Tamami Shimizuishi, Nikkei)

3. Crunch time for carbon markets

The voluntary carbon market has been tipped to be one of the world’s fastest growing over the next decade, as companies rush to buy credits to offset their emissions. But growth stuttered last year, with issuance in the first half down 19 per cent from a year earlier, according to Climate Focus.

That makes 2023 a crucial year for this fledgling market. It has been dogged by concerns about quality, with warnings that the unregulated sector is rampant with exaggerated claims on projects’ carbon impact. That was surely a factor in last year’s slowing growth, and we’ll get a sense this year of whether initiatives to raise standards — notably the Integrity Council for the Voluntary Carbon Market — can restore confidence.

Advocates of the voluntary carbon market see it as a vital means of raising capital for sustainable development as well as climate change mitigation. We’ll be watching for progress on initiatives that were flagged at November’s COP27 summit, such as the Africa Carbon Markets Initiative, which aims to generate $6bn for the continent by 2030, and the Energy Transition Accelerator announced by US climate envoy John Kerry.

Meanwhile, COP27 negotiators left plenty of unfinished business around the UN’s new international carbon market, through which countries will be able to sell carbon credits to each other or to businesses. That will be one of the crunch topics at this year’s COP28 in Dubai. (Simon Mundy)

How effective is your company at combating climate change? The FT and data provider Statista are compiling the 2023 editions of Europe’s Climate Leaders and Asia-Pacific Climate Leaders — two surveys listing the businesses that have gone furthest in reducing their carbon emissions intensity. If you think your company might be eligible, please click through to the Europe and Asia-Pacific calls for entries, where you can find details of how to participate.

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