Ethical Investment 2022: 5 Trends You Should Pay Attention To

Photo by Ross Findon on Unsplash

Ethical investing is about capitalizing on companies or organizations that are socially and environmentally responsible. It could be with how they do their business internally or how their business contributes to the people and the planet. Nowadays, modern investors demand accountability that goes beyond “business as usual”.

Ethical investments have been slowly building their way up pre-pandemic due to climate concerns, mainly. But with the current pandemic weighing in and with the increased polarity due to social media, investors are warier of where they put their investments into.

If you’re wondering what are the new trends in ethical investing, these are just the top 5 things you should know.

1. Europe is the ESG Leader of the World

ESG is headlining the rapid growth of investors’ interest in ethical investments around the world. Even more so in Europe among the continents, with Asia-Pacific joining the sustainable market.

According to Morningstar Sustainability Atlas released in April 2021, these are the ESG leaders of the world with their corresponding ESG risk rating:

  1. Netherlands (17.86)
  2. France (19.40)
  3. Finland ((19.73)
  4. Hong Kong (20.13)
  5. Taiwan (20.62)

Just like in the previous years, Europe remains to be the most advanced market for ESG investing. France, now second, has outranked Sweden and Finland from the previous rankings. Outside of the European sustainable market, Hong Kong leads the Asia-Pacific region with the insurance company, AIA Group. Taiwan also places in 5th with Taiwan Semiconductor Manufacturing.

When it comes to corporations, the corporate ESG leaders are still Apple, Microsoft, Berkshire Hathaway, and Visa.

These countries and corporations are good starting points of reference for investors looking to buy into ethical investments in 2022.

2. Sustainability-linked Bonds & Green Bonds

Green bonds are just like traditional bonds but with a designated purpose for the use of proceeds. Funds raised from green bonds are used to finance or refinance environmental projects. We talk more about green bonds in a separate post. Eligible green projects may include:

  • Climate change mitigation
  • Conservation of natural resources
  • Protection of biodiversity
  • Pollution control
  • Renewable energy
  • Green buildings
  • Clean fuels for transportation
  • Sustainable waste and water management

Meanwhile, sustainability-linked bonds are much more flexible. Its funds can be used beyond green projects, as long as it has key performance indicators (KPIs) linked to sustainability outcomes of the business. For example, a company can commit to reducing its GHG emissions by 50% in 3 years. Some common examples of its KPIs are shown below:

Both green bonds and sustainability-linked bonds saw a significant increase in the annual sustainable debt issuance (2013–2021) according to Bloomberg NEF — especially between 2019 at $ 577B to 2021 at $1.6T. These amounts also include green loans and social bonds.

What good comes out of these sustainable debts?

While world governments are trying their best to reduce GHG emissions, the climate change effects are still happening. It’s equally urgent to protect the vulnerable nations against floods, hurricanes, drought, and other extreme weather conditions, while we try and reverse the effects of global warming. These green and sustainable projects will help nations around the world adapt to the changing climate. According to the November 2021 data gathered by MSCI ESG Research LLC, the top sovereign green bonds allocated for climate adaptation are the Netherlands, U.K., France, Germany, Spain, Ireland, Hungary, Sweden, Italy, and Chile.

3. Greenwashing Awareness

Ethical investments, especially anything that’s labeled as “ESG-friendly” or “sustainable”, are hotspots for modern investors. But these labels can get vague especially when there is lacking standardized metrics.

There is a gap for greenwashing where disinformation and deception can occur. Greenwashing is when companies deceive investors by overstating their sustainable investments through marketing when in reality, there are no clear objectives and execution of plans.

In 2020 and 2021, several big companies were called out for greenwashing. More and more investors demand accountability through transparent disclosures. All these investor appeals didn’t go unnoticed by government agencies and economic unions. Some policies that abate greenwashing are:

U.S. SEC’s ESG Task Force

The ESG Task Force is a subagency within the SEC that is dedicated to reviewing all submitted company disclosures to investigate ESG-related violations. Hence, if a company markets itself as sustainable or ESG-friendly, expect the ESG Task Force to analyze company disclosures and identify skeptical misstatements and target gaps.

EU’s Taxonomy Regulation

The European Union made the Taxonomy Regulation effective on January 1, 2022. It will require all its member states to conform to the classification system of whether an activity is environmentally sustainable. The list includes 6 objectives on:

  1. Climate change mitigation
  2. Climate change adaptation
  3. Sustainable use and protection of water and marine resources
  4. Transition to a circular economy
  5. Pollution prevention and control
  6. Biodiversity and ecosystems

It is voluntary for corporations to align their activities to the above criteria. If their activities don’t align, it doesn’t necessarily mean it’s unsustainable. However, this will be the new basis that will label green corporate bonds and investments.

4. Supply Chains of the World’s Biggest Corporations Will Follow Suit in Net-Zero

Ethical investments are getting more recognized now because even the biggest corporations are setting sustainable targets and timelines to achieve their green goals. Such examples are Amazon, Microsoft, Alphabet Inc. (Google), and Alibaba. But just like in any ecosystem, the goals of the biggest players will also cascade down to its supply chain — creating a B2B engagement for sustainable practices.

For example, Alphabet Inc. pledges to run all its facilities using carbon-free electricity by 2030. Investors must also pay attention to companies that supply for them like those in the software or semiconductors industries. Some examples of Alphabet suppliers are Accenture and Nvidia.

There are probably more promising, but not-so-known companies that are connected to these large corporations. It’s a good opportunity to invest in them to diversify your investment portfolio or while the smaller ones are still quietly building their way up. Do diligent research and watch out for greenwashing, though.

5. Reshaping the Food & Agriculture Landscape

If we continue to cut down the Amazon forest for overgrazing, it would only worsen the planet’s chances of survival. If large corporations continue unsustainable fishing practices, biodiversity will suffer. Aside from natural capital accounting, we must also look into more creative and sustainable ways of food production.

There are 2 major challenges with food supply — growing world population and extreme weather conditions from climate change effects. Drought and floods impart a heavy toll on food availability. This is where technology reshapes the food and agriculture industries.

For example, vertical farming produces fresh healthy produce, reduces carbon footprint from transportation, and provides a more stable supply because of advanced technology that optimizes the growth conditions. There is also regenerative agriculture which uses smarter sustainable ways.

About regenerative agriculture

Looks like we don’t have to necessarily stop eating beef if done with regenerative grazing.

It’s going to be a challenging yet exciting time for investors to find opportunities in the sustainable market. ESG investing and sustainable investments — you hear them more often now because these are the growing trends in the market. It just goes to show that we care more about our money’s impact than just merely allowing it to multiply for growing riches.

Because in the bigger picture, accumulating wealth and passing it down to the next generations will only be worthwhile if there’s still a planet to live in by then.

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Roman Reitman

Roman Reitman

Proficient Investor concentrated on ethical investments and green technologies.