ESG Insights: Building analytical solutions for a sustainable future

ESG Insights: Building analytical solutions for a sustainable future

DPA ESG Insights

Building Analytical Solutions for a Sustainable Future

Welcome to the latest edition of our ESG Insight series, where we delve into the latest trends, data, and issues related to Environmental, Social, and Governance (ESG) investing. As the world becomes more focused on sustainability and responsible investing, we are dedicated to providing you with the insights and tools necessary to make informed decisions.

In this edition, we will be exploring the latest developments in ESG investing, including emerging themes and new initiatives that are shaping the landscape. We will also be sharing our expert analysis on the most pressing ESG issues facing investors today, and how these issues can be addressed through innovative analytical solutions.

At Decimal Point Analytics, we are committed to working with our clients and partners to drive sustainable growth and create a better future for all. We believe that ESG investing plays a crucial role in achieving these goals, and we are proud to be at the forefront of this rapidly evolving field.


Summary:

ESG tailwinds are very strong in the corporate sector, while there are signs of moderation of the trend in the financial sector.


Count of companies focusing on Net Zero is increasing at over 50% per annum

The ESG tailwinds continue to be strong in the corporate sector, while there are signs of moderation of the trend in the financial sector.

Our review of SBTi data shows that the number of companies approaching SBTi for target validation is growth at just over 50% per annum. The pool of companies aligned to 1.5 degree has crossed 2000 globally; this pool is growth at over 60% run rate.

These are heady numbers, which also synch well with another bit of data on corporate budgets dedicated to sustainability goals.


Companies plan to boost sustainability budgets by over 30%

A survey by Honeywell shows strong intent amongst corporates to back sustainability goals with budget allocations. The average increase in budgets projected by the surveyed companies appears to be around 30%.

Around 50% of the companies believe their efforts have been highly successful.


Fund industry alignment to ESG seems to be stabilising

The growth in fund community focused on sustainability appears to be stabilising. The population of funds on the UN PRI platform increased by 19% in 2022, a slowdown over historical trend. The current run rate points to a growth of 10-12% in 2023. This could be a sign of maturing of the market, indicating saturation in developed markets. Developing markets and China still have considerable scope for ESG focus to increase amongst investors.


Funds need to prepare for 2023 Reporting

UN PRI’s 2023 reporting cycle opens in May’23, and will remain open for three months after that. UN PRI has made reporting guidance available. Funds can now start preparing for the reporting. We are witnessing increased interest in our TCFD reporting solution.


Revival in green bonds, but still off desired level

Green Bond issuances have revived in 2023, after a drop in 2022. However, the run rate remains after away from the $1 trillion level that observers have been predicting.

Read on for More Details...


Corporate Sector: Net Zero Track

‘Companies Taking Action’ nearing 5000


Increasing number of companies approaching SBTi

‘Companies Taking Action’ is the term Science Based Target Initiative (SBTI) uses for companies that approach it for target validation.

SBTi’s position as the go-to platform for Net Zero target validation seems to have solidified in recent months, as seen by the rapid increase in the number of companies approaching SBTi for independent validation of targets. By 28th April, the count of ‘Companies taking Action’ has hit 4991.

The number of new companies approaching SBTi appears to be running at around 200 per month. In other words, the annual growth rate in ‘Companies Taking Action’ is over 50%.


?4,991 companies from various regions are listed with SBTi.

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Regional Split of Companies Taking Action (April 2023)

Source:?https://sciencebasedtargets.org/ , DPA ESG Research


Top countries with companies registered with SBTi

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Country Split of Companies Taking Action (April 2023)

Source:?https://sciencebasedtargets.org/ , DPA ESG Research

UK headquartered companies continue to lead the country count of companies that have approached SBTi, ahead of USA, indicating low enthusiasm amongst US businesses towards climate change.

Moving on to validated targets, SBTi has validated targets for 51% of the companies, or 2574 to be precise. Of these, 2085 companies have been certified as being aligned with 1.5-degree goal for near term targets.


2085 companies have near term targets aligned to 1.5 degree

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Near Term Verified Targets

Source:?https://sciencebasedtargets.org/ , DPA ESG Research


We advise fund to base Net Zero strategy on SBTi information.

The rapid increase in the number of companies with validated targets is good news for asset managers looking to align portfolios with Net Zero.

For most funds, we would advise using SBTi data for Net Zero Alignment, particularly looking at the pace with which SBTi’s population of validated targets is increasing.


ITR approach is too speculative, we are not sure if asset owners should place their faith on it yet

The alternative methodology for Net Zero Alignment, based the Implied Temperature Rise (ITR) calculation, is very much a work-in-progress. While there are several attempts going on to develop ITR based Net Zero tracking methodologies, at DPA we are not convinced there exists a great need to go down that route.

While there is no denying the additional insights an ITR process provides, our scepticism is based on the number of assumptions an ITR approach needs. This we believe clouds the reliability of the final results, we are not sure if results are worth the effort.


Corporate Sector: Honeywell Environmental Sustainability Report

Sustainability budgets are on the rise


Corporates report aggressive intent to increase budgets for sustainability initiatives, shows a survey

Nearly 85% of the corporates polled in a recent survey by Honeywell reported a strong intent to increase budgets for environmental sustainability (see table below).

The planned increase as reported by the survey is quite aggressive. (Caveat: Honeywell is an interested party since it supplies equipment to address sustainability issues). About a third of the companies that responded plan to increase budget by 20%, and this is the lower end of the range. Others plan to increase even more; around 20% plan to increase sustainability budgets by over 50%.

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The survey also reports the companies are making good progress on the ground. Almost 90% of all organizations surveyed report they have been extremely successful or somewhat successful in achieving atleast one or more of their ES goals over the prior 12 months.

Despite Energy Evolution and Efficiency being cited as the top ES priority, Circularity & Recycling continues to be cited as initiative with the most extreme success over the past 12 months.


Financing Sector: UN PRI News

The 2023 Reporting Cycle of UN PRI about to start

?The 2023 reporting cycle starts in May

We attended UN PRI’s sessions on the new reporting cycle, held a couple of weeks ago. As the readers may be aware, UN PRI’s reporting cycle took a break in 2022, and is now resuming from May 23. It will close in three months. Signatories that intend to report this year should start preparing for it now.

The output of reporting will be available from Nov’23 on the PRI portal, which gives various types of reports: Public Transparency Report, Public Transparency Report, Private Assessment Report and a Climate Report.

?The 2023 Reporting Cycle of UN PRI about to start


Number of indicators sharply reduced

The main differences between the 2021 and 2023 reporting cycles are:

Reporting Effort:?The need to reduce reporting effort was a feedback taken into consideration. Total number of indicators to be reported on has been reduced by 40-60% for different type of signatories. Number of indicators requiring granular data has been reduced.

The reporting form has been made more efficient. Navigation has been improved; plus several persons can work on a form at the same time.

Suitability to Asset Owners:?Asset Owners don’t need to report on assets managed internally in 2023.

Ambiguities reduction:?Definitions of several indicators have been looked at carefully and revised where applicable. Also, some queries have been reclassified to make more logical sense. Indicators relating to REITs have been removed from listed equity asset class and have moved to the real estate section.

Some considerations to keep in mind:

  • For asset classes where ESG is not incorporated, the score will one star (out of a possible five), even if represents less than 10% of the assets of the investment manager or asset owner.

?TCFD based climate indicators mandatory to report

  • UN PRI is emphasizing focus on Climate Change and Human Rights. It is encouraging signatories to embed these issues in their policies and governance structures. PRI had introduced TCFD based climate change indicators in 2018. All the indicators in 2023 are ‘core’, therefore mandatory to report.

?Reporting guidance uploaded on PRI site

  • Reporting Guidance resources have been improved. There are now available to be downloaded. A new resource is Logic guide that explains when and how an indicator is applicable to a signatory. Indicator Changes guide lists how the current indicators are similar to indicators to 2021.
  • PRI does not rate signatories at organisation level. Signatories get a score for each asset class on which they report.
  • Signatories that do not report for two years will be delisted. If they wish to relist, they will have to wait for one year. They will also need to provide evidence that they meet the PRI’s minimum requirements. They will not get a grace year that first time signatories get, where they can wait out a year before starting to report.

?Signatory Count crosses 5300 in Mar’23

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?5380 signatories at the end of Mar’23

UN PRI Signatory Count (31-Mar-23)

Source: UN PRI, DPA ESG Research

The UN PRI platform has seen maturing of growth rates in new fund signups

The growth rate of new signatories to UN PRI fell in 2022 after many years of robust growth. The population of UN PRO signatories grew by 19% in 2022 as compared to 30-35% per annum in the previous three years. The current run rate points to a growth of 10-12% in 2023.

This could a reflection of market saturation in many markets, particularly developed markets, where most meaningful asset managers or asset owners may already be signed up. However, the fund community in much of the developing world is yet to commit to ESG goals. This scenario can change, given that governments and regulators, even in developing countries are beginning to drive focus on Net Zero goals.

?Annual Increase in UN PRI Signatories

?8 out of the top 10 countries are from Europe

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Countries with most signatories

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Source: UN PRI, DPA ESG Research


Financing Sector: Green Bond Issuance in Q1 2023 (Jan-Mar’23)

Growth seen, but far below USD 1 trillion annual run rate

?Recovery likely over 2022, but far away from USD 1trillion run rate

Monthly green bond issues remain in the USD50-60B range, in line with the last couple of years. The trend line remains below the rate needed to achieve USD1 trillion or more of annual green bond mop up that observers say need to be reach to fast forward the climate transition.

Total issuances for 2023 are expected to do better than 2022, which reported a 25.6% decline over 2021. Globally, issuers sold $443.72 billion worth of green bonds in 2022, down from $596.30 billion in 2021.


EU countries lead global green bond issuances

Currency of Issue: Q1 2023

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Source:?www.climatebonds.net/ , DPA ESG Research


Sovereign and quasi-sovereign issuances dominated Q1 2023

Top Issuers: Q1 2023

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About DPA’s ESG Practice

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?Decimal Point Analytics (DPA), India's leading analytics firm focused on the asset management sector, is proud to announce the continued expansion of its ESG practice. As sustainability becomes increasingly important for investors, DPA is committed to providing cutting-edge analytical solutions to help clients navigate this complex landscape.

With a track record of 20 years in the asset management industry, DPA has built a reputation for excellence in providing data-driven insights and innovative solutions. Today, our ESG practice is working with a growing list of clients across a range of areas:

Our clients look for the following benefits from DPA:

?At DPA, we understand that our clients are looking for more than just technical expertise. That's why we strive to provide a comprehensive suite of services that meet their unique needs and requirements. Here are some of the benefits DPA delivers to its clients:

Cost-effective solutions:?We believe in delivering affordable solutions that provide value to our clients. We avoid over-engineered solutions and instead focus on creating tailored solutions that meet their specific needs while keeping costs in check.

Reliable data and solutions:?With our extensive experience in running large-scale data projects, our clients can rest assured that they are getting reliable data and solutions that are backed by rigorous quality controls.

Customisation:?We understand that every client is unique, which is why we offer customisation options for our core solutions like TCFD or PAT reporting solutions. We work closely with our clients to understand their specific needs and requirements and tailor our solutions accordingly, whether it's tweaking the output format or providing additional features.

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