Morningstar - Q4 2022 - 61

The Chinese climate fund market has grown
significantly in recent years-let's not forget that
China is the biggest renewable energy market.
Here in Europe, driven by the ESG disclosure
agenda, more and more investors are considering
climate risks and opportunities in portfolios.
Increasingly, asset owners request that
asset managers and index providers create
strategies that incorporate climate-related
performance indicators. It could be, for example,
an objective to lower carbon intensity in
the portfolio by 20%, or 50%. There is a lot of
innovation in that space.
Whelan: Just one additional data point from the
consumer research that we do with IRI in the U.S.,
where we review actual consumer purchasing
of sustainability-marketed products annually. In 2021,
$3.4 billion of carbon-labeled product was sold
in the consumer packaged goods space. In 2020, it
was $1.3 billion. And in 2019, it was next to zero.
So, there is clear demand. As to the broader
sustainability opportunities: One out of every two
new products introduced in CPG in the United
States last year had some type of sustainability
attribute. While climate is the major driver, there's
opportunities in the other aspects of sustainability.
Hale: Given everything we've talked about, what will
sustainable investing 2.0 look like?
Bioy: There will be full data transparency.
Companies will disclose consistent and comparable
ESG data, which will allow investors to make
better-informed decisions and allow for personalization.
At Morningstar, we're big on the theme
of personalization because when it comes to
values, people care about different things. We talk
about the E, the S, and the G of ESG and how
these three pillars work together. Sometimes there
can be a conflict between the three letters.
Krosinsky: For me, the question is what does
4.0 look like? I teach that 1.0 was a phrase you
never hear anymore: socially responsible investing.
Version 1.0 was applying your values to your
money, then 2.0 was connecting sustainability to
financial value. The 3.0 is this desire to understand
the impact of investing. For me, the 4.0 is
fully integrated considerations of ESG issues as
business as usual for investors writ large.
Whelan: What do we need for that 4.0? Investors
who are well grounded in material ESG issues and
best-in-class practices for industries and regions.
Another key element is that investors need to look
beyond the process-based reporting metrics and
ask companies for their performance-based
ESG goals and for the ROSI. What have they done
to project and monetize potential risk? Do they
understand what kind of operational efficiencies
can be driven by reduction in waste and circular
strategies? Are they tracking and understanding
the impact of retention on their financials? A more
comprehensive approach to financial analysis
that's tied to sustainability metrics will be critical.
Finally, investors need to walk the talk. I hear
from corporates that if they make ESG investments,
investors start squawking about how they're
not making their short-term numbers. There needs
to be commitment from investors willing to look at
the potential positive impacts of longer-term
strategies that may not show up in a quarter-byquarter
perspective. K
Jon Hale, Ph.D., CFA, is a director on Morningstar's
sustainability research team.
Photography by Chris Lane and David Woolfall.
We need to push on all cylinders when it
comes to climate change.
Cary Krosinsky
morningstar.com/products/magazine
61
https://www.morningstar.com/authors/1855/jon-hale http://www.morningstar.com/products/magazine
Morningstar - Q4 2022

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