2021 in review

The year began with vaccines and optimism. But the persistence of COVID-19 remained the story of the year.

December 2021

For those of us in the responsible investment industry, the pandemic continued to shine a spotlight on the relationship between sustainable business practices and economic resilience, while the surge of interest from investors continued.

Significant developments we saw during 2021 included:

Regulation and greenwash

In 2021, the cries of greenwash grew louder as hundreds of funds rebranded as ‘green’ or ‘sustainable’ without changing their underlying holdings.

In response to existing weak regulation, in March the EU’s Sustainable Finance Disclosure Regulation (SFDR) came into force, designed to help institutional asset owners and retail clients understand, compare and monitor the sustainability characteristics of investment funds.

In April, attention turned to the US, where President Biden promised new emissions targets and the SEC took aim at ESG disclosures.

Come July and closer to home, ASIC announced a review to address the threat of greenwashing and to improve governance and accountability in the market.

Record flows

Nonetheless, record amounts continued to flow into ESG-focused funds. In July, the Global Sustainable Investment Alliance (GSIA) published its fifth Global Sustainable Investment Review (GSIR) biennial report. It found that global sustainable investment reached USD 35.3 trillion at the start of 2020, a 15% increase over the past two years.

In addition, the same report found that sustainable investment assets under management comprised more than a third (35.9%) of total assets under management in 2020, up from 33.4% in 2018.

In September, the Responsible Investment Benchmark Report Australia 2021 showed the Australian responsible investment market continued to soar in popularity to AUD 1.2 trillion in 2020, with responsible investment assets growing at 15 times the rate that overall Australian professionally managed investments have grown.

Climate takes centre stage

2021 was also a crucial year for the future of our planet with another steady stream of UN-backed reports reinforcing a stark message: man-made climate change is an urgent and even existential threat to life on Earth.

For investors focused on sustainability, the year was dominated by the run-up to and takeaways from November’s COP26 climate change negotiations in Glasgow. Discussions at COP26 reminded capital markets of the critical role they must play in the road to net zero. But it won’t be an easy one.

Nonetheless, in November a further 92 asset managers joined the Net Zero Asset Managers initiative, bringing the total to 220 investors managing USD 57.4 trillion. Investors representing nearly 60% of the world’s total managed assets are now committed toward achieving the goal of net zero emissions by 2050 or sooner.

With wildfires, ice storms, flooding and more, the effects of climate change became increasingly visible in 2021. And while the year was marked by challenges and change, a clearer view of what’s ahead is coming into focus: a growing demand for solutions that have the potential to lead to positive change, as we look to rebuild our economies and communities on stronger foundations.

Market backdrop

From an economic and markets perspective, there has been no shortage of headlines throughout the quarter which contributed significantly to the volatility in asset prices. This included concerns about rising inflation, a new variant of Covid and escalating geopolitical tensions as the threat of a Russian invasion of the Ukraine appeared imminent.

These headlines were reflected in asset prices. We saw the VIX (a market measure of uncertainty) exceed 28 in late November, compared with a long run median of 17 and a post-emergence Covid median of 23. And while uncertainty was high, supportive economic data and easing fears of widespread global lockdowns saw the VIX decline back below 20 with equities ending the quarter on a positive note. Meanwhile long-term yields on Australian government bonds - having exceeded 2% at the end of October - finished roughly unchanged by the end of the quarter. 

Also making headlines was the carbon price. As we mentioned at the close of last quarter, European energy prices – and energy prices more broadly – have been rising and contributing to volatile inflation expectations. In Australia we have seen this extend into the voluntary carbon market, with the price of Australian carbon credit units (ACCUs) more than doubling through the quarter. This is likely driven by both growing domestic demand from increasing net-zero emissions commitments and European power producers partially offsetting their higher usage of non-renewable energy sources with ACCUs.

This link between the price for carbon and energy is an important component of how we believe inflation protection is embedded in fossil fuel-free portfolios.