Where is ESG investing heading?

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Here’s a note from Nawar Alsaadi about the future of ESG investing:

I get a lot of questions about where I see the ESG/Sustainable and Impact investing space going. Follows is my take on where this industry is heading over the next 5-7 years:

1.      ESG integration is to increasingly dissolve into fundamental analysis in case of fundamentally oriented shops. And merge into style factor investing (in close alliance with quality factors) for quantitatively oriented shops. ESG ratings to become an artifact.

2.      Generalist ESG investing is likely to diminish in favor of thematic ESG funds, with new and rebranded funds increasingly specializing in one of the ESG constituents letters. ESG as a descriptive term will take a back seat to sustainable investing.

3.      Climate will become its own asset class. Climate will distance itself to become its own category, with the E from ESG retaining all other environmental-related categories.

4.      The ESG-data space will evolve from one offering and collecting sustainability data to one focusing on sustainable investing data management and analytics. The ESG data space will experience a period of heavy consolidation, with the number ESG/sustainability data firms diminishing by 80 to 90% by 2030.

5.      ESG/Sustainable teams within financial institutions will gradually move away from ESG integration (as this function will be integrated into investment teams) to focus on sustainable engagements, proxy voting, and deep sustainability-research (in addition to their current duties of sustainability reporting and tracking).

6.      Instead of the current seven sustainable investing categories under GSIA, Sustainable investing will increasingly fall under two overriding categories: Sustainable Risks Management and Sustainable Impact. Double materality will largely be incorporated in the latter.

7.      Europe will gradually lose its sustainable investing dominance as heavy sustainability regulation stifle sustainable products innovation to the advantage of US market-oriented policy. (We are already seeing this with Article-9 exodus).

8.      Climate shareholder activism will explode to a point where the term activist hedge fund will come to mean a fund hedging against climate change as opposed to a fund hedging against market volatility.

9.      Mainstream investing and sustainable investing to become indistinguishable, with the exception of a more evolved version of impact investing, where the latter will be perceived as the only credible capital markets lever to derive tangible-real world change.

10.  Greenwashing loses ground as maturing regulation, growing investor sophistication, and improved sustainability data and integration void the practice of its appeal.

Take all the above with a grain of salt!.