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ESG investing: Will it prevail in 2023?
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Environment and Forestry Minister Siti Nurbaya Bakar (center) and Norwegian Climate and Environment Minister Espen Barth Eide (left), alongside Foreign Minister Retno LP Marsudi, pose with a new memorandum of understanding between Indonesia and Norway on Indonesia’s greenhouse gas reduction efforts during a signing ceremony on Sept. 12, 2022 in Jakarta. (The Jakarta Post/Norwegian Ministry of Climate and Environment)
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he year 2022 was marked by what Adam Tooze, professor of history at Columbia University, called a “polycrisis”. The term, which means interlocking and simultaneous environmental, geopolitical and economic crises, clearly defined the global situation in 2022.
Starting in optimism after the long pandemic, just a month passed in 2022 when the world suddenly tilted into a geopolitical crisis; the Russia-Ukraine War. The war created one of the greatest humanitarian crises since World War II, its ramifications have no sign of an end.
The war sent commodity prices, including oil and energy prices rocketing. This created interwoven global crises: rising energy prices, accelerating inflation and slower global economic growth.
For environmental, social, and governance (ESG) investing, 2022 put a brake on the upward trend. On the global debt markets, ESG-related bonds contracted in 2022 after reaching almost US$1 trillion in 2021. Specifically, in the third quarter ESG-linked bonds showed a decline of 35 percent compared with the second quarter, and 45 percent compared with the third quarter of 2021, as shown in Climate Bonds Initiative 2022.
Equity investors also experienced the same thing. Yet it was much harder for ESG equity investors. As of November 2022, the MSCI World Index was down 14 percent. Meanwhile the MSCI World ESG index fell even further by 15.5 percent year-to-date (ytd). Indeed the 10 largest ESG funds posted double-digit loses, according to Bloomberg. It appears that ESG investing could not keep its promise of minimizing risks tied to environmental, social and governance, let alone getting higher returns.
The good things of 2022 for 2023
