ESG Series: ESG 2023 outlook

  • Jan 17, 2023

To read the full report, please download the PDF above.

Executive summary | ESG 2023 outlook

5 themes on the trilemma of affordability, security and sustainability

Increased ESG penetration in 2022 but so did the decibels of debate

  • As ESG’s contours and penetration increased in 2022, so too did the decibels of debate. Surging inflation, the reverberations of the war in Ukraine, the energy crunch and global recessionary angst have called into question the value of ESG considerations, forcing policymakers to reconsider the rank of importance in the energy trilemma pillars – affordability, security and sustainability. Yet, we view louder deliberations and pockets of pushback as indicative of ESG’s burgeoning relevance and a natural and necessary step in its maturation.

Remaining in the “measurement phase” in 2023

  • In 2023, we believe we will remain in the “measurement phase” of the ESG journey, marked by greater penetration, rising focus on product impact and increasing regulatory scrutiny on both corporates and investors.
  • We envisage the ESG conversation coalescing around three core avenues: (i) how to best fuse ESG metrics with financial fundamentals; (ii) macro and micro implications of engagement vis-à-vis exclusionary strategies; and (iii) how to measure and compare company ESG performance as single answer ESG scores/ratings obfuscate ESG’s intent.

5 key themes on the trilemma of affordability, security and sustainability that will shape ESG’s journey in 2023

  • We identify five key themes on the trilemma of affordability, security and sustainability that we believe will shape the ESG journey this year to guide corporates and investors in navigating the volatile operating environment:
    • Sustainable finance – further evolution of the shift from aspiration to action leading to the (i) broadening of the investible universe; and (ii) mitigating the fear of misaligned exposures through quantification, improvement and performance.
    • Climate agenda and the just transition – urgency to return to the climate progress after a year of distractions with the global stocktake at COP28 another wake-up call.
    • Sustainable energy and the recalibration of oil companies – from “big oils” to “big energy” through the pivot from a one dimensional to a multi-dimensional ecosystem, requiring greater complexity, risk management and vertical integration.
    • The rise of clean hydrogen – clean hydrogen has emerged as a critical pillar to any aspiring global net zero path, aiding the decarbonisation of ~15% of global emissions with the total addressable market for hydrogen generation alone having the potential to double to ~USD250bn by 2030 and reach >USD1tn by 2050.
    • Trajectory of the “greenium” in bond markets – the green bond market has surged to ~USD2.3tn since it took off nearly a decade ago, attracted by the premise of lower borrowing costs. Yet this “greenium” is ebbing owing to surging inflation, rising rates and apprehensions over greenwashing.
  • All in, valid questions have been raised surrounding ESG, and in particular the path to net zero. Yet, today’s reality is that affordability, sustainability and energy security dovetail as never before. The need for corporates and investors to address their externalities and be much nimbler to balance steadfastness with an energy future that is affordable, secure and clean, is likely to become essential to maintaining their social licence, in 2023.