Shocks and aftershocks: BI's top ESG predictions

This analysis is by Bloomberg Intelligence’s Adeline Diab, the Director of ESG Research for EMEA & APAC. It appeared first on the Bloomberg Terminal.

ESG is fundamentally reshaping capital markets. A rough 2022 — political backlash, slowing investments and energy security concerns with the Russia-Ukraine war — only sharpened ESG investing. Momentum looks strong. These are five of the pivotal issues BI’s team of ESG analysts see emerging:

A steady rise in ESG ETF flows after volatile times.

ESG ETFs will experience long-term and steady investment flows thanks to stronger regulations that support growth and consumer confidence. Our base case assumes ESG ETFs should represent 10% of the $800 billion global flows by 2030, capturing $83.5 billion a year on average, Diab says. Our bear and bull cases are $50 billion (5% share) and $120 billion (15% share) a year, respectively. While the global ETF market has grown 20% on average in recent years, ESG’s share peaked at 20% in 2021 before diving to about 6.5% last year.

More downgrades from top ESG rating for funds

Downgrades from the EU’s top ESG designation for funds will speed up as more rules invite scrutiny over potential mislabeling and so-called greenwashing, says Diab. More than 17% of funds labeled at the highest ESG level, Article 9, were downgraded in 4Q to Article 8, meaning they have no overarching ESG objective or, based on our analysis. That represents more than 180 funds totaling $126.3 billion, with 75% managed by Credit Agricole, BlackRock and BNP Paribas. We also expect a wave of downgrades from Article 8 to Article 6, which have no set ESG objectives.

 

 

EU utilities find the decarbonization payoff

European utilities with a strong record of cutting carbon dioxide emissions have valuations that appear low relative to financial quality and the outlook is supportive, says Rahul Mahtani. More than 70% of decarbonizing utilities, including Enel and Iberdrola, have higher valuations than implied by the negative relationship between profit and book-to-market ratios (minus 40% correlation). The decarbonizing utilities — with three-year carbon intensity or emissions reductions exceeding 20% — have returned 42% since 2019, exceeding the 31% for sector peers and 18% for the Stoxx 600 benchmark.

IRA to boost solar spending growth up to 40%

The Inflation Reduction Act’s focus on solar could help boost U.S. installations by 30-40% in 2023 from last year, based on our scenario analysis, which sees continued double-digit growth through the end of this decade. Even though trade uncertainty persists with barriers to Chinese exports and Beijing mulling solar-tech export bans, Clelia Imperiali says long-term prospects for U.S. solar growth appear stronger than ever. Prospects for solar-equipment manufacturing in Europe are likely to be capped by the IRA’s competitive disadvantage unless the bloc adopts a similar plan.

China’s reopening adds more emissions than canada

The reopening of China’s economy may boost power generation this year by 6% — and overall carbon dioxide emissions by 5.3% — assuming that its energy mix remains the same, says Michelle Leung. Emissions from coal could increase by 600 million tons, 5.3% growth from 2021 — exceeding Canada’s annual emissions. Our forecasts are based on China’s plans to raise yearly coal output by 300 million tons in 2023 to avoid a severe power crunch and emissions of about two tons for each ton of thermal coal burned, in line with the past five years’ average.