Our expectations for ESG trends this year

As we gain a greater understanding of how the dynamics of sustainable investing work and as we broaden our horizons (we are not only talking about environmental sustainability, but also about social impact on communities, resource optimization, good governance and good practices, diversity, inclusion, etc.), our approaches to a given investment strategy are also amplified and diversified.

• Exclusion and screening will remain important, along with impact investing

Until recently, exclusionary screening and ESG integration had been the predominant investment approaches when incorporating an element of sustainability into portfolios and positioning. Now, as the sophistication in this area has grown, other approaches have emerged that contribute as much or more to the sustainable development goals. For example, impact investing – which essentially seeks to generate an environmental or social benefit in addition to generating a financial return – has become one of the top three investment approaches preferred by ESG investors. We expect a rebound in investments with positive social and local impact, together with greater involvement of governments and public entities in this sphere. The capital managed by impact investing in Spain reached 2.398.6 billion euros in 2021, according to SpainNab. 2023 will see similar figures, given the growing importance of this trend.

This year gives us the opportunity to review some of these approaches and improve them, thanks to tools and data analysis we can use to gain a perspective that goes beyond superficial analysis and the current moment. We can build predictive models, analyze historical data and predict trends, and even create different scenarios to test the strength and performance of a particular strategy.

• Active vs. passive investment: two management methods that can coexist

Similarly, active strategies are investors' most popular choice when investing in ESG, particularly in Europe and North America, as shown by Capital Group's recent survey: nearly two-thirds of global investors opt for active funds to expose themselves to ESG investing. By asset class, equities, followed by fixed income, continue to dominate the ESG investment landscape. Nevertheless, commodity investing in particular but also alternatives and real estate have been gaining ground in the last year.

• Traditionally profitable assets are no longer the protagonists

Another trend is that funds continue to overweight sectors aligned with the transition to low carbon, while underweighting those typically excluded despite their strong rebound in 2022 (gas, oil, energy, etc.). Assets traditionally more profitable in more challenging market times are being more affected by the relevance of sustainable investment approaches; and it is clear that sustainable assets have managed to outperform and have been more resilient in complex market times, such as during the COVID-19 pandemic. We expect the global universe of sustainable investing to continue to grow in the coming years, supported by this performance.

• New concerns, new niches of opportunity

Climate change, biodiversity and the price of carbon emissions are the top-of-mind topics for investors and companies. It is no longer enough to preserve the environment; we must now focus on more specific problems. Investments that help mitigate the water footprint, for example, also demonstrate the efforts of teams to innovate. At BBVA, we created a new sustainable loan in July of last year that focuses on reducing the water footprint, a key priority in the sustainability policies of many companies.

• The importance of data: traceability

The quality and traceability of ESG data will become increasingly essential. As sustainable investing grows, so will the need for reliable data. The ESG data market is estimated to have exceeded $1 billion for the first time in 2021 and we believe this trend will continue in 2023, as ESG factors embedded in investment become mainstream. With new regulatory requirements becoming more stringent, we expect them to continue to push data providers to improve their offerings, both in product breadth and in the quality and consistency of the data provided.

Overall, we reiterate our conviction that ESG investing is a long-term opportunity for both companies and investors. Once the ESG regulations are consolidated and are fully in place, they will provide another tool to enhance the transparency and credibility of the industry. Sustainability is undoubtedly an unstoppable trend that will take ever-increasing prominence, but also the right thing to do to preserve the well-being of future generations.