In the midst of unprecedented confusion and uncertainty in world history, 2023 The blatant hegemonic struggle and economic and trade wars we have seen in the last two to three years have shown the vulnerability of solidarity between countries to universal values to be shared by mankind. The new health crisis of COVID-19 has undermined scientific civilization and faith in medicine. Global leadership and international order are missing, and the U.S. is losing leadership in the international community due to its short-sighted policies such as interest rate and exchange rate policies or short-sighted policies such as automobiles and battery semiconductors. It seems that sustainable development and climate change response led by the United Nations through the Sustainable Development Goals (SDG) and the Climate Change Convention (UNFCCC) are also weakening.
The 2022 General Assembly of the Parties to the United Nations Framework Convention on Climate Change (COP27) left poor results due to the energy crisis caused by Russia's invasion of Ukraine. Due to the U.S. sidelines and Europe's energy security crisis, discussions on phase-out, the core of the transition to a decarbonizing society, seem to be falling behind nuclear energy and natural gas, a low-carbon fossil fuel.
Despite this situation, ESG investment continues. The tremendous influence of ESG investors makes companies around the world strive to improve ESG performance, which is ESG management. Usually, during a severe recession, it is difficult for companies to invest in environmental and social performance, and investors also focus on economic viability, but it is difficult to understand that ESG investment has been sweeping the global financial and industry over the past two to three years. However, if you look deeply, it can be reasonably explained, and furthermore, future predictions after 2023.
First, the sustainability needs of key stakeholders such as consumers, investors, and employees will become increasingly severe. Investors should consider ESG performance when required by stakeholders, and companies should strive to improve ESG performance if there is a demand from employees and consumers with investors. According to the 2022 PWC survey, more than 80% of institutional investors in the U.S. and Europe said they would increase investment in ESG-related products over the next two years. In addition, according to the US Social Responsibility Investment Forum (USSIF), institutional investors are investing at least $3 trillion, prioritizing climate change and carbon emissions-related investments.
Second, changes in the values of the MZ generation will accelerate ESG investment trends. Faced with climate change and environmental problems, social inequality and unfairness, and economic instability, MZ generations are having a major impact on consumption, investment, and employment practices. According to a survey by Kearny, a U.S. consulting firm, one in four MZ generations will leave if the environmental and social performance of their bank is not good. Intergenerational changes are taking place in asset management, and stakeholder capitalism, in which stakeholders influence corporate decision-making, will emerge.
Third, the size of the ESG investment market will be reduced. This is because regulations on ESG investment and product classification standards and greenwashing will be stricter, which will reduce ESG label products. In fact, according to the US SIF, as a result of applying stricter ESG classification standards, US ESG assets in the United States decreased from $17.1 trillion in 2020 to $8.4 trillion in early 2022. The U.S. Securities and Exchange Commission (SEC) fined Goldman Sachs $4 million for making false ESG claims.
Fourth, regulations on information disclosure will be strengthened as investors' demand for ESG information increases. With the establishment of the International Sustainability Standards Board (ISSB) in 2022, the basis for including ESG information in the company's compulsory disclosure framework has been laid. The SEC also mandates disclosure of climate change information. Accordingly, data competitiveness in the accuracy and reliability of sustainability-related information and the efficiency of information provision will become important in the future.
Fifth, the competitive advantage of ESG management will decrease in the long run, and the survival crisis of ESG inferior companies will increase instead. Currently, for example, carbon neutrality and the RE100 declaration can be seen by stakeholders as a forward-looking effort, but in just three to five years, it will become a normative practice for all companies and disappear.
Sixth, pros and cons of ESG investment will spread. There will be skepticism and challenges within the enterprise regarding ESG scores and their usefulness. Academics will pose challenges to the effectiveness of ESG investment and investor authenticity in combination with the structural problems of capitalism. In particular, politicians will increasingly intervene in ESG investment and issues, but the confrontational ESG policies of conservative and progressive governments will undermine credibility. In the U.S., Texas and other Republican-dominated states demanded that they stop trading with financial institutions that adhere to ESG principles.
There are signs that ESG promotion strategies are weakening under the new regime. In particular, the new national energy goal, which has increased the share of nuclear energy and significantly reduced the share of renewable energy, could pose practical difficulties in achieving long-term carbon neutrality and companies' RE100 goals. Since achieving carbon neutrality through renewable energy expansion will determine the survival and competitiveness of countries and companies, a careful approach is needed. Companies should move away from showing ESG management and focus their efforts on future key issues: decarbonization, biodiversity, safety, circular economy, and fair labor practices (DEI), and the government should spare no policy support to this end.
Writer: Yeyoung Jeon
(Picture from Unsplash)
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