Ollie Smith: Just moments ago, BlackRock Chairman and CEO Larry Fink gave his views on ESG and sustainability to a conference call of customers and commentators. It was almost perfectly timed. Today, I'm joined by Morningstar's Global Director of Sustainability Research, Hortense Bioy, to take another look at where ESG might take us in 2022.
So, Hortense, thanks for being with us. I gather you're expecting more money to flow into ESG this year.
Hortense Bioy: That's right. Last year we saw record inflows into ESG and sustainable funds as well as record assets, and I think there is still going to be a strong demand for ESG products this year.
It will be driven still by continued investor interest in sustainability issues, environmental issues like climate change, of course, but also social issues such as diversity and inclusion, employee treatment and rising inequalities, especially in the context of the Covid-19 crisis.
Strong demand for ESG products will also be helped by more transparency and clarity on the strategies that are available to investors. And finally, it will be also driven by regulation. There is so much happening on the regulatory front. But if I could mention two pieces of regulation one in Europe and one in the US In Europe, we have a Mifid II amendment that is going to go live in August. It will require financial advisers to consider clients' sustainability preferences in addition to their financial objectives, and that, I think, has the potential to really accelerate retail money into sustainable products. And also, in the US, there's the DOL, the Department of Labor, which will make it easier for retirement plans to consider ESG factors and invest in sustainable funds.
Smith: Okay. I'll come on to the topic of shareholder activism in just a second, but I just wanted to drill down into climate change because that was the big story at the back end of 2022 with COP26. What are you expecting specifically on climate change this year?
Bioy: You're right. We've just come out of COP26, so there's so much going on on the climate front. A lot of commitments were made at COP26, and we can expect more commitments coming from companies, asset owners, asset managers, more commitments to achieve net zero carbon emissions by 2050, and I think there is going to be more scrutiny of these commitments. And also, as a result, there is also going to be more climate-related data and metrics available that will allow investors to better assess climate risks and also allocate more capital towards climate-friendly companies and countries.
Smith: Okay. And it feels to me like we're living in a very intense period of shareholder activism. As we saw last year with Third Point, and its supposed plan to split a company like Shell into two into the good bit and the bad bit, so to speak. What are you expecting on shareholder activism in 2022? Is that level of intensity going to continue?
Bioy: So, some investors prefer to talk about active ownership rather than shareholder activism. But we are talking about the same thing here. We are talking about investors that are becoming more active owners of the companies that they hold in their portfolios. And what we can expect this year is really asset managers and investors stepping up the engagement efforts to push for change to improve ESG practices. And we are going to see also some escalation strategies intensifying.
So, for example, if engagement faila, then investors will more likely vote against a company's management and ultimately divest if they consider that the ESG risks are too high and especially when it comes to ESG risk within the most polluting companies, the highest emitters. So, we are going to see really more pressure coming from investors onto companies to really push for change and improve ESG practices.
Smith: Sure. Thanks so much for your time. For more on ESG and sustainability, check out Morningstar.co.uk. But until next time, I've been Ollie Smith for Morningstar.
