Investor appetite for ESG investing has continued to grow, with roughly one-fifth of net new flows in the U.S. going into sustainable strategies in 2021.
Investor appetite for ESG investing has continued to grow, with roughly one-fifth of net new flows in the U.S. going into sustainable strategies in 2021. As policymakers, consumers, corporations and regulators coalesce around a goal to achieve a more sustainable future, we are likely to see massive change over the next several decades — change that can drive longterm opportunities for portfolios. Policymakers began setting the stage for that change with climate negotiations that will carry into 2022.
Global policymakers convened at the U.N. Climate Change Conference (COP26) in November to cement the details of the 2015 Paris Agreement, to strengthen commitments to net zero greenhouse gas emissions and to mobilize financing. The summit yielded mixed success, with commitments to reduce methane emissions, to “phase down” coal, to halt and reverse deforestation and to finance the transition to net zero through greater public and private investment. However, the primary goal, to strengthen net zero targets, was essentially postponed to late 2022 when countries are expected to further revise their commitments, placing a heavy emphasis on COP27 in Egypt in 2022.
Although the U.S. is unlikely to revise its commitment of cutting emissions by 50% by 2030, lawmakers did propose spending to work toward that target. The $1.2 trillion infrastructure package includes funding for infrastructure resiliency, $15 billion for electric transport and $6 billion for Western water infrastructure, and a reconciliation package could include up to $555 billion for clean energy tax credits and clean technology. This would represent the largest climate commitment the U.S. has made yet.
While that is a start, the public sector globally will likely struggle to accelerate net zero efforts further in 2022, shifting focus to the private sector for financing and innovation. There is evidence this is underway; global sustainable debt issuance doubled in 2021 to nearly $1.5 trillion, and venture capital had its strongest year ever for climate tech. This presents attractive long-term opportunities for investors in both the public and private markets and across equity, fixed income and alternatives. Key beneficiaries are likely to be industrials, utilities, technology and transportation, and the opportunities will be global, in Europe and even China. However, just as the transition to a more sustainable future will be a multi-decade one, investors should likewise be patient, selective and active in ESG investing as the landscape evolves.