An analysis by MSCI ESG Research noted 32 factors and risks that institutional investors and companies should consider for 2023 and beyond when evaluating the space.
The risk considerations were split into seven different categories: changing corporate governance, responses to regulation, supply chain innovation, work life changes, turning points for ESG assets, expansions in emissions tracking and new types of investments in ESG.
"ESG risk is financial risk," said Meggin Thwing Eastman, managing director and global ESG editorial director at MSCI, in a news release. "ESG and climate research showcased in today's report was conducted to support investor needs to synthesize previously unseen risks and incentivize companies to better manage both emerging issues and the longstanding, expansive threat of the climate crisis."
Changing governance refers to the shifting demographics on corporate boards. For example, the number of female directors in Asia-Pacific is rising in part due to gender diversity regulations in Malaysia and South Korea. The average age of directors by market and gender is also something to watch as developed market directors tend to be older and emerging markets younger, with female directors being younger on average, according to the MSCI's findings.
Researchers said investor opposition to corporate climate strategies will be important after the average proportion of votes against such strategies went to 9.6% in 2022 from 3.1% in 2021. Whether or not climate-focused boards push back against such opposition is also a factor to pay attention to for investors.
In the regulatory sphere, researchers are watching rules around ESG fund names and disclosures of ESG integration and climate targets, which will be important considerations for investors. Banks will also be eyed to see whether they can create the right models for climate risk data as required by law. Companies linked to deforestation will likely face higher scrutiny, MSCI said. After the European Union's 2022 Digital Markets and Digital Services Act, companies that can adapt to the regulations the quickest will be deserving of attention according to the research.
In supply chains, researchers will be paying attention to developments around responsibly sourced cotton shortages, mining secondary metals from electronic waste, health concerns around genetically modified organisms and the adoption of blockchain technology to combat human rights violations, among other areas.
Work life includes factors such as risks of global railroad strikes, air quality risks toward worker health, media attention toward ESG risks and which companies can adequately solve labor and wage issues.
Researchers noted turning points and new investment opportunities manifesting themselves as lab-grown commodities like diamond and cotton, the novel use of investing in carbon as the market grows to over $300 billion and companies able to advance decarbonization and climate-adoption efforts.
Lastly, turning points include the emergence of green bonds, whether nuclear energy can rejuvenate itself, greenwashing, how energy market disruptions harm clean energy transition, and whether energy companies that have produced record profits will double down on current business models or invest in cleaner technologies.
