ESG: A hectic year marked by regulations

Against a complex background characterized by high inflation and geopolitical tensions, regulatory advances are of notice, especially in the European Union

2023 was a challenging period for sustainable investing, with multiple factors affecting its investor appetite and performance. The climate context has played a crucial role in this scenario with extreme weather events, such as the continuous increase in global temperatures or adverse phenomena. Another milestone at this level was the decision by COP28, which recognized the need to phase out fossil fuel subsidies and increase investment in renewable energy to reach the goal of net zero emissions by 2050.

Despite these challenges, ESG investing is being reconsidered. According to Bloomberg New Energy Finance, $4.8 trillion of investment is needed every year for the energy transition between 2024 and 2030. Sustainability is, without a doubt, an unstoppable trend that will become increasingly important. This year we have reached various regulatory milestones, especially in the EU, where efforts to improve ESG data disclosure and ensure transparency in financial markets have been intensified. On the other hand, a recent anti-ESG movement that emerged this year in the U.S.A. politicized sustainability issues, especially in the wake of the upcoming presidential election. Many investors have adjusted their sustainability language to a more conservative discourse, and the regression in ESG integration could be limited.

Although there has been a recent decline in interest in ESG, regulation in developed markets continues to set the tone for continuing to drive a greener future. Over the past five years, the European Union has charted a significant path toward achieving sustainable goals, in line with the European Commission's priorities, such as the EU Green Deal. Eurostat's Sustainable development in the European Union report revealed the EU's progress toward the Sustainable Development Goals (SDGs), underscoring socio-economic progress and the need for further environmental action. The EU has established a sustainable financing framework to direct private capital toward the objectives of the European Green Deal, developing initiatives such as the EU Taxonomy, the Sustainable Financial Disclosure Regulation (SFDR), the European Green Bond Standards (EuGB), the Corporate Sustainability Reporting Directive (CSRD) and the guidelines on greenwashing.

As for the U.S., 2022 saw significant progress in regulating sustainable finance, with stricter requirements for climate risk disclosure by public companies and changes to investors' ESG investment practices. However, in 2023, the Securities and Exchange Commission (SEC) delayed its new climate disclosure rules several times, hoping to finalize them in the spring of 2024. Meanwhile, California has enacted laws imposing reporting requirements on greenhouse gas emissions and climate-related financial risks on private and public companies operating in the state. Although challenges and discrepancies in emissions reporting persist, scope 3 emissions are becoming increasingly important in the new requirements, which could influence the adoption of similar legislation at the federal and global levels.

As demonstrated, regulation continues to work to promote sustainable investing. The Global Markets Strategy team -special thanks to Santiago Méndez and Volodymyr Kmetyk- has published a report called ESGPedia: "Looking for greener pastures", which highlights the main challenges, outlooks and future scenarios in this field. At BBVA CIB, we are committed to supporting our clients in their green transition, and we are confident that sustainable investment will experience a gradual recovery in the coming months.