A new report by Bloomberg Intelligence, ESG’s Shocks & Aftershocks: BI’s Top Predictions, highlights some of the key issues and trends with regards to ESG.
As ESG takes shape after 2022’s shocks, the pivotal issues that BI sees emerging include the wave of regulation tackling mislabelling and greenwashing, the race for green subsidies unfolding between the US and Europe, the implications of China’s reopening, and the Russia-Ukraine war on energy security.
BI also expects corporate governance and accounting scrutiny to top activists’ agendas amid the Adani crisis. ESG funds’ downgrades and ETF flows will be closely watched, while sustainable debt issuance could recover, fuelled by the US Inflation Reduction Act.
Two of BI’s predictions look at ETFs and SFDR:
What’s ESG ETF Flows Trajectory After Volatile Years? Still Up
BI expects long-term and steady gains in ESG ETF flows thanks to stronger regulation supporting growth and consumer confidence. However, it sees downside risk for 2023 as oil and gas fundamentals look more bullish, potentially weighing on flows because they are underweighted in energy. Based on its regression analysis, BI’s base case assumes ESG ETFs to represent 10% of the $800 billion global flows by 2030, capturing $83.5 billion a year on average. The figures for BI’s bear and bull cases are around $50 billion (5% share) and $120 billion (15% share) a year, respectively.
Adeline Diab, Director of ESG Research EMEA & APAC, Bloomberg Intelligence, says: “While the global ETF market has grown 20% on average in recent years, ESG’s share peaked at 20% in 2021 before diving to about 6.5% in 2022. Flows contracted more than 30% in 2022 amid the US political backlash and global energy landscape.”
Will SFDR Help Tackle Greenwashing? Fund Downgrades to Speed Up
More than 17% of funds labelled Article 9 were downgraded to Article 8 over Q4, based on BI’s analysis, with 60% occurring since November as more reporting rules invite scrutiny. This represents over 180 funds totalling $126.3 billion. BI believes that funds presenting potentially serious mislabelling risks led this first rush of downgrades, and it expects this trend to accelerate.
It also expects a next wave of downgrades from Article 8 to Article 6 — a more sizable share of the market. Our analysis covers over 23,000 funds categorized under SFDR. Article 9 (5% ) are EU “dark green” funds with key objectives; Article 8 (35% ) are “light green” funds with no overarching objective. Article 6 (55%) funds are without set objectives to disclose funds’ risks exposure.