At the beginning of 2023, I highlighted five reasons why sustainability matters more than ever, and why as an investment thesis it’s not going anywhere. The points I made then still stand now, but more themes have emerged since, which can help to guide investment decision-making in the second half of this year. 

Bonds are back, and green, social, sustainable (GSS) bonds are no exception

After almost two decades in the doldrums, fixed income yields are now offering a historically attractive entry point. With inflation falling, global central banks nearing the end of tightening cycles and duration offering diversification benefits, there are finally opportunities emerging in fixed income – and green, social and sustainable bonds are no exception. The Bloomberg Global Aggregate Green Social Sustainability Bond Index has even outpaced the returns of the Bloomberg Global Aggregate Index, returning 4.9% in the year to end of July compared to the latter’s 2.1%. This reflects investors’ continued preference for use of proceeds bonds.

Enthusiasm for sustainable fixed income is also shown by the rebound in issuance. The Climate Bonds Initiative recorded USD 204.8 billion in GSS+ issuance in Q1 2023 – a 17% increase compared with the last quarter of 2022.1 Green bonds made the largest contribution to this jump in issuance and are still generally the most favoured by investors. However, the opportunity in social bonds is also increasingly compelling, with total global social bond issuance as of the beginning of August 2023 standing at USD 83.3 billion, compared with 75.8 billion by the same point in 2022. On the other hand, sustainability-linked bonds, which have been under scrutiny regarding the integrity and ambition of their targets, saw reduced issuance in H1 2023.

Sustainable fixed income is gaining traction globally. While Europe leads, with EUR-denominated issuance at least twice that of USD-denominated, demand in the US remains resilient. Political and regulatory developments such as the comprehensive package of climate policies under the US Inflation Reduction Act (IRA) could also revitalise the market. The Asia Pacific region has seen significant recent growth with green bond issuance, with China growing 35% last year to reach a high of USD 155 billion.2

Overall, the GSS universe is broadening out and offering more sophisticated options, especially as regulatory guidelines and standards continue to evolve. The Institutional Investors Group on Climate Change (IIGCC) recently released Net Zero Bondholder Stewardship Guidance is a sign of the increasing engagement by bondholders with global climate challenges like decarbonisation. Such developments mean that the traditional view of bondholders as less involved in stewardship than their equity counterparts is being steadily debunked.


Global growth in labelled issuance in recent years

Source: HSBC Green Bond Insights as of August 2023.  

Investors can play a part in hitting SDG targets

The UN’s 2023 Global Sustainable Development Report, an annual stocktake of progress towards achieving the 17 Sustainable Development Goals (SDGs), confirms that the world is nowhere near on track to reach its 2030 SDG targets. Progress has been halted due to unforeseen crises including the Covid-19 pandemic. It will take a concerted effort – and a substantial increase in financing – to change course.

It has been estimated that achieving the SDGs could require additional annual investments of up to USD 4.2 trillion. This is a large figure, but it is equivalent to just 1.1% of the USD 379 trillion in total financial assets held by banks, institutional investors and asset managers,3 showing that it is certainly not out of reach.

With COP28 approaching in November, there is particular scrutiny on the fact that the USD 100 billion target for annual climate finance to developing countries has never been met since it was first agreed at COP15 in 2009. A recent Oxfam report found that only USD 83.3 billion in climate financing was even reported in the year 2019-2020 – and of this, only USD 21 billion – USD 24.5 billion could actually be considered real support, since the relevance of the funds for tackling climate change was often overestimated.4 What is more, as we highlighted in our climate adaptation series this year, a tiny proportion of climate finance goes to projects focusing on climate adaptation – just 7% in 2019-2020.


Climate finance committed versus reported and delivered

Source: Oxfam as of June 2023

Increase in SDG funding gap post COVID-19 pandemic

Source: United Nations as of July 2023

Private finance can play a role in filling this gap, while also enabling investors to benefit from the opportunities that climate and SDG finance present. Clean energy investment, for example, is vital for the achievement of both net zero by 2050 and many SDGs including SDG 7 (Affordable and Clean Energy) and SDG 11 (Sustainable Cities and Communities). Analysis by the International Energy Agency suggests that around 70% of clean energy investment in emerging market and developing economies may need to be footed by the private sector.5

Strategies for addressing this lack of funding are emerging. SDG-aligned investing has been growing as a trend for some years, demonstrating how private capital can be directed towards reaching the goals. The UNDP’s own SDG Investor Platform showcases a diverse range of companies offering solutions that contribute to achieving the SDGs. Specialised funds focused on mitigation and adaptation solutions, buying bonds with proceeds directed towards SDG-aligned investments, or investing in alternatives funds focused on climate-resilient real estate and infrastructure are other ways that investors can look to use their capital to fill these persistent financing gaps.

AI could become key to advancing ESG research and decarbonisation 

There has been a deluge of commentary on artificial intelligence (AI) over the first half of 2023, but much less explicit discussion of how it could help to solve some of the most intractable sustainability challenges. At J.P. Morgan Asset Management, we have long taken the view that AI could be a game-changer for ESG research. Already, we’ve seen in practice how large language models (LLMs) and natural language processing can help sift through huge amounts of alternative data to rapidly narrow the investment universe and offer a more precise opportunity set, as well as provide deeper insights into less transparent areas of company performance.

The availability of ESG data is rapidly increasing, but datasets are still often large, complex and disparate, while our means of processing are currently relatively manual and prone to errors. AI can enhance our capacity to gather and complete this data, allowing it to be more effectively used in decision-making. Investors will be able to quickly summarise any written document and also ask questions about the content of documents in natural language – a vast improvement on ‘CTRL F’.

In terms of climate data, AI-based machine learning could help to bridge gaps in corporate emissions disclosures or enhance climate risk stress testing models,6 for example downscaling larger and more sophisticated physical climate risk models that are more expensive and time-consuming to run. It could also be used for forecasting carbon prices or for calculating the carbon footprint of products.7

Another major application of AI could be in the area of climate adaptation. In this case, it can be used for hazard forecasting and improving early warning systems using satellite imagery, as well as supporting practical adaptation solutions like precision agriculture.8

The promise of AI is especially relevant in less developed areas of sustainable investing research like biodiversity, where data is still more sparse and unstandardised. AI can, for example, be combined with geospatial data to produce new analytical tools and more precise asset-level data which enable better collection and interpretation of biodiversity information.9 This data can then be more efficiently applied to sustainable investment decision-making.

AI is also emerging as a practical tool to help companies with difficult aspects of decarbonisation, helping them improve their sustainability profile faster. For example, AI can help to manage unpredictability in the energy grid and therefore minimise emissions from standby generators. It has also successfully been used to reduce energy consumption for cooling data centres – resulting in significant savings in terms of both costs and emissions.10 Additionally, it could assist with carbon removal, both natural and mechanical, through assessing carbon storage sites and monitoring forest carbon absorption trends.

Problems with AI, such as biases and a perceived lack of transparency, as well as the technology’s own environmental impact, must be acknowledged and worked with. There is a need for upskilling and knowledge-sharing about the realistic opportunities and limitations of AI to support climate change research and action. But viewing AI as both a tool for more sophisticated ESG research and a means to improve companies’ operational sustainability should give a sense of the key role it could soon come to play in the sustainable investing landscape. 

Extreme heat poses ever more of a risk to health and the economy

With summer in the northern hemisphere well underway, extreme heat is once again in focus and there is no shortage of related bad news across the world to focus on. The first week of July 2023 was officially declared the world’s hottest week on record by the World Meteorological Organisation and 2023 is now more likely than not to be the hottest year since records began.11

The consequences of extreme heat are entirely relevant for investors and should be factored into decision-making as part of physical climate risk assessments. Transport infrastructure can buckle under extreme temperatures, bringing significant disruption to logistics and movement of people. Extreme heat goes hand in hand with surging demand for power for cooling, which creates grid reliability problems that heighten costs and reduce output.

On a more long-term view, higher temperatures threaten crops and livestock, resulting in lower yields, reduced food supply and increased food prices. Extreme heat and related perils such as wildfires could also dramatically reduce the attractiveness of tourism destinations such as southern Europe, with knock-on consequences for the local economy and businesses operating in those areas.

Alongside the direct costs to businesses and economies of heat-related illnesses and mortality, these impacts on output and labour productivity can have more indirect, but no less damaging, effects. The ILO forecasts that by 2030, more than 2% of total working hours worldwide will be lost every year, equivalent to the loss of 80 million full-time jobs. This carries a cost of USD 2.4 trillion, nearly 10 times the heat-related productivity loss of 1995.12

Overall, economic growth prospects can be significantly undermined. One study found that the firms most exposed to extreme heat risk could lose up to 1-2% of their market value.13 However, physical climate risk is still under-recognised by investors and rarely sufficiently priced in investment decisions – something we think needs to change as extreme temperatures become a permanent reality.


Relative change in labour productivity due to heat stress under NGFS current policies scenario

Source: Climate Analytics as of 2023 . NGFS = Network of Central Banks and Supervisors for Greening the Financial System.

Global climate policy and regulation will continue to influence the investment opportunity set 

There has been no shortage of discussion around recent developments in global climate policy, with the IRA and the European Union’s Green Deal Industrial Plan (GDIP) particularly in the spotlight. These legislations are signs of a full-scale resurgence of industrial policy in response to global challenges that require coordinated, targeted support to solve and cannot be tackled by the private sector alone.

The IRA offers support for a wide range of climate-related activities, including renewable energy generation, carbon capture and storage (CCS), low-carbon hydrogen, buildings efficiency, nuclear, biofuels and conservation, and rural development. The support is offered largely via production and consumer tax credits which incentivise investment across these industries and also in related areas, such as companies providing equipment and infrastructure for these projects.

The EU’s Net Zero Industry Act, one component of the GDIP, identifies eight ‘strategic net zero technologies’ including solar, battery and storage technologies, onshore and offshore renewables, heat pumps, grid technologies and CCS. Tailwinds can be expected for these prioritised industries, both for those directly involved in producing or indirectly in servicing such technologies. Attempts to streamline processes such as permitting should also accelerate projects. Rules requiring domestic manufacturing and the use of locally sourced materials for green technologies could stimulate new local industries and turbocharge employment.

The momentum created by supportive policy is partly shown by the fact that investment in clean energy now far outpaces investment into fossil fuels and continues to increase.14 Policy support is also correlated with an increase in announced projects for potential decarbonisation solutions like hydrogen and carbon dioxide capture and storage.


Global investment in clean energy and fossil fuels

Source: IEA as of May 2023

The impact of these policies supports the idea that well-designed climate policy and government spending can boost economic growth and unlock investment opportunities. Overall, by April 2023, estimates suggest the IRA had led to USD 89.5 billion in new investments announced, spanning over 90 new clean energy projects and over 100,000 jobs.15 The REPEAT project forecasts it will lead to the creation of 200,000 net new jobs in energy supply related industries – at the same time as achieving a 2% reduction in energy use.16

Nevertheless, a bottom-up approach to analysing the effects of industrial policy is key, since outcomes will differ significantly across countries, sectors and asset classes. While it is difficult to accurately assess the total impact on global GDP and economic growth trajectories, the return of industrial policy brings real credibility to efforts at transforming economies in line with net zero goals. The increase in investment into critical low-carbon technologies and the boost to employment should provide confidence to investors considering allocating capital to the sectors of the future. 

1 Climate Bonds Initiative, Q1 2023 Market Update: Sustainable debt shows recovery (May 2023)
2 Climate Bonds Initiative, China Sustainable Debt: State of the market report 2022 (May 2023)
3 UN, Global Sustainable Development Report 2023 (June 2023)
4 Oxfam, Climate Finance Shadow Report 2023: Assessing the delivery of the $100 billion commitment (June 2023)
5 IEA, Financing clean energy transitions in emerging and developing economies (2021)
6 Amundi, Artificial Intelligence and ESG: How do they fit? (October 2022)
7 Shahzad, U., Sengupta, T., Rao, A. et al. Forecasting carbon emissions future prices using the machine learning methods. Annals of Operations Research (2023)
8 LSE, What opportunities and risks does AI present for climate action? (July 2023)
9 Fairr, Using Geospatial Imagery and AI to Solve the Environmental Data Gap (September 2022)
10 Google DeepMing, DeepMind AI Reduces Google Data Centre Cooling Bill by 40% (July 2016)
11 Carbon Brief, State of the climate: 2023 now likely hottest year on record after extreme summer (July 2023)
12 International Labour Organisation, Working on a Warmer Planet: The impact of heat stress on labour productivity and decent work (July 2019)
13 Paul Griffin, David Lont, Martien Lubberink; Extreme high surface temperature events and equity-related physical climate risk; Weather and Climate Extremes (December 2019)
14 IEA, Clean energy investment is extending its lead over fossil fuels, boosted by energy security strengths (May 2023)
15 Climate Power, The 101,036 (and counting) new clean energy jobs across the United States (February 2023)
16 REPEAT Project, Preliminary Report: The Climate and Energy Impacts of the Inflation Reduction Act of 2022 (August 2022) 
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