The ESG Revolution – Opportunities and Challenges for Companies and Investors

Earth’s changing climate, evidenced by rising sea levels and more frequent and severe heat waves, floods, and droughts, will undoubtedly have an impact on all aspects of human civilization.

Fortunately, and perhaps just in time, everyone – from individuals to businesses and governments, capital markets to lenders and financial institutions – is promising to act to course-correct.

In a bid to fight global warming, 197 countries have signed the Paris Agreement[1], which aims to reduce carbon emissions to ensure the global average temperature increases no more than 1.5 degrees Celsius above pre-industrial levels.

To this end, more and more companies and governments are committing to achieve net-zero emissions by 2050. [2] And as corporates grapple with the growing need to reduce emissions and minimize the environmental impact of their products and services, the demand for sustainable infrastructure is rising, creating a host of new investment and business opportunities.

With investors increasingly looking at environmental, social and governance (ESG) factors along with financial considerations when making decisions, deals in this space are growing. Nomura Greentech, an ESG specialist investment bank, works hand-in-glove with Nomura bankers and capital markets professionals around the world to provide M&A and strategic advisory services, and raise capital for sustainable technology and infrastructure clients globally.

It focuses exclusively on clients using innovative technologies to transform essential industries such as energy, advanced transportation, agriculture and consumer, water technologies, industrial Internet of Things, and software.

“We believe these industries are all seeking to decarbonize, become more resource efficient, more sustainable and to use digital technologies to drive their efficiency,” Jeff McDermott, Global Co-Head of Investment Banking, said at Nomura’s panel – The ESG Revolution – Opportunities and Challenges for Companies and Investors.

As efforts to curb climate change pick up pace, opportunities in sustainable investing appear to be endless. McDermott notes three converging trends that are spurring ESG growth and making it a force that will create long-term value – technology innovation-driven cost reductions, investment capital from ESG investors and political will to neutralize climate change and build a more sustainable planet.

He highlighted how technology innovation is contributing to the decreasing cost of electricity from offshore wind and the declining price of lithium-ion battery packs, adding that this is a pattern repeated across all areas of sustainable technology. “The costs get lower and lower every year, and the value of clean energy or of sustainable technology solutions increases,” McDermott said.

Secondly, assets under management in this area have grown dramatically over the last few years. In the first half of 2021, about $43 billion was committed to funds that only focused on ESG, almost as much as was committed in all of 2020.

And perhaps most importantly, people across the world are coming together and asking their politicians to put policies in place that will lead to the creation of a more sustainable planet. Policymakers are taking note.

Between the European Green Deal, [3] US President Joe Biden’s ambitious clear energy plan, [4] Japan’s commitment to reach net-zero emissions by 2050[5] and China’s pledge towards carbon neutrality by 2060, [6] the world’s largest economies are already moving in the right direction.

Nomura Greentech expects to see increased policy activity in the ESG space in and around COP26, the 2021 United Nations Climate Change Conference, starting in Glasgow at the end of October.

With all this, significant progress is being made towards sustainable technology and infrastructure spending across the world. For instance, the annual spend in low carbon infrastructure is estimated to be $5 trillion by 2030, and advanced transportation will likely be a $1 trillion to $2 trillion market per year by 2030 according to Nomura Greentech[7]. The energy technology, software and services market is also expected to be at $1 trillion by 2030. Meanwhile, about $77 billion has been raised in equity for ESG companies in the U.S. special purpose acquisition companies (SPAC) market over the last two years.

Average annual spending in Asia-Pacific for energy transition investments is at about $800 billion per year currently and is forecast to grow to more than $1 trillion a year between 2026 and 2030, according to Nomura Greentech.

“Asia is the next frontier for ESG and sustainability and Japanese companies can lead the way,” he said. “De-carbonizing Asia will be one of the largest fights in the battle against climate change, and this will require an acceleration of the already sizeable investments being made in emerging Asia.”

As the world moves toward sustainability and investment avenues in the space open up, Nomura Greentech has seen corporates engage in three broad strategies in their ESG transitions.

Certain companies choose to undertake a transformational shift. For instance, a European power company embarked on a move to clean energy by building platforms for large scale greenfield project development in addition to divesting from fossil fuel businesses.

On the other hand, some major multinational conglomerates have segmented parts of their operations with good ESG growth opportunities, creating platforms that are independent from their main business and raising outside capital to drive growth in those platforms.

Others acquire emerging technology innovation companies to position themselves for future developments in their sustainable transition.

“We see these trends creating fantastic business opportunities for global corporations and great investment opportunities for asset managers,” McDermott added.

From oil and gas companies grappling with largescale asset write-downs to emerging climate activist investors pushing to decarbonize aging oil companies, the ESG revolution does pose risks to companies that are not thinking about these factors. Additionally, as investors steer clear of low ESG-rated companies, they could see their costs rise and their access to capital be limited.

On the other hand, investment rewards from the shift to ESG have been significant and are likely to grow. Clean energy companies listed in the US outperformed the MSCI World Index over the last 24 months, as well as oil and gas companies.

“The opportunities are large, but the challenges are also great,” McDermott said.

[1] https://www.nrdc.org/stories/p...

[2] https://www.iea.org/reports/ne...

[3] https://ec.europa.eu/info/stra...

[4] https://joebiden.com/clean-ene...

[5] https://www.reuters.com/articl...

[6] https://www.reuters.com/articl...

[7] Note: Advanced Transportation Addressable Market includes electric vehicles, autonomous driving, transit/traffic management etc.; Energy Technology, Software, and Services Addressable Market includes: Energy Efficiency: Navigant; Facility Management: Frost & Sullivan; HVAC-R: IBIS World; Building Management & Automation: MordorIntelligence, Building Services Research & Information Association; Energy Storage: BNEF; Demand Response: McKinsey; Distributed Generation / C&I Solar: BNEF; Microgrids: Wood Mackenzie.