Last year, we noted that sustainability had started to become embedded into public consciousness. And we argued that governments and corporations would need to move quickly in response. Recent climate protests suggest there is still a lot of work to be done.
Some corporations have become lightning rods in the climate debate. Extractive industries, in particular, are in the firing line — not only from protesters flinging red dye at company headquarters, but also from governments seeking redress for the costs of dealing with climate change. The activities of groups like Extinction Rebellion and the People’s Climate Movement only reinforce that society now expects more from their governments and corporations.
The good news is that corporations are now starting to embrace the sustainability agenda and more specifically the concept of decarbonization. This past September, 87 major companies representing more than USD2.3 trillion in market capitalization committed to support the 1.5 degree goal set out at the Paris climate talks. Many are making significant investments towards reducing their carbon footprint across the supply chain.
Even the extractive industries are getting in on the action. We are aware of a number of oil producers, coal extractors and miners who are switching the power source of their production facilities over to sustainable energy sources. Many are also investing into new, ‘cleaner’, revenue streams in order to diversify their portfolios away from non-ESG (Environmental, Social and Governance) compliant assets in the future.
While initiatives by individual companies and industry groups are encouraging, we expect changes in the financial markets to provide the greatest catalyst towards wide-spread corporate adoption of ESG criteria this year.
Indeed, it seems the financial markets are passionate about sustainability and in particular, they are focusing on corporates with clearly defined decarbonization strategies. According to recent data, the so-called ‘Impact Investing’ market is now estimated to be worth more than USD500 billion. Another USD500 billion has been invested into Green Bonds to date. And that’s just a small slice of the action. At the start of 2018, global sustainable investing assets in just 5 major markets was estimated to have reached more than USD30 trillion (PDF 2.4 MB). ESG performance is similarly becoming part of mainstream decision-making.
This should be sobering news for those infrastructure owners dependent on non-ESG compliant assets and revenue streams. The reality is that, as the trend towards ESG investing continues, owners and promoters of these assets and projects will find it increasingly difficult to secure funding and financing at reasonable rates. Over the next few years, we believe it is inevitable that significant value in non-ESG compliant assets will become stranded or lost.
While the shrill voices at the extremes will persist, we are seeing a significant shift in the ‘middle.’ The mainstream corporation and investor now understand the strategic importance of addressing this issue. This year, expect them to evolve themselves and push governments towards action. Where government inaction is insurmountable, don’t be surprised to see more private interests taking infrastructure planning and decision-making into their own hands.
Look back: What did we predict? In 2019, we predicted that “the coming year [will] bring more public pressure and scrutiny on the sustainability of infrastructure planning, delivery, maintenance and funding as attitudes around the globe continue to shift.”