The importance of ESG criteria in investments

In the last month, there have been almost 62,5K public mentions related to ESG in investments and its criteria. At BBVA CIB , we have cross-matched this data with the over 12K mentions linked to #ESGinvesting , #ESGregulation and #Sustainablefinance , to offer you a brief analysis on ESG criteria trends for 2023.

ESG investing has gone through several stages since it emerged as a relevant criterion in financial settings. It has gone from being the medal desired by all to being a weakness to improve on, particularly because of the growing regulations and the reform of the funds art. 8 and 9 to avoid greenwashing by products and entities.

Therefore, transparency is extremely topical as regards ESG investments. Managers and professionals in the sector are required to provide as much information as possible regarding their decisions, the risks involved in the chosen assets in terms of sustainability, and their impact. The ESMA (European Securities and Markets Authority) has strengthened this control and, as a result, it has become essential to explain and understand a series of concepts that were completely new and unknown until ten years ago. Despite the challenges, several milestones have been reached, such as the first draft of Social Taxonomy, the proposed Directive on corporate sustainability reporting (CSRD) and the incorporation of sustainability criteria with MiFID II, in force since August 2022. Additionally, the data supports this type of investment: according to Forética's latest report, ESG assets performed better financially in the last five years, both due to improved profitability and reduced risk.

The increase in regulation and the demands of investors have driven tangible improvements in terms of transparency, quality and depth of the data analyzed in investment processes, and have brought social as well as environmental issues to the foreground.

What can we expect from sustainable finance this year?

In a context marked by instability and volatility, #BBVACIB is working closely with our clients to help them find the best solutions in this area. Solutions that, in addition to having a real impact on society and the environment, help our clients contribute to the energy transition and, together, continue working toward the SDGs.

We have long understood sustainability as a pillar of our strategy and a key aspect of all our operations. In fact, we adhered to the Davos Forum's commitment to publish ESG metrics in 2021, and have raised the sustainable financing target to €300 billion.

2023 is sure to bring the same level of interest in this topic: climate and social risks are top items on the agenda of regulators and investors, with a focus on issues such as biodiversity and social impact. The rollout of tools like #ChatGPT also makes AI a hot topic of conversation, an excellent complement to all the tools currently used to measure and record data in order to better understand the impacts of investments. Technological advances are an ally. Innovation is therefore a key element, and at BBVA we incorporate it into our day-to-day work.

The market will also eagerly witness the two main events on the agenda of sustainable finance this year: COP28, a new opportunity to analyze the results of the measures taken in Egypt in 2022 and reinforce the commitment of nations worldwide in the fight against climate change; and COP16, which will gauge the progress made on the objectives set in the previous meeting, when a series of global nature preservation targets were agreed for 2030 and 2050.

IN THE WORDS OF AN EXPERT- Leer más (ESP) / Read more (EN)

Our expectations for ESG trends this year

As we gain a greater understanding of how the dynamics of sustainable investing work and as we broaden our horizons (we are not only talking about environmental sustainability, but also about social impact on communities, resource optimization, good governance and good practices, diversity, inclusion, etc.), our approaches to a given investment strategy are also amplified and diversified.

Exclusion and screening will remain important, along with impact investing

Until recently, exclusionary screening and ESG integration had been the predominant investment approaches when incorporating an element of sustainability into portfolios and positioning. Now, as the sophistication in this area has grown, other approaches have emerged that contribute as much or more to the sustainable development goals. For example, impact investing – which essentially seeks to generate an environmental or social benefit in addition to generating a financial return – has become one of the top three investment approaches preferred by ESG investors. We expect a rebound in investments with positive social and local impact, together with greater involvement of governments and public entities in this sphere. The capital managed by impact investing in Spain reached 2.398.6 billion euros in 2021, according to SpainNab. 2023 will see similar figures, given the growing importance of this trend.

This year gives us the opportunity to review some of these approaches and improve them, thanks to tools and data analysis we can use to gain a perspective that goes beyond superficial analysis and the current moment. We can build predictive models, analyze historical data and predict trends, and even create different scenarios to test the strength and performance of a particular strategy.

Active vs. passive investment: two management methods that can coexist

Similarly, active strategies are investors' most popular choice when investing in ESG, particularly in Europe and North America, as shown by Capital Group's recent survey: nearly two-thirds of global investors opt for active funds to expose themselves to ESG investing. By asset class, equities, followed by fixed income, continue to dominate the ESG investment landscape. Nevertheless, commodity investing in particular but also alternatives and real estate have been gaining ground in the last year.

Traditionally profitable assets are no longer the protagonists

Another trend is that funds continue to overweight sectors aligned with the transition to low carbon, while underweighting those typically excluded despite their strong rebound in 2022 (gas, oil, energy, etc.). Assets traditionally more profitable in more challenging market times are being more affected by the relevance of sustainable investment approaches; and it is clear that sustainable assets have managed to outperform and have been more resilient in complex market times, such as during the COVID-19 pandemic. We expect the global universe of sustainable investing to continue to grow in the coming years, supported by this performance.

New concerns, new niches of opportunity

Climate change, biodiversity and the price of carbon emissions are the top-of-mind topics for investors and companies. It is no longer enough to preserve the environment; we must now focus on more specific problems. Investments that help mitigate the water footprint, for example, also demonstrate the efforts of teams to innovate. At BBVA, we created a new sustainable loan in July of last year that focuses on reducing the water footprint, a key priority in the sustainability policies of many companies.

The importance of data: traceability

The quality and traceability of ESG data will become increasingly essential. As sustainable investing grows, so will the need for reliable data. The ESG data market is estimated to have exceeded $1 billion for the first time in 2021 and we believe this trend will continue in 2023, as ESG factors embedded in investment become mainstream. With new regulatory requirements becoming more stringent, we expect them to continue to push data providers to improve their offerings, both in product breadth and in the quality and consistency of the data provided.

Overall, we reiterate our conviction that ESG investing is a long-term opportunity for both companies and investors. Once the ESG regulations are consolidated and are fully in place, they will provide another tool to enhance the transparency and credibility of the industry. Sustainability is undoubtedly an unstoppable trend that will take ever-increasing prominence, but also the right thing to do to preserve the well-being of future generations.

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