Global ESG 2018 Outlook Gregory Elders, Shaheen Contractor

Bloomberg Intelligence analysts

Asia will power the next stage of environmental, social and governance (ESG) uptake in 2018 as China is poised to join Japan in accelerating disclosure and engagement. China’s pollution battle will keep the heat on fighting carbon emissions globally, even as the U.S. disengages.

Investor focus on gender diversity will receive a big boost in 2018, when U.K. companies will have to disclose pay-gap data. Greater investor demand and better corporate data disclosure will fuel continued ESG asset increases.

Tilting to ESG shows performance and promise where leaders lag

Using environmental, social and governance (ESG) performance as an added factor, rather than primary criterion, offers a path to added information for investors and helped produce better performance this year. Fossil-free indexes, for example, have outperformed as energy shares have trailed the market.

Outperformance this year tilting towards ESG in the MSCI USA ESG Select, vs. underperformance in the single-factor MSCI ESG USA Leaders index, shows the potential advantage in using ESG as an added factor rather than a sole investment criterion. The Select index overweights ESG leaders and underweights laggards, and optimizes for other factors such as risk and return. It has outperformed its non-ESG variant by around 120 bps in 2017, while the MSCI USA and World Leaders variants have trailed by about 150 bps.

Asia’s ESG surge will see Japan awakening gain China boost

Japan’s giant $1.3 trillion Government Pension Investment Fund (GPIF) will continue to be a key force in driving ESG uptake globally. China’s deepening pollution fight, alongside the Hong Kong Exchange’s ratchet up in environmental disclosure rules, will fuel added focus on ESG risks and engagement across Asia.

GPIF sustainable funds shift good for investors and companies

Japan’s Government Pension Investment Fund expects its 1 trillion yen investment, 3% of its Japanese equity portfolio, into environmental, social and governance (ESG) indexes will boost both its own risk-adjusted returns and those of corporate Japan.

The move is part of GPIF’s multi-pronged ESG efforts that include last year’s signing onto the U.S. and U.K. 30% clubs targeting improved gender diversity and its chief investment officer joining the board of the Principles of Responsible Investment.

Disclosure trend a tale of one city

Hong Kong-listed Chinese companies will continue to improve their ESG data transparency more rapidly than mainland peers, as they’re driven by the Hong Kong Exchange’s ESG reporting guidelines and from more international investor exposure. Shanghai Shenzhen CSI 300 companies on median have seen no improvement in their Bloomberg ESG disclosure score over the past five years; however, members also listed on the Hang Seng Composite Index exhibit better and improving disclosure, even when controlling for market cap.

Hong Kong Exchange rules this year required companies to report on ESG issues, and in 2018 specifically on environmental metrics, on a comply-or-explain basis.

Carbon fees to fossil-fuel-ban goals stoke climate slow simmer

From China to Canada, more countries are going to charge for carbon in 2018, slowly increasing long-term pressure on high-emitters and fossil-fuel producers. Indicating a potentially more stringent shift, several European countries have declared goals for outright bans on coal power and petroleum-fueled vehicles.

Technology, climate goals bring forward coal, oil demand peak

Alternative-energy technology and country-pledged carbon goals could wipe out forecasts for growth in coal and oil demand and trim natural gas expansion. If countries follow through on Paris climate agreement goals, which is a big “if,” coal demand would peak by 2020 and oil by 2030, according to OPEC forecasts. A decrease in global coal use since 2014, led by China and the U.S., may point to the risk of a faster energy and emissions transition.

Women work more for less, even as directors, missing top posts

Female directors tend to earn less money, yet sit on more committees, indicating a pay gap even at the pinnacle of companies. All directors at a company usually earn a flat fee, but board and committee chairs (mostly men) earn more. The median female director (excluding chairs) earns less than 50% of male counterparts at Flughafen Zurich, Groupe Bruxelles Lambert, Bolsas y Mercados Espanoles and Pargesa Holding, based on Bloomberg-compiled data, the biggest gap among S&P 500, Stoxx 600, ASX 200 and FTSE 100 firms.

U.S. cedes gender diversity leadership to more avid countries

The U.S. has flipped from a relative boardroom gender leader to a laggard in five years as other countries have successfully turned to legislation and threats to boost diversity. While many European countries have adopted quotas, something not likely to fly in the U.S., Australia has demanded simple corporate transparency and disclosure. The Stoxx Europe 600 has nearly tripled to a median 30% female directors since 2010, the Australia ASX 200 has climbed to 25%, and the S&P 500 has limped to 21%.

Sustainable investing talk turns to more action as assets flow

Investor talk about ESG is more rapidly turning into action as assets flow into sustainability focused funds. Large, institutional pension and insurance asset owners, alongside retail demand from millennials, are driving asset managers to boost systematic ESG focus and funds.

Surge of demand optimism lifts ESG assets in rising tide

ESG assets and funds have accelerated since 2015, pointing to a growing demand for such strategies. Asset growth has picked up pace, with increases in 1H surpassing full-year 2016 levels. Similarly, the number of funds created doubled in 2016 vs. 2013, with 2017 set to beat last year’s peak. Although assets have grown to over $360 billion, ESG is still limited to a niche market, with U.S. ESG ETFs having the least amount of assets of the 11 Bloomberg-defined smart beta categories.

Green-bond issuance keeps hitting records

Sales of green bonds from corporates and Fannie Mae helped power a sixth-straight record amount of quarterly issuance for the instruments in 3Q, while 4Q volume is running near the pace for a seventh. Almost $140 billion of green bonds have been issued this year vs. about $100 billion for all of 2016. Companies, led by utilities and increasingly transport-related businesses, are issuing green bonds to fund clean-energy transitions.

Bloomberg Intelligence offers valuable insight and company data,interactive charting and written analysis with government, creditinsights from a team of independent experts, giving trading andinvestment professionals deep insight into where crucial industriesstart today and where they may be heading next.