from obligation to advantage

Despite a simmering backlash against ESG investing, businesses and their investors are confident that sustainability drives financial performance. The blue economy is a fast-emerging priority. Meanwhile, sustainable investment is not being directed where it is most needed: the developing world. Investment guided by environmental, social and governance (ESG) criteria has become a global force to be reckoned with. In 2022, the assets under management of sustainable investment funds grew to $2.5trn.1

Lately, though, ESG investing has faced a political backlash, especially in the US. In the first half of 2023, 37 US states introduced 165 ‘anti-ESG’ bills,2 although the majority of these failed to progress into legislation.

Meanwhile, researchers have forecast diminishing returns for ESG investments3, and investors’ commitment to the cause has been tested by inflation, geopolitics and growing concerns over greenwashing4.

Does this signal an end to the business and investment community’s commitment to sustainability? Far from it, our survey of 700 senior executives and investors shows. For them, sustainability is simply good business.

The overwhelming majority (84%) agree companies that invest more effectively in sustainability will perform best financially in the next five to ten years – a counter to the claim that ESG and growth are incompatible.

Furthermore, when making sustainability investments, more executives prioritise growth and profit (65%) than regulatory obligations (42%) (Fig. 1).

For some sectors, sustainability investment is driven more by outside pressure than the promise of profit and growth. Asset managers and investment funds (AMIFs), for example, prioritise areas where they face ‘the greatest pressure from external stakeholders’.

“If clients of AMIFs want funds which invest in the future of the planet and human society, then that’s what they will offer. AMIFs understand that they need to offer what their clients demand, if they are to stay relevant,” says Lucian Firth, partner in our AMIF sector.

An urgent agenda

So where are these opportunities? The top concern for executives is an equitable society, with diversity and inclusion (D&I) the primary focus of businesses’ internal sustainability investments. More than seven in ten (71%) executives rank D&I in their top five focus areas (Fig. 2).

D&I is an especially high priority for executives at AMIFs, our survey shows, with 78% placing it in their top five. One explanation for this is the rising pressure from regulators on the finance sector to be more diverse and inclusive. "The industry has a lot to gain from investments in diversity," explains Cathryn Bean, partner in our employment practice.

“Greater diversity and inclusion can create better outcomes for consumers and markets by supporting healthy work cultures, reducing groupthink, unlocking talent and improving understanding of diverse consumer needs,” advised the UK’s Financial Conduct Authority in a recent consultation.5

High-performing companies are auditing themselves against their peers on D&I measures such as gender pay equity and the inclusivity of their company culture. The former, in particular, will help them get ahead of upcoming regulation, Bean explains. “With the introduction of the Pay Transparency Directive across EU Member States by June 2026, there is greater scrutiny on pay practices.”

‘Climate adaptation’, meanwhile, is the dominant focus area for investors, and for executives in the energy and natural resources, infrastructure and real estate sectors, all of which have large physical footprints.

“Climate adaptation is entirely ingrained in the real-estate sector’s thinking now,” explains Ali Crosthwaite, partner in our real estate practice. In Europe, this means building resilience against flooding and extreme heat, she says.

Similarly, some businesses with manufacturing arms, such as those in the healthcare and life sciences (HLS) and technology, media and telecommunications (TMT) sectors, use flood risk models and other tools to assess the vulnerability of their supply chains to extreme weather events, adds Frances Gourdie, managing associate in our disputes and investigations practice.

The other side of the climate coin is decarbonisation, which has steadily climbed the corporate agenda since the 2015 Paris Agreement, where UN member states agreed to limit global warming to 1.5°C above pre-industrial levels. According to the International Energy Agency’s latest estimate, spending on clean energy must triple by 2030, up to $4.5trn annually, if this target is to be met.6

Encouragingly, decarbonising operations is now a primary focus area for 59% of executives and 55% of investors. This is driven primarily by the business opportunities, says Alex Blomfield, a partner in our energy, natural resources and infrastructure practice.

Whilst businesses face regulatory pressures in some parts of the world, such as with the upcoming EU Carbon Border Adjustment Mechanism, corporate efforts to reduce emissions have been gathering pace in regions of the world such as the US without such pressures. “This is happening for good business reasons,” he says. “For example, there are very few places in the world where electricity from renewable sources is not the cheapest kind of electricity, and often by some margin, particularly in an environment with rising gas prices.”

In addition, consumer demand as much as regulatory requirements is incentivising companies to stand behind green messaging with concrete action. “Over 400 global corporates have joined the RE100, for example, pledging to power their operations 100% from renewable energy within clear timeframes,” explains Marc Fèvre, partner in our energy, natural resources and infrastructure practice. “This has led to a boom in direct sourcing of renewable energy through Corporate PPA, which in turn has provided new subsidy-free revenue opportunities for renewable energy project owners, attracting increasing private capital into the sector.”

This growth will continue, despite economic headwinds, Blomfield adds. “Decarbonisation requires us to electrify and that means that we’re going to be consuming a lot more electricity.”

Blue economy: a rising tide of investor interest

The blue economy is a fast-growing priority for investors, with 58% ranking ‘water/ocean sustainability’ in the top focus areas for their portfolio. Biodiversity is another hot topic (54%).

Interest in emerging sustainability themes reflects AMIFs’ need to stand out, explains Tristram Lawton, managing associate in our financial services regulation group. “Asset managers are competing for assets under management, and therefore want to offer something that’s different from the crowd.”

Investors are tapping into the blue economy and biodiversity through vehicles that offer returns while supporting conservation. Biodiversity-related investment funds, which invest in companies that conserve and replenish nature, saw a “surge in inflows” in 2023, according to the European Securities and Markets Authority,7 while a growing number of funds target the ocean specifically.

Meanwhile, blue bonds, issued by island and coastal states from the Seychelles to Indonesia, ringfence investment to support ocean conservation and related economic activity. Recent guidance from the International Capital Market Association will most likely build confidence in this emerging asset category.8

Lastly, the ability of marine ecosystems to absorb carbon dioxide has emerged as an investible opportunity. By buying blue carbon credits, investors and corporates can offset emissions and support natural climate change solutions.

Investors’ interest in the blue economy has spurred businesses into action. Our survey shows that 57% of executives say ‘investing in ocean and blue economy projects’ is a top five priority action – more than any other option.

This spike in interest is well timed, says Sonali Siriwardena, partner and our global head of ESG. “We’ve seen a growing awareness around the untapped potential of blue ecosystems where financial returns can co-exist with climate and biodiversity benefits,” she explains.

“The oceans remain the least funded of the Sustainable Development Goals, which have a fast-approaching deadline of 2030. So now is a pivotal moment for the oceans, and the C-suite and investors are awakening to its potential.”

Investing where it is needed most

Businesses and investors tend to focus their sustainability initiatives on local markets (Fig. 3), our survey shows, although some are more adventurous. For example, 17% of UK respondents, and 15% from Europe, say that developed countries in APAC are their primary destination for sustainable investment.

Asia’s energy transition presents tremendous opportunities for international and regional investors, explains David Blumental, partner and head of our energy, natural resources and infrastructure sector in Asia. "Both large strategic players and infrastructure funds continue to be active in acquisition and other investments in offshore wind, large-scale solar power and energy storage projects, and other renewables opportunities across the region.”

“Sometimes it’s indirect,” he adds, with western institutional investors backing local funds to access opportunities in the region.