Discussing ESG Trends, Private Capital’s Role in the Transition and Energy at the Nasdaq IR Forum
Massud Ghaussy, Senior Analyst at Nasdaq and Daily Markets Outlook Author, moderated a panel on the global economic outlook, which featured Dr. Ed Yardeni of Yardeni Research, Savita Subramanian of Bank of America, Michael Kantrowitz of Cornerstone Macro, and Dr. David Kelly of J.P. Morgan Asset Management. During the panel, Ahad Minhas, a Senior Member of Nasdaq’s ESG and IR Advisory practices and author of the ESG section of Nasdaq’s Daily Markets Outlook, spoke with Dr. David Kelly and Savita Subramanian on a few key topics related to ESG investing. Below is a summary of key trends and topics discussed in the panel.
Investors are taking a more sophisticated approach to ESG investing and engagement
Over the past few years, investors have dedicated more resources toward building out and developing sophisticated ESG integration practices to assist in their investment decisions. Internal expertise, access to better data, and the rise of corporate disclosure concerning ESG topics have enabled investors to take a more nuanced approach to ESG-related engagements, integration, and investments.
The learning curve has improved pretty considerably across the investor spectrum.Savita Subramanian
Led by investor demand, some of the most significant contributors to emissions, including large energy companies, have meaningfully integrated ESG into their business practices and investor communications. Subramanian noted that certain companies regarded as uninvestable have addressed issues that deterred ESG investors. A deeper focus on credible transition strategies at corporates will lead investors to further engage on these plans to improve the company’s long-term performance. In addition, the adoption of a more standardized disclosure spectrum, driven in part by an increased involvement of regulators, will enable companies and investors to compare and understand what they are evaluating.
Policies need to help catalyze private capital for public good
As limited partner pressure builds on general partners to address ESG-related concerns, public market participants engaging with the private markets should be aware of the growing effect ESG has on the private markets. Notable participants in the private markets have aligned on initiatives to streamline ESG data collection and reporting, and net-zero guidance has been published by The Science-Based Targets initiative and investor groups representing nearly $58 trillion in AUM. Additionally, influential firms in the private markets have begun to commit to net-zero emissions across their investments. However, data reveals that many limited partners do not ask for investment opt-out options for ESG reasons and as some privately held companies do not face the same disclosure standards and pressure from investors as public companies, there is growing trepidation that private markets may continue funding dirty assets that public companies no longer want. Kelly expressed the need for policy that encourages macro taxes and subsidies to combat the concern.
The right way to approach this is a public policy approach, similar to how we need to have a global carbon tax to address warming.David Kelly
There may be some justification for ESG strategies to include nuclear and natural gas
Further investment in certain forms of energy is at odds with production reductions required to keep warming below 1.5°C scenarios. Therefore, the European Commission’s classification of gas and nuclear as green in their taxonomy was met with a great degree of backlash. While Europe grapples with an energy crisis, natural gas demand continues to rise. The IEA’s Net Zero by 2050 roadmap highlighted that gas production must decrease after 2030 significantly to meet the 1.5°C target. Gas can be an essential bridge away from coal-fired stations in the short term to reduce emissions but opens the risk that such investment may lock in emissions in the long term. Europe also continues to lose nuclear power throughout the energy crisis as some governments continue to shut down reactors. Despite advancements in nuclear technology, it is unlikely that cleaner forms of nuclear energy will develop in time to get us to net-zero emissions by 2050, and concerns remain on the waste created from nuclear power in its current state. However, the IEA estimates that an average yearly new nuclear capacity of 20 GW is required between 2020 and 2050 to meet net-zero goals, compared to the 6 GW of new nuclear capacity that came online in 2020. Nasdaq estimates that $500B+ of ESG-integrated and ESG-dedicated capital excludes nuclear power. Kelly expressed that nuclear and natural gas may hold a place in ESG strategies.
We need to be pragmatic and recognize that we can help the environment more by investing in some of these halfway houses towards pure energy solutions rather than deciding to invest in nothing that has got any change at all because that’s not really a way of dealing with our problems.David Kelly
The difference in valuations between clean and traditional energy could compress throughout the year
Pandemic-induced inflation, supply chain issues, and unpredictable policy contributed to a sizeable correction in clean energy last year. Subramanian discussed ESG investing and clean energy and Bank of America’s view on clean vs. traditional energy.
“I think that what’s happening right now is that we’re starting to see some important differentiation between the so-called green investments on the so-called brown investments, and what I mean by this is when you look at the average ESG fund, they’re overweight renewables, they’re overweight tech, they’re overweight asset-light areas of the market, but some of these companies actually have significantly higher indirect emissions than the biggest vendors from a direct emissions standpoint. The math and clarity around what’s included in the full emissions profile of companies, I think, will take center stage this year."
We’re bullish on energy, even though it’s one of the biggest emitters in the S&P 500, simply because we think the valuation of renewables relative to energy is wide enough that energy companies are being more than punished for the risks around their emissions profiles and I think that difference in valuation could compress throughout the year.Savita Subramanian
To watch a full recording of the IR Forum 2022 panel, click here.
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