The TRADE predictions series 2022: ESG and sustainability

It would be hard to look at the year ahead and not recognise sustainability as central theme for 2022. This has predominantly been a theme for stock pickers in the asset management industry until recently, but trading desks, banks, platforms, trading technology companies and exchanges are now starting to come together to see what they can do to further the cause. While these discussions are in early stages, it’s exciting to look ahead and to optimistically see some impactful industry lead, sustainable solutions.

In 2022, I see continued innovation in the trading space as the industry looks for new liquidity providers, more efficient and cost effective paths to execution. Distributed ledger technology (DLT) has long been discussed and is set to become more of a focus in terms of how we can implement DLT in the trading space from settlement (PvP), execution venues and the tokenisation of assets. This topic is here to stay, and everyday user cases and applications are set to increase. 

Spending on investment research will increasingly recognise the brokers that have continued to hire and retain analysts with experience and expertise, as asset managers have become far more sensitive to changes in the quality of the analyst teams that their portfolio managers are accessing. Budgets will also materially shift towards research providers that are creating differentiated environmental social governance (ESG) content that helps navigate and prioritise all the ESG data that they are now consuming. Salespeople will become more important in this market after MiFID II’s downsizing effect on this function, as now more than ever a trusted advisor to curate and filter content across fundamental, alt data and ESG parts of broker and Independent Research Provider offerings will be crucial for the buy-side’s efficient use of external research.

The assets under management (AUM) of global environmental social governance (ESG) funds is growing at three times the rate of non-ESG funds but, according to InfluenceMap, just over half of climate-themed funds and c.70% of ESG funds are misaligned with the Paris Agreement goal (of 723 funds with $330bn AUM). Given the surge in ESG financial products, global regulators are ramping up the review of sustainability statements for compliance with current law. We believe investors should reconsider their ESG criteria and be more cautious when making claims about green and social investments in light of recent controversies around the overstated use of sustainable investing. Our asset management equity research team expects ESG AUM figures to be refined by all asset management players as regulation evolves.

There has been a noticeable and fundamental shift in society’s demand for a more sustainable future. The pandemic served to highlight the impact our actions have on the world and the environment. Two years on and it has, without a doubt, become a truly mainstream topic.  ESG is everywhere.  In 2022, we anticipate the level of interest in this topic to continue to grow, with the financial markets seeing a continued evolution and deepening development of the sustainability arena, particularly across data, transparency and standardisation. 

We believe market participants will advocate for more understanding and clarity around grey areas such as the description of “green” as participants become more focused on how the proceeds from their investments are being used. With reporting frameworks already being implemented throughout the UK and Europe, and following the large regulatory focus at COP26, global leaders and regulators have begun addressing the need for global verification and standard, which in turn will improve the quality and quantity of ESG data as these reporting requirements grow. Something we are very focused on at Tradeweb. The year ahead will see the level of interest and focus in ESG continue across the globe, with sustainable investments growing across Asia and elsewhere with the harmonisation of taxonomy already happening between the EU and China and with the US reengaged with global Climate policy.