December 17, 2025 • 39 mins
As ESG debates evolve and financial materiality moves to the forefront, the issues shaping company performance are becoming clearer — and more consequential. In this episode of Bloomberg Intelligence’s ESG Currents podcast, BI’s director of ESG research Eric Kane is joined by the analysts who hosted the show throughout the year to break down the ESG forces most likely to influence markets in 2026. Grace Osborne, Rob Du Boff, Melanie Rua, Andy Stevenson, Gail Glazerman, Yasutake Homma, Chris Ratti, Conrad Tan and Shaheen Contractor discuss sustainable debt in emerging markets, shareholder activism, water scarcity, climate damages, the ESG implications of AI, carbon removal, sustainable funds and more.
The episode was recorded on Dec. 9.
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Episode Transcript
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Speaker 1 (00:00):
ESG is constantly evolving. Over the years. It is shifted
from socially responsible investing to impact to sustainable finance. While
the terminology continues to change, what hasn't changed are the
underlying science market pressures, tangible physical and financial impacts of
the climate crisis, as well as increasing regulatory scrutiny and
(00:22):
rising consumer expectations. We aim to filter out the noise
by speaking with industry experts to identify what is really
driving value. Welcome to ESG Currents, brought to you by
Bloomberg Intelligence.
Speaker 2 (00:37):
Welcome to the podcast. I'm Eric Kane, director of ESG
Research for Bloomberg Intelligence, and for this episode, the last
of the year, we'll be taking a slightly different approach.
Instead of hearing from external guests, I'll be joined in
studio here in New York by the members of the
BIESG team, who will share their thoughts on key EU
(01:00):
ESG themes going into twenty twenty six. We'll hear from
Grace Osbourne, Rob Dubof, Melanie Rua, Andy Stevenson, Gail Glazerman,
Yasujaki Homa, Chris Rady, Conrad Tan and Shaheen Contractor, and
I'll also share my thoughts as well. We'll cover a
range of topics that we see driving the ESG conversation
(01:21):
in twenty twenty six, including the emergence of sustainable debt
in emerging markets and sustainable debt trends more broadly, shareholder activism,
water scarcity, climate damages, the ESG implications of AI carbon
regulation for airlines and marine shippers ESG in Japan, and
sustainable funds in sum I think the discussion will make
(01:44):
plane that despite the noise created by the ESG backlash
and the ultimate de emphasis of the ESG label, the
underlying issues will continue to create meaningful signals for investors
and corporates in twenty twenty six and beyond. With that,
let's get into the program, Grace, Given your focus on
(02:05):
sustainable finance and with COP thirty putting emerging markets at
the center of the climate conversation, what does the data
actually show about sustainable finance in these markets and what's
driving the trends we're seeing.
Speaker 3 (02:21):
Yeah.
Speaker 4 (02:21):
Absolutely, I think COP thirty, which you had just last month,
it's really crystallized why emerging markets are so central to
the climate story, underscoring the real need for affordable, large
scale finance given they face the bulk of future emissions
growth risk and of course highly susceptible to climate vulnerability,
(02:43):
and this finance really needs to be mobilized to enable
them to manage both and also catch some of the opportunities.
But the data year to date, we're seeing that sustainable
debt issuance in emerging market sets at about three hundred
and eighty eight billion dollars. That's roughly nineteen percent of
global issuance, So this is actually broadly flat with twenty
(03:04):
twenty four. And within this green bonds still dominate, the
account for a high percentage of issuance at almost two
hundred and fifty billion dollars of the total, and I
think we're really beginning to see the shift. I think
something's particularly interesting Last year in twenty twenty four, eighty
seven percent of all power generation investment in emerging markets
(03:28):
and China went into clean energy. So we're really seeing
that emphasizing how capital has already been mobilized into transition
into low carbon infrastructure, and I think as we look forward,
this is set to grow. It's an estimated that seventy
percent of all global infrastructure spending is expected to occur
(03:48):
in emerging markets by twenty thirty. So we think about this,
it's things like transport, water systems, real estates and aligning
that infrastructure to a low carbon path represents and estimate
mated five trillion dollars a year transition opportunity over the
next decade, So quite significant upside potential there, and I
(04:09):
think other dynamics we saw earlier this year, g FANS
has doubled down on mobilizing transition capital to these markets.
And when we zoom into these markets more closely, we're
seeing shifts both in emerging and developing markets where financial
institutions are kind of stepping up into roles which were
previously led by sovereigns that they're issuing more sustainable debt. They're
(04:31):
setting sustainable finance targets, innovating and actually opening up products
that are becoming competitive advantage and generating new revenue streams
from these products.
Speaker 2 (04:41):
Very very interesting, and given that emerging markets sustainable debt
issuance has actually been relatively flat, you're to date versus
twenty twenty four, which you mentioned, What are we expecting
to see going into twenty twenty six? Is it likely
to accelerate as we continue to look to close the
one point three trillion dollars annual climate financing gap in
(05:04):
emerging markets.
Speaker 4 (05:05):
Yeah, I think it's interesting. As I mentioned, we did
see it issuance kind of plateaus from last year, but
I think there's some pretty strong tailwinds building for twenty
twenty six, and I do expect an acceleration going into
twenty twenty six. I think the first big driver is
that we've seen increased promotion of sustainable finance taxonomies. I
(05:26):
think just before COP thirty Brazil announced their sustainable finance taxonomy.
We've seen at India, YUOI, Chile, Paraguay, and this is
really critical to start mobilizing capital that's going to be
closing this one point three trillion annual climate financing gap
that emerging markets are facing. Investors really need that kind
of clarity over what counts towards green or transition or adaptation.
(05:52):
So I think it's really key for mobilizing that capital.
And the second trend that we're seeing that I think
is particularly interesting is that all outstanding sustainable bonds currently
in emerging markets, more than thirty percent of that outstanding
em sustainable bonds are going to mature by the end
of twenty twenty six. So this means that we'd like
to see quite a substantial wave of refinancing. I think
(06:15):
a very high proportion of this should come back into
the sustainable formats, especially from financial institutions that are becoming
much more active in the space. So I think going
forward we will see that acceleration. We still need kind
of volume and scalability of investable projects and development, further
of kind blended finance, and of course, I think what
(06:35):
we need is kind of evolution of channels products that
are going to enable investors to hedge some of the
associated risks with these markets, whether it's f X risk,
and essentially allow investors to capture kind of long term
investment value from these markets.
Speaker 2 (06:56):
Excellent, wonderful Grace, Thank you so much for joining us here.
Speaker 1 (07:01):
Rob.
Speaker 2 (07:01):
With your focus on shareholder activism and engagement in the US,
what should we expect in the year ahead.
Speaker 1 (07:09):
That's a good question.
Speaker 5 (07:10):
So twenty twenty six, we actually expect to see major
challenges to shareholder proposals and corporate engagement. For one, we
actually saw a huge drop last year. The number of
shareholder proposals was down twenty three percent in the twenty
twenty five proxy season, and that drop was particularly noteworthy
for ESG issues like human rights, which were down forty
(07:31):
one percent from the prior year. Climate was down thirty
eight percent, DEI was down thirty two percent. So certainly
some of that is due to the broader pushback and
the slowdown in ESG asset center management, but more specifically
the second Trump term and the SEC has really tried
to scale back the burden on corporate issuers, part of
(07:51):
the new SEC Chairman Paul Atkins so called make IPO's
Great Again agenda. So what does that look like? They've
been very aggressive actually and fighting off what they view
as nuisance shareholder proposals, even going so far as to
raise the bar and what qualifies as a valid shareholder
proposal earlier this year, and you know you can trust
(08:12):
that with the Biden administration, which lowered that bar, and
that led to a nearly fifty percent increase in shareholder
proposals from twenty twenty one to twenty twenty four. So
we're now seeing as major backtracking on that, and it's
expected to get even more difficult in twenty twenty six.
Is the SEC basically taken itself out of the process
(08:33):
this year, their differing corporations to determine what is or
is not a valid shareholder proposal, which in turn is
expected to lead to another significant drop. So is this
a good thing? I think guests we've talked to on
the podcast over the last year have largely agreed that
some of the shareholder proposals have indeed been borderline nuisance,
but at the end of the day, most investors have
(08:55):
pushed back on the notion that they need to be
done away with altogether. Now, on the your activism front,
the story is quite different. Recent data indicates that activism
tends to slow down around presidential elections like we had
in twenty twenty four, and then rebound over the next
two years. So certainly some of the challenges I just
talked about to ESG proposals and engagement can hamper traditional activism,
(09:17):
but overall we expect a solid bounce in twenty twenty six.
Speaker 2 (09:22):
Very very interesting and curious. Are there any positive takeaways
from the deregulation agenda?
Speaker 1 (09:28):
That's a good one.
Speaker 5 (09:29):
As I mentioned, a lot of the so called pro
markets regulations may wind up hurting shareholder rights, but I
do think it may open up innovation that could help
push sustainable finance forward. You know, we hear a lot
from the SEC about blockchain and tokenization and decentralized finance,
and while I think crypto is the clear winner there,
there are other applications like carbon trading or supply chain
(09:52):
reporting which could also benefit from these technologies.
Speaker 2 (09:55):
Wonderful, Well, thanks so much for taking the tent to chat. Absolutely, Melanie.
As we look at the infrastructure footprint of AI, one
issue that's risen fast on the risk radar is water,
especially in data center heavy states like Texas and Virginia,
and you've been leading our work on water stress and
(10:16):
AI exposure. Curious to hear what's your outlook on water
risk in the AI and data center space for twenty
twenty six.
Speaker 6 (10:24):
Yeah, thanks for having me, Eric, So I would say
what we're really seeing is a major shift in how
data centers are thinking about infrastructure. So operators are really
designing for this water independence and even on site power
not just for the environmental purposes but also to avoid downtime.
(10:46):
And like you mentioned earlier about Texas being a case point,
it's now the number two hub for data centers following Virginia,
and so voters just pass actually a billion dollar a
year waterf fun to support new supply. So that's timely
because data center water use is expected to grow more
(11:07):
than eightfold by twenty thirty and most of that expansion
is happening in high stress areas like West and Central Texas,
and so to stay ahead of the constraints, hyperscalers are
deploying closed loop cooling systems that use no municipal water,
and so Meta's El Paso campus and Microsoft's new builds
(11:27):
in Medina County both run on zero water designs. And
then you have others like Galaxy Digital that still disclose
little and that lack of transparency carries some sighting and
reputation risks. And so power is another stress point. So
we saw Senate Bill six in Texas and how it
shifts the grid upgrade costs to large users, and so
(11:49):
that lets AIRCOT, which is Electric Reliability Council of Texas,
curtail usage during emergencies. And so that's pushing data centers
to secure their own generation. And just recently saw headlines
of Chevron's building a two point five gigawatt facility for
data and West Texas Next Era plans fifteen gigawatts nationally,
(12:12):
part of partly for tech clients. And so you've got
this convergence of water stress, grid pressure, and AI demand,
and it's changing how these campuses are finance built and run.
Speaker 2 (12:24):
Super interesting and maybe stepping back from just hyperscalers, there's
also been a broader wave of water related funding activity
across the US and globally. Where do you see capital
shifting as we head into twenty twenty six.
Speaker 6 (12:40):
Yes, So building on that earlier point about Texas's new
billion dollar a year fund water fund, what we're seeing
now is how that capital is shifting project pipelines. So
Corpus Christie's one point two billion desalination plant, which had
been paused, is now back in motion under a no
(13:00):
cost proposal. Other cities are also fast tracking reuse and
groundwater projects through public private partnerships that lower that delivery risk.
But we're also seeing this globally. So Mexico just issued
one point four billion dollars in sustainability linked bonds, partly
for water and biodiversity, but it's also under US pressure
(13:21):
to meet cross border water treaty obligations. So I think
it's two hundred thousand acre feet do by year end
or they face tariffs, and so even as funding kind
of picks up, disputes over access are also intensifying. And
so I think our view heading into twenty twenty six
is we really expect water infrastructure to stay front center,
(13:42):
but not only as a resilience play, also as a
strategic asset. So the scale of funding is new, but
so is the framing of governments. You know, aren't just
investing infrastructure, they're competing to secure supply, and so that's
really going to shape everything from permitting to geopolitics heading
in twenty twenty six.
Speaker 2 (14:01):
Fantastic, Melanie, Thanks so much for taking the time to
chat pleasure.
Speaker 1 (14:04):
Gil.
Speaker 2 (14:04):
Your research covers a range of key topics across the
ESG landscape, and I know AI has been a dominant
theme in the market for years. What do you think
could surprise in the year ahead twenty twenty six.
Speaker 7 (14:19):
I think community pushed back against the data centers needed
to support the growth in AI. It's starting to get real,
and I think we'll translate into policy and business impacts
for companies. A group of two hundred and thirty organizations
are looking to try to implement a moratorium on data
center buildouts just to give a sense of the extremity
(14:39):
of the situation, and so governments are starting to rethink
the incentives are offering for projects. But also there's increasing
awareness about the resource demands of the data center's energy
and water and how to ensure that their citizens have
access to those resources and reliable access as well as
(15:02):
aren't paying for the infrastructure needed to support data centers.
So I think that's going to be the biggest one.
I would also say that it's not entirely about the
environmental side. There's also increasing pushback on the social side.
So chat GPT just had to rework some models in
response to concerns about safety, for example. So we're starting
(15:22):
to see some legislation risk there as well.
Speaker 2 (15:25):
Very very interesting and maybe shifting topics a little bit,
I would say, in twenty twenty five, we've seen a
trend towards backing off of commitments and softening of ESG
related regulation. Is this all bad news in your mind?
Or could there be some surprises?
Speaker 7 (15:41):
I think there very much are some unintended consequences that
could be positive, some that could be negative that go
along with this. So for instance, if the US removes
federal regulation, that could potentially open the door for states
to write their own laws, which could then create a
very fragmented and complicated landscape for businesses to navigate, clearly,
(16:03):
adding costs and risks. It could also undermine some litigation
defenses and open some companies up to litigation risk. So
that would be one example where maybe behaviors don't change
as much because of that broader context. And additionally, a
change in one jurisdiction jurisdiction doesn't change the implications for
the world. So looking at autos, if the rest of
(16:26):
the world is pushing through evs or consumers want evs,
and even if you're not mandated to reduce your emissions
in one country or region, you're at risk of falling
behind if you're not making those investments in R and
D and producing that product. If that's the way the
market and the consumer demands are going. So those would
(16:46):
be a couple of implications. And then one last one
something like the US effort to reduce small packages coming
in from Chinese retailers, well, if to the extent that
that might from like one off packages being sent by
air to larger packages and shipments being sent by c
(17:07):
You could actually see some positive emissions benefit just from
that transfer. So things like that, I think, you know,
we have to stay tuned, but there could be.
Speaker 2 (17:14):
A lot very interesting Gil, Thanks so much for taking
the time to chat. Thank you, Homasan. You're joining me
in person today in New York, which is a real treat,
but normally you're based in and focused on the Japanese market.
Curious to hear what is the biggest expected issue next
year in the ESG space in Japan.
Speaker 8 (17:36):
Thank you for asking. One of the most important developments
to watch is the upcoming revision of Japan's Corporate Governance Code,
which was first introduced in twenty fifteen. The revision scheduled
for next year will include several whole cold points, and
the notable one is the issue of excess cash holdings.
(17:57):
Japanese companies are often set to sit on large cash
reserves instead of investing to drive growth and productivity. How
the governance called addresses this structural change and how companies
respond will be closely monitored. We are paying very careful
attention to discussions within the Corporate Governance Committee, particularly around
(18:19):
the mechanisms and the expectations for reducing excess cash and
encouraging more strategic capital allocation.
Speaker 2 (18:26):
Wonderful, So what is the major policy shift of the
new government and administration with respect to ESG.
Speaker 8 (18:35):
This year marks the start of the new government administration.
The Prime Minister Sanai Takaichi has expressed a strong opposition
to larger scale solar panel installations, signaling a significant shift
away from the previous renewable centric approach. Instead, she has
emphasized restarting nuclear power plants as a central policy direction.
(18:58):
Many of Japanese Japan's nuclear facilities remain offline due to
extended inspections and the safety reviews and the pace of
the restart we will be a key factor for Japan's
energy and the decomponization strategy. Thus, we are also being
much attention on the ongoing discussion over the restart of
the nuclear power plants.
Speaker 2 (19:18):
Wonderful, Homosan, Such a pleasure to have you here in
New York. Thanks for taking the time to chat.
Speaker 8 (19:22):
Thank you so much, Chris.
Speaker 2 (19:24):
With your focus on sustainable debt and as we begin
to turn the page to twenty twenty six, what are
your expectations for the sustainable debt market? In the year ahead.
Speaker 9 (19:35):
Thanks Eric, Yeah, I mean for global sustainable debt, we
expect sales to exceed two trillion again for the third
consecutive year now. This is based on our expectation that
green and social bond issuance will remain the top contributors.
This has been supported by sovereign and government agency programs
as well as persistent strong demand from impact related investors.
(19:57):
Green bonds are the largest part of the market, and
we've seen issuance increase over four percent through November of
this year, so we're forecasting similar load to sing mid
single digit growth in twenty twenty six. Though there is
someone certainly around litigation risks for corporates, especially in the US,
that could curb our expectations, our issuance expectations, especially for
(20:22):
green bonds. But we are expecting social bond offerings to
also expand next year, and this has been boosted by
increases in agency and supernatural offerings or multilateral development banks
super interesting.
Speaker 2 (20:35):
Curious also here, what are some new developments you've seen
in regards to funding the climate transition.
Speaker 9 (20:42):
Well, we expect that there's going to be more in
terms of what we're calling thematic fixed income it's going
to keep expanding as there's more targeted solutions for environmental
and social initiatives, and this continues to be fueled by
strong investor demand for such projects. We've also seen standout
for formants in some of these products, like cat bonds
(21:02):
that have turned over eleven percent year to date through November,
and this is after seventeen point six percent returned in
twenty twenty four. We expect more growth will also come
from specialized ESG products like that include blue financing. We've
seen this include in over three hundred and sixty one
deals this year that have been tied to marine conservation,
(21:23):
and cat bonds has seen a raise in over eighteen
point four brilliant in issuanes this year as well. One
other area is like the debt for nature swap space
where Indonesia recently or earlier this year completed a swap
and you know, we continue to see that there's opportunities
for these type of structures. There's also some other new
(21:46):
impact related products such as the Interamerican Development Banks Social
Amazonian Bond, which was brought this year, and this just
shows that there's continued potential for these thematic initiatives through
some type of sustainable finance innovation, and just earlier this
month we also saw ten multilateral development banks come together
(22:08):
to isssue joint pledge to scale up finance for low
and middle incum countries. They're expected to commit one hundred
and eighty five billion towards adaptation and mitigation projects, and
of that, sixty five billion is must be included from
private capital mobilization. Private credit is an area where we
see there also to be tremendous opportunity. We've already seen
(22:30):
private credit funds step up and provide construction finance for solar,
wind and battery story bridge loans for projects that haven't
yet achieved cash flow status, and equipment leasing for projects
that maybe haven't been completed yet, providing microgrids or heat
pumps to get projects started. So we think private credit
(22:51):
is another area of growth as the market has to
turn towards leverage finance or private markets because state aid
continues to dwiddle.
Speaker 2 (23:02):
Super interesting Chris, thanks so much for taking the time
to chat. Thank you, Eric Conrad. You've been looking into
carbon regulation for airlines and marine shippers. Maybe starting with airlines,
the industry faces its first ever charges for excess emissions
under the UNS Carbon Offsetting and Reduction Scheme for International Aviation,
(23:24):
or more frequently known as CORCIA. Curious to hear what
does this imply for merging carbon capture and storage technologies?
Speaker 10 (23:33):
Thanks Eric So, CORSIA is likely to drive further investment
in carbon capture and storage technologies, both to produce sustainable
aviation fuel by lowering life cycle emissions in fuel production,
and also to generate carbon credits that airlines can buy
to offset emissions under CORCA. Not just the reminder listeners,
(23:53):
CORSIA requires applane operators to offset emissions on international flights
above an agreed baseline. The idea is to make global
aviation growth carbon neutral. An October update showed that emissions
rose above the baseline for the first time in twenty
twenty four. That's why airlines now face their first ever
CORSER charges and they need to buy credits to offset
(24:16):
the excess emissions. Based on the current price of credits
at around twenty dollars per ton, the ten most exposed
airline groups fase four hundred and fifty million dollars in
combined charges for their twenty twenty four emissions. Looking ahead,
they also face significant price risk for future year emissions
because the available supply of eligible carbon credits is a
(24:38):
fraction of projected demand. We explore this in greater detail
in a research note we published recently. So all this
is likely to drive greater investments in carbon capture and
storage solutions, and we've seen some new developments related to
this so Very recently, the International Civil Aviation Organization or
(24:59):
IC approved the first ever carbon removal credits eligible for
offsetting emissions under CORSA. We expect to see more such
developments driving interest in carbon capture and storage in the
year ahead.
Speaker 2 (25:13):
Super interesting and similar regulations have been proposed to decarbonize
the marine shipping industry, but as many of us know,
the International Maritime Organization decided in October to postpone a
vote on the adoption of its net zero framework by
a year. Curious to hear your thoughts as to what
are the key implications of this delay.
Speaker 10 (25:37):
Well, it makes planning for fleet renewal and retrofitting very difficult. Specifically,
it makes it hard for ship owners to assess the
attractiveness of cleaner fuels and technologies such as on board
carbon capture and storage when making capital investments, so this
could slow investment into such technology spending more regulatory clarity.
(25:57):
As an example, there are some on board carbon capure
and storage solutions now in commercial trials that claim a
carbon capture cost of fifty euros per ton, including capital
and operating costs now compared to the penalties of up
to three hundred and eighty dollars per ton that ships
would have been charged for excess emissions from twenty twenty
eight under the net zero framework for shipping, the one
(26:19):
that's now been delayed. Retrofiting ships with such solutions would
certainly appear to be a cost effective way forward for shipowners. Also,
the increasingly strict penalty thresholds for fuel emissions intensity under
the proposed net zero framework would also have signaled that
certain fields such as liquified natural gas or LNG would
no longer be commercially viable in marine shipping beyond the
(26:41):
early twenty thirties, and that would have encouraged shipowners to
look for alternative fuels and on board carbon capture technologies
in planning. Now, these thresholds and penalties may be renegotiated,
which means many shipowners are likely to take await and
see approach and others could end up investing in new
ships that lock in higher emission fleets for much longer.
(27:01):
I would remind our listeners that this has wide the
implications beyond marine shipping, since shipping underpins global trade and
ultimately forms the backbone of the supply chains for many
other global industries. We'll be tracking developments on this going
into twenty twenty six and provide key updates through our
research as always.
Speaker 2 (27:20):
Wonderful Hanna, thank you so much for braving the cold
and joining us here in New York all the way
from Singapore. Really appreciate it.
Speaker 10 (27:26):
Thank you, Eric. Thanks for all the time.
Speaker 2 (27:27):
Andy, you're focused on all things climate. I'm curious to
hear what role do you see renewables playing in meeting
the rising US power demand in twenty twenty six?
Speaker 11 (27:38):
Thanks Eric. Yeah, there's certainly a lot going on in
the AI power space. Power demand is going up quite
a bit in the United States about four percent a year,
and prior to the administration's scaling back up subsidies for
renewable power, a lot of that power would have gone
to help.
Speaker 1 (27:56):
Fill that gap.
Speaker 11 (27:57):
The need to actually power these data centers and more
going forward from here. So the administration has certainly been
trying pretty hard to rein in the renewables sector as
a whole. But given the demands for not just AI
deriven power, but power growth in general and kind of
(28:18):
LNG as another power export from the United States, it's
really going to be kind of an all hands on
deck operation beyond just the subsidies to fulfill the power
needs of the open aiyes that googles the metas of
the world. So we think there's quite a bit of
a possible upside surprise for some of these renewable energy
companies going into next year. Across the board really, so
(28:41):
you're talking about on the storage side, companies like Fluence.
On the project side, companies like a next Era who
may see a lot of projects that were abandoned by
other companies that just don't have the wherewithal to kind
of see through the next several let's say, eighteen twenty
four months and really get some additional projects online that
(29:03):
will be pretty valuable to them as well, all electrons
sort of for the next five years or so. And
then on the panel side as well, so kind of
the first solos of the world. US company will probably
should see a re analysis of their business case going
forward towards the end of the year, when really power
demand becomes kind of primal.
Speaker 2 (29:23):
Awesome and maybe shifting topics a little bit, but of
course staying within climate, Climate costs hit a record high
of about a trillion dollars. How have firms in bi's
Prepare and Repair Index fared in the year twenty twenty five.
Speaker 11 (29:40):
So we've seen, as you mentioned, significant rise in climate costs.
At the beginning of this year, we had Hurricane Helene
and we had the LA wildfires generating a significant amount
of costs. Insurance costs rose to about three hundred and
fifty billion dollars this year, which was a record high.
So there's been a significant cost we saw with associated
(30:02):
with the climate and extreme weather this year, and the
index that we built around that the idea that there's
a lot of spending and there's this sort of a
big wealth transfer taking place between the companies that are
trying to help prepare and repair for the next storm, fire, flood,
and storm and those that have to pay the bills
and they're seeing certainly outsized margins in these businesses have
(30:26):
performed fairly well this year. There are about three hundred
and forty basis points relative to their index on the year,
which again another strong performance this year, going on sort
of nine out of the last ten years. Companies like
Quanta and die Com, mass Tech all in that index
doing extremely well. We did see towards the end of
the year that companies that were more reliant on the
(30:48):
federal government, where we've seen the federal government such as
FEMA really starting to scale back on spending related to
climate and disaster recovery, starting to fall off a bit.
Companies like ACoM. We also saw a very unusual year
in the United States. It's not super uncommon, but we
didn't have a major hurricane hit. That's about a twenty
(31:09):
percent case in the United States. We do not see
major hurricanes. But if you think about a company like
Generak that has really built much of their business on
the fact that people are very nervous about power outages,
hurricanes being a primal one, a primary one, they did
see some pullback this year as well.
Speaker 2 (31:29):
Wonderful Andy, It's such a pleasure to have you here
in New York. Thanks so much for taking the time
to chat.
Speaker 1 (31:33):
Thank you seen.
Speaker 2 (31:34):
You're the expert unsustainable funds. Curious to hear if we
look at sustainable funds, where's the market right now, what
themes are seeing the most interests, and any particular theme
that you're ultimately most excited about.
Speaker 3 (31:49):
Sure, so, Eric, if we think about where the market is,
so I track sustainable funds with sustainably as she related
keywords in the name. So I know of about three
trillion right now, and it's very clear that this market
is dominated by Europe. So eighty five percent plus of
assets is is you have now expected it to be
a lot, but I didn't expect it to be so
(32:11):
much in terms of direction and what themes are seeing
interest you know, despite this whole rhetoric, we've seen the
CEO where people you know, are moving away from the
word ESG and towards climate flows at the opposite. So
in the first half of the year, we saw flows
actually move into ESG strategies a lot of money market
funds and away from climates. So a lot of the
(32:33):
climate strategies actually saw outflows, and that's something I'm actually
very excited about and interested in. So actually the flip side,
so clean energy in particular, clean energy is a strategy
which has seen this very interesting disconnect that's seen outperformance,
but the funds have seen outflows, and I think that's
starting to reverse and catch up. The funds are starting
(32:56):
to see some inflows now. I think the outflows driven
by this negative political sentiment around clean energy, Whereas you
know a lot of the performance is driven by the
whole AI story on renewables we needed to power and
the data centers and the AI driven power demand. So
I think people are realizing now that it's not just
(33:18):
about you know, politics and policy. There is a separate
story behind this, and we're starting to see that turn.
So I'm excited to see whether that completely turns or
how that goes here or out given.
Speaker 2 (33:32):
The air performance, very very interesting, and when we look
at what these funds ultimately hold, what can we discern
about what managers prefer and is there any risk of
divestment given all the ESG.
Speaker 3 (33:46):
Rollbacks, So what do man just prefer? So if you
look at the holdings, you know, the companies that are
top held and the most popular, it's very clear that
investors prefer or lean towards the environmental metrics. The first
you know, the sectors like utilities, materials, these carbon intensive
industries and sectors are always underweight in ESH funds, so
(34:09):
that's one. And then if we look at you Know
again the company is most held, it's very clear that
it's the environmental metrics that are driving this selection, whereas
governance metrics, like the company's most are very mixed. On
governance metrics, you have companies like Saint Gobain which are
very popular in ESG funds, but at the same time
(34:30):
they have let's just call it questionable governance structures, like
a dual CEO and chairman, they have dual voting class
or share class and voting class. So there are many
such companies and that picture is very mixed. It's almost
like governance doesn't matter. And you mentioned about divestment risks, right,
So I think divestment risks is actually one of the
(34:51):
things that probably the most important given where we are
right now with the current political environment. So when a
company you know rowse it's ESG goals. I think an
unintended consequence that not many people realize is divestment from
your ESG investor base. So take vals Fargo for example,
and when it rolled back it's climate it's net zero goal.
(35:14):
In February about zero point five percent of its market
gap was held by ESG funds. I say ESG, but
sustainable climate everything. Zero four five percent is not much.
But what if you have like an Ing or another
bank where over three percent of their market gap is
in ESG funds. So that's where the risk lies. So
(35:35):
I'm watching companies like Simmrize EEDP. These are companies were
over five percent of the market gap is in ESG
funds and they have very ambitious carbon goals, so that's
really great. But if they folter on their carbon goals,
I think that five percent would come into question. So
I think that's really this unintended consequence that and I
(35:56):
tell clients, you know, whether you're an ESG investor or not,
you should know the concentration you investigate. So I think
that's that's something that's pivotal. So I think for twenty
twenty six, it's the clean energy space that I'm excited about,
just because that disconnect and it's starting to reverse and
where that goes, and then the divestment risk is really pivotal.
And Erica, I'll throw you know, these questions back to you.
(36:19):
Is there a particular topic you know we haven't covered
today that you're particularly excited about for twenty twenty six.
Speaker 2 (36:27):
Yeah, thanks, Shane. I would say I think carbon removal
is a key one. I know Conrad talked a little
bit about carbon capture with respect to CORSA, but in
my mind, carbon removal is a little bit different, and
I really do believe it will continue to emerge in
the year ahead and well beyond. And I think, you know,
(36:48):
we all recognize the unfortunate reality is that we aren't
decarbonizing fast enough. In fact, twenty twenty five is likely
to be yet another record year for total greenhouse gas emissions.
So as a result, I think we're in a position
as a society where carbon removal ultimately needs to play
a bigger role, and there are strong signs kind of
pointing in this direction, including major investments from companies like
(37:14):
Occidental Petroleum and Black Rock, and also the fact that
tax credits for carbon capture and also removal were maintained
and even strengthened here in the US under the recent
tax law. So just to put this under context, I think,
you know, mckensey estimates that the removal market alone could
hit one point two trillion dollars by the year twenty
(37:35):
fifty from around six hundred and ten million in the
year twenty twenty three. So I'd say we're ultimately not
alone and kind of anticipating strong growth for the removal market.
Speaker 3 (37:45):
Interesting. So that's that's that's an interesting theme that you
touched upon. I guess from a more macroview, just what
are your thoughts on ESG going forward?
Speaker 2 (37:55):
Yeah, it's it's a good question. I think it's also
a tough question. I think ultimately there's a lot of
uncertainty related to politics and regulation, not only here in
the US but across other major markets. But what is
clear to me, and I think what the team has
done a great job throughout this episode of articulating, is that,
(38:16):
whether you want to put a label on it or not,
the underlying themes that we're ultimately looking at are changing companies, industries,
and societies at large, and that's not going to change.
And because of that, I think the work that we're
doing to analyze these themes and ultimately bring insights to
the market remains more critical than ever. Well want to
(38:37):
thank all of the team members for joining me here
in studio for today's episode. As a reminder, this will
be our last episode of twenty twenty five, but we'll
be back in the beginning of twenty twenty six. In
the meantime, you can find more information on all things ESG,
including our twenty twenty six outlook, by going to our
(38:58):
dashboard b bas ESGG on the Bloomberg terminal. And as always,
if you have an ESG quandary or burning question you'd
like to ask bi's expert analysts, please send us an
email at ESG currents at bloomberg dot net. Thank you
very much, and we'll see you in twenty twenty six.
ESG is constantly evolving. Over the years. It is shifted
from socially responsible investing to impact to sustainable finance. While
the terminology continues to change, what hasn't changed are the
underlying science market pressures, tangible physical and financial impacts of
the climate crisis, as well as increasing regulatory scrutiny and
(00:22):
rising consumer expectations. We aim to filter out the noise
by speaking with industry experts to identify what is really
driving value. Welcome to ESG Currents, brought to you by
Bloomberg Intelligence.
Speaker 2 (00:37):
Welcome to the podcast. I'm Eric Kane, director of ESG
Research for Bloomberg Intelligence, and for this episode, the last
of the year, we'll be taking a slightly different approach.
Instead of hearing from external guests, I'll be joined in
studio here in New York by the members of the
BIESG team, who will share their thoughts on key EU
(01:00):
ESG themes going into twenty twenty six. We'll hear from
Grace Osbourne, Rob Dubof, Melanie Rua, Andy Stevenson, Gail Glazerman,
Yasujaki Homa, Chris Rady, Conrad Tan and Shaheen Contractor, and
I'll also share my thoughts as well. We'll cover a
range of topics that we see driving the ESG conversation
(01:21):
in twenty twenty six, including the emergence of sustainable debt
in emerging markets and sustainable debt trends more broadly, shareholder activism,
water scarcity, climate damages, the ESG implications of AI carbon
regulation for airlines and marine shippers ESG in Japan, and
sustainable funds in sum I think the discussion will make
(01:44):
plane that despite the noise created by the ESG backlash
and the ultimate de emphasis of the ESG label, the
underlying issues will continue to create meaningful signals for investors
and corporates in twenty twenty six and beyond. With that,
let's get into the program, Grace, Given your focus on
(02:05):
sustainable finance and with COP thirty putting emerging markets at
the center of the climate conversation, what does the data
actually show about sustainable finance in these markets and what's
driving the trends we're seeing.
Speaker 3 (02:21):
Yeah.
Speaker 4 (02:21):
Absolutely, I think COP thirty, which you had just last month,
it's really crystallized why emerging markets are so central to
the climate story, underscoring the real need for affordable, large
scale finance given they face the bulk of future emissions
growth risk and of course highly susceptible to climate vulnerability,
(02:43):
and this finance really needs to be mobilized to enable
them to manage both and also catch some of the opportunities.
But the data year to date, we're seeing that sustainable
debt issuance in emerging market sets at about three hundred
and eighty eight billion dollars. That's roughly nineteen percent of
global issuance, So this is actually broadly flat with twenty
(03:04):
twenty four. And within this green bonds still dominate, the
account for a high percentage of issuance at almost two
hundred and fifty billion dollars of the total, and I
think we're really beginning to see the shift. I think
something's particularly interesting Last year in twenty twenty four, eighty
seven percent of all power generation investment in emerging markets
(03:28):
and China went into clean energy. So we're really seeing
that emphasizing how capital has already been mobilized into transition
into low carbon infrastructure, and I think as we look forward,
this is set to grow. It's an estimated that seventy
percent of all global infrastructure spending is expected to occur
(03:48):
in emerging markets by twenty thirty. So we think about this,
it's things like transport, water systems, real estates and aligning
that infrastructure to a low carbon path represents and estimate
mated five trillion dollars a year transition opportunity over the
next decade, So quite significant upside potential there, and I
(04:09):
think other dynamics we saw earlier this year, g FANS
has doubled down on mobilizing transition capital to these markets.
And when we zoom into these markets more closely, we're
seeing shifts both in emerging and developing markets where financial
institutions are kind of stepping up into roles which were
previously led by sovereigns that they're issuing more sustainable debt. They're
(04:31):
setting sustainable finance targets, innovating and actually opening up products
that are becoming competitive advantage and generating new revenue streams
from these products.
Speaker 2 (04:41):
Very very interesting, and given that emerging markets sustainable debt
issuance has actually been relatively flat, you're to date versus
twenty twenty four, which you mentioned, What are we expecting
to see going into twenty twenty six? Is it likely
to accelerate as we continue to look to close the
one point three trillion dollars annual climate financing gap in
(05:04):
emerging markets.
Speaker 4 (05:05):
Yeah, I think it's interesting. As I mentioned, we did
see it issuance kind of plateaus from last year, but
I think there's some pretty strong tailwinds building for twenty
twenty six, and I do expect an acceleration going into
twenty twenty six. I think the first big driver is
that we've seen increased promotion of sustainable finance taxonomies. I
(05:26):
think just before COP thirty Brazil announced their sustainable finance taxonomy.
We've seen at India, YUOI, Chile, Paraguay, and this is
really critical to start mobilizing capital that's going to be
closing this one point three trillion annual climate financing gap
that emerging markets are facing. Investors really need that kind
of clarity over what counts towards green or transition or adaptation.
(05:52):
So I think it's really key for mobilizing that capital.
And the second trend that we're seeing that I think
is particularly interesting is that all outstanding sustainable bonds currently
in emerging markets, more than thirty percent of that outstanding
em sustainable bonds are going to mature by the end
of twenty twenty six. So this means that we'd like
to see quite a substantial wave of refinancing. I think
(06:15):
a very high proportion of this should come back into
the sustainable formats, especially from financial institutions that are becoming
much more active in the space. So I think going
forward we will see that acceleration. We still need kind
of volume and scalability of investable projects and development, further
of kind blended finance, and of course, I think what
(06:35):
we need is kind of evolution of channels products that
are going to enable investors to hedge some of the
associated risks with these markets, whether it's f X risk,
and essentially allow investors to capture kind of long term
investment value from these markets.
Speaker 2 (06:56):
Excellent, wonderful Grace, Thank you so much for joining us here.
Speaker 1 (07:01):
Rob.
Speaker 2 (07:01):
With your focus on shareholder activism and engagement in the US,
what should we expect in the year ahead.
Speaker 1 (07:09):
That's a good question.
Speaker 5 (07:10):
So twenty twenty six, we actually expect to see major
challenges to shareholder proposals and corporate engagement. For one, we
actually saw a huge drop last year. The number of
shareholder proposals was down twenty three percent in the twenty
twenty five proxy season, and that drop was particularly noteworthy
for ESG issues like human rights, which were down forty
(07:31):
one percent from the prior year. Climate was down thirty
eight percent, DEI was down thirty two percent. So certainly
some of that is due to the broader pushback and
the slowdown in ESG asset center management, but more specifically
the second Trump term and the SEC has really tried
to scale back the burden on corporate issuers, part of
(07:51):
the new SEC Chairman Paul Atkins so called make IPO's
Great Again agenda. So what does that look like? They've
been very aggressive actually and fighting off what they view
as nuisance shareholder proposals, even going so far as to
raise the bar and what qualifies as a valid shareholder
proposal earlier this year, and you know you can trust
(08:12):
that with the Biden administration, which lowered that bar, and
that led to a nearly fifty percent increase in shareholder
proposals from twenty twenty one to twenty twenty four. So
we're now seeing as major backtracking on that, and it's
expected to get even more difficult in twenty twenty six.
Is the SEC basically taken itself out of the process
(08:33):
this year, their differing corporations to determine what is or
is not a valid shareholder proposal, which in turn is
expected to lead to another significant drop. So is this
a good thing? I think guests we've talked to on
the podcast over the last year have largely agreed that
some of the shareholder proposals have indeed been borderline nuisance,
but at the end of the day, most investors have
(08:55):
pushed back on the notion that they need to be
done away with altogether. Now, on the your activism front,
the story is quite different. Recent data indicates that activism
tends to slow down around presidential elections like we had
in twenty twenty four, and then rebound over the next
two years. So certainly some of the challenges I just
talked about to ESG proposals and engagement can hamper traditional activism,
(09:17):
but overall we expect a solid bounce in twenty twenty six.
Speaker 2 (09:22):
Very very interesting and curious. Are there any positive takeaways
from the deregulation agenda?
Speaker 1 (09:28):
That's a good one.
Speaker 5 (09:29):
As I mentioned, a lot of the so called pro
markets regulations may wind up hurting shareholder rights, but I
do think it may open up innovation that could help
push sustainable finance forward. You know, we hear a lot
from the SEC about blockchain and tokenization and decentralized finance,
and while I think crypto is the clear winner there,
there are other applications like carbon trading or supply chain
(09:52):
reporting which could also benefit from these technologies.
Speaker 2 (09:55):
Wonderful, Well, thanks so much for taking the tent to chat. Absolutely, Melanie.
As we look at the infrastructure footprint of AI, one
issue that's risen fast on the risk radar is water,
especially in data center heavy states like Texas and Virginia,
and you've been leading our work on water stress and
(10:16):
AI exposure. Curious to hear what's your outlook on water
risk in the AI and data center space for twenty
twenty six.
Speaker 6 (10:24):
Yeah, thanks for having me, Eric, So I would say
what we're really seeing is a major shift in how
data centers are thinking about infrastructure. So operators are really
designing for this water independence and even on site power
not just for the environmental purposes but also to avoid downtime.
(10:46):
And like you mentioned earlier about Texas being a case point,
it's now the number two hub for data centers following Virginia,
and so voters just pass actually a billion dollar a
year waterf fun to support new supply. So that's timely
because data center water use is expected to grow more
(11:07):
than eightfold by twenty thirty and most of that expansion
is happening in high stress areas like West and Central Texas,
and so to stay ahead of the constraints, hyperscalers are
deploying closed loop cooling systems that use no municipal water,
and so Meta's El Paso campus and Microsoft's new builds
(11:27):
in Medina County both run on zero water designs. And
then you have others like Galaxy Digital that still disclose
little and that lack of transparency carries some sighting and
reputation risks. And so power is another stress point. So
we saw Senate Bill six in Texas and how it
shifts the grid upgrade costs to large users, and so
(11:49):
that lets AIRCOT, which is Electric Reliability Council of Texas,
curtail usage during emergencies. And so that's pushing data centers
to secure their own generation. And just recently saw headlines
of Chevron's building a two point five gigawatt facility for
data and West Texas Next Era plans fifteen gigawatts nationally,
(12:12):
part of partly for tech clients. And so you've got
this convergence of water stress, grid pressure, and AI demand,
and it's changing how these campuses are finance built and run.
Speaker 2 (12:24):
Super interesting and maybe stepping back from just hyperscalers, there's
also been a broader wave of water related funding activity
across the US and globally. Where do you see capital
shifting as we head into twenty twenty six.
Speaker 6 (12:40):
Yes, So building on that earlier point about Texas's new
billion dollar a year fund water fund, what we're seeing
now is how that capital is shifting project pipelines. So
Corpus Christie's one point two billion desalination plant, which had
been paused, is now back in motion under a no
(13:00):
cost proposal. Other cities are also fast tracking reuse and
groundwater projects through public private partnerships that lower that delivery risk.
But we're also seeing this globally. So Mexico just issued
one point four billion dollars in sustainability linked bonds, partly
for water and biodiversity, but it's also under US pressure
(13:21):
to meet cross border water treaty obligations. So I think
it's two hundred thousand acre feet do by year end
or they face tariffs, and so even as funding kind
of picks up, disputes over access are also intensifying. And
so I think our view heading into twenty twenty six
is we really expect water infrastructure to stay front center,
(13:42):
but not only as a resilience play, also as a
strategic asset. So the scale of funding is new, but
so is the framing of governments. You know, aren't just
investing infrastructure, they're competing to secure supply, and so that's
really going to shape everything from permitting to geopolitics heading
in twenty twenty six.
Speaker 2 (14:01):
Fantastic, Melanie, Thanks so much for taking the time to
chat pleasure.
Speaker 1 (14:04):
Gil.
Speaker 2 (14:04):
Your research covers a range of key topics across the
ESG landscape, and I know AI has been a dominant
theme in the market for years. What do you think
could surprise in the year ahead twenty twenty six.
Speaker 7 (14:19):
I think community pushed back against the data centers needed
to support the growth in AI. It's starting to get real,
and I think we'll translate into policy and business impacts
for companies. A group of two hundred and thirty organizations
are looking to try to implement a moratorium on data
center buildouts just to give a sense of the extremity
(14:39):
of the situation, and so governments are starting to rethink
the incentives are offering for projects. But also there's increasing
awareness about the resource demands of the data center's energy
and water and how to ensure that their citizens have
access to those resources and reliable access as well as
(15:02):
aren't paying for the infrastructure needed to support data centers.
So I think that's going to be the biggest one.
I would also say that it's not entirely about the
environmental side. There's also increasing pushback on the social side.
So chat GPT just had to rework some models in
response to concerns about safety, for example. So we're starting
(15:22):
to see some legislation risk there as well.
Speaker 2 (15:25):
Very very interesting and maybe shifting topics a little bit,
I would say, in twenty twenty five, we've seen a
trend towards backing off of commitments and softening of ESG
related regulation. Is this all bad news in your mind?
Or could there be some surprises?
Speaker 7 (15:41):
I think there very much are some unintended consequences that
could be positive, some that could be negative that go
along with this. So for instance, if the US removes
federal regulation, that could potentially open the door for states
to write their own laws, which could then create a
very fragmented and complicated landscape for businesses to navigate, clearly,
(16:03):
adding costs and risks. It could also undermine some litigation
defenses and open some companies up to litigation risk. So
that would be one example where maybe behaviors don't change
as much because of that broader context. And additionally, a
change in one jurisdiction jurisdiction doesn't change the implications for
the world. So looking at autos, if the rest of
(16:26):
the world is pushing through evs or consumers want evs,
and even if you're not mandated to reduce your emissions
in one country or region, you're at risk of falling
behind if you're not making those investments in R and
D and producing that product. If that's the way the
market and the consumer demands are going. So those would
(16:46):
be a couple of implications. And then one last one
something like the US effort to reduce small packages coming
in from Chinese retailers, well, if to the extent that
that might from like one off packages being sent by
air to larger packages and shipments being sent by c
(17:07):
You could actually see some positive emissions benefit just from
that transfer. So things like that, I think, you know,
we have to stay tuned, but there could be.
Speaker 2 (17:14):
A lot very interesting Gil, Thanks so much for taking
the time to chat. Thank you, Homasan. You're joining me
in person today in New York, which is a real treat,
but normally you're based in and focused on the Japanese market.
Curious to hear what is the biggest expected issue next
year in the ESG space in Japan.
Speaker 8 (17:36):
Thank you for asking. One of the most important developments
to watch is the upcoming revision of Japan's Corporate Governance Code,
which was first introduced in twenty fifteen. The revision scheduled
for next year will include several whole cold points, and
the notable one is the issue of excess cash holdings.
(17:57):
Japanese companies are often set to sit on large cash
reserves instead of investing to drive growth and productivity. How
the governance called addresses this structural change and how companies
respond will be closely monitored. We are paying very careful
attention to discussions within the Corporate Governance Committee, particularly around
(18:19):
the mechanisms and the expectations for reducing excess cash and
encouraging more strategic capital allocation.
Speaker 2 (18:26):
Wonderful, So what is the major policy shift of the
new government and administration with respect to ESG.
Speaker 8 (18:35):
This year marks the start of the new government administration.
The Prime Minister Sanai Takaichi has expressed a strong opposition
to larger scale solar panel installations, signaling a significant shift
away from the previous renewable centric approach. Instead, she has
emphasized restarting nuclear power plants as a central policy direction.
(18:58):
Many of Japanese Japan's nuclear facilities remain offline due to
extended inspections and the safety reviews and the pace of
the restart we will be a key factor for Japan's
energy and the decomponization strategy. Thus, we are also being
much attention on the ongoing discussion over the restart of
the nuclear power plants.
Speaker 2 (19:18):
Wonderful, Homosan, Such a pleasure to have you here in
New York. Thanks for taking the time to chat.
Speaker 8 (19:22):
Thank you so much, Chris.
Speaker 2 (19:24):
With your focus on sustainable debt and as we begin
to turn the page to twenty twenty six, what are
your expectations for the sustainable debt market? In the year ahead.
Speaker 9 (19:35):
Thanks Eric, Yeah, I mean for global sustainable debt, we
expect sales to exceed two trillion again for the third
consecutive year now. This is based on our expectation that
green and social bond issuance will remain the top contributors.
This has been supported by sovereign and government agency programs
as well as persistent strong demand from impact related investors.
(19:57):
Green bonds are the largest part of the market, and
we've seen issuance increase over four percent through November of
this year, so we're forecasting similar load to sing mid
single digit growth in twenty twenty six. Though there is
someone certainly around litigation risks for corporates, especially in the US,
that could curb our expectations, our issuance expectations, especially for
(20:22):
green bonds. But we are expecting social bond offerings to
also expand next year, and this has been boosted by
increases in agency and supernatural offerings or multilateral development banks
super interesting.
Speaker 2 (20:35):
Curious also here, what are some new developments you've seen
in regards to funding the climate transition.
Speaker 9 (20:42):
Well, we expect that there's going to be more in
terms of what we're calling thematic fixed income it's going
to keep expanding as there's more targeted solutions for environmental
and social initiatives, and this continues to be fueled by
strong investor demand for such projects. We've also seen standout
for formants in some of these products, like cat bonds
(21:02):
that have turned over eleven percent year to date through November,
and this is after seventeen point six percent returned in
twenty twenty four. We expect more growth will also come
from specialized ESG products like that include blue financing. We've
seen this include in over three hundred and sixty one
deals this year that have been tied to marine conservation,
(21:23):
and cat bonds has seen a raise in over eighteen
point four brilliant in issuanes this year as well. One
other area is like the debt for nature swap space
where Indonesia recently or earlier this year completed a swap
and you know, we continue to see that there's opportunities
for these type of structures. There's also some other new
(21:46):
impact related products such as the Interamerican Development Banks Social
Amazonian Bond, which was brought this year, and this just
shows that there's continued potential for these thematic initiatives through
some type of sustainable finance innovation, and just earlier this
month we also saw ten multilateral development banks come together
(22:08):
to isssue joint pledge to scale up finance for low
and middle incum countries. They're expected to commit one hundred
and eighty five billion towards adaptation and mitigation projects, and
of that, sixty five billion is must be included from
private capital mobilization. Private credit is an area where we
see there also to be tremendous opportunity. We've already seen
(22:30):
private credit funds step up and provide construction finance for solar,
wind and battery story bridge loans for projects that haven't
yet achieved cash flow status, and equipment leasing for projects
that maybe haven't been completed yet, providing microgrids or heat
pumps to get projects started. So we think private credit
(22:51):
is another area of growth as the market has to
turn towards leverage finance or private markets because state aid
continues to dwiddle.
Speaker 2 (23:02):
Super interesting Chris, thanks so much for taking the time
to chat. Thank you, Eric Conrad. You've been looking into
carbon regulation for airlines and marine shippers. Maybe starting with airlines,
the industry faces its first ever charges for excess emissions
under the UNS Carbon Offsetting and Reduction Scheme for International Aviation,
(23:24):
or more frequently known as CORCIA. Curious to hear what
does this imply for merging carbon capture and storage technologies?
Speaker 10 (23:33):
Thanks Eric So, CORSIA is likely to drive further investment
in carbon capture and storage technologies, both to produce sustainable
aviation fuel by lowering life cycle emissions in fuel production,
and also to generate carbon credits that airlines can buy
to offset emissions under CORCA. Not just the reminder listeners,
(23:53):
CORSIA requires applane operators to offset emissions on international flights
above an agreed baseline. The idea is to make global
aviation growth carbon neutral. An October update showed that emissions
rose above the baseline for the first time in twenty
twenty four. That's why airlines now face their first ever
CORSER charges and they need to buy credits to offset
(24:16):
the excess emissions. Based on the current price of credits
at around twenty dollars per ton, the ten most exposed
airline groups fase four hundred and fifty million dollars in
combined charges for their twenty twenty four emissions. Looking ahead,
they also face significant price risk for future year emissions
because the available supply of eligible carbon credits is a
(24:38):
fraction of projected demand. We explore this in greater detail
in a research note we published recently. So all this
is likely to drive greater investments in carbon capture and
storage solutions, and we've seen some new developments related to
this so Very recently, the International Civil Aviation Organization or
(24:59):
IC approved the first ever carbon removal credits eligible for
offsetting emissions under CORSA. We expect to see more such
developments driving interest in carbon capture and storage in the
year ahead.
Speaker 2 (25:13):
Super interesting and similar regulations have been proposed to decarbonize
the marine shipping industry, but as many of us know,
the International Maritime Organization decided in October to postpone a
vote on the adoption of its net zero framework by
a year. Curious to hear your thoughts as to what
are the key implications of this delay.
Speaker 10 (25:37):
Well, it makes planning for fleet renewal and retrofitting very difficult. Specifically,
it makes it hard for ship owners to assess the
attractiveness of cleaner fuels and technologies such as on board
carbon capture and storage when making capital investments, so this
could slow investment into such technology spending more regulatory clarity.
(25:57):
As an example, there are some on board carbon capure
and storage solutions now in commercial trials that claim a
carbon capture cost of fifty euros per ton, including capital
and operating costs now compared to the penalties of up
to three hundred and eighty dollars per ton that ships
would have been charged for excess emissions from twenty twenty
eight under the net zero framework for shipping, the one
(26:19):
that's now been delayed. Retrofiting ships with such solutions would
certainly appear to be a cost effective way forward for shipowners. Also,
the increasingly strict penalty thresholds for fuel emissions intensity under
the proposed net zero framework would also have signaled that
certain fields such as liquified natural gas or LNG would
no longer be commercially viable in marine shipping beyond the
(26:41):
early twenty thirties, and that would have encouraged shipowners to
look for alternative fuels and on board carbon capture technologies
in planning. Now, these thresholds and penalties may be renegotiated,
which means many shipowners are likely to take await and
see approach and others could end up investing in new
ships that lock in higher emission fleets for much longer.
(27:01):
I would remind our listeners that this has wide the
implications beyond marine shipping, since shipping underpins global trade and
ultimately forms the backbone of the supply chains for many
other global industries. We'll be tracking developments on this going
into twenty twenty six and provide key updates through our
research as always.
Speaker 2 (27:20):
Wonderful Hanna, thank you so much for braving the cold
and joining us here in New York all the way
from Singapore. Really appreciate it.
Speaker 10 (27:26):
Thank you, Eric. Thanks for all the time.
Speaker 2 (27:27):
Andy, you're focused on all things climate. I'm curious to
hear what role do you see renewables playing in meeting
the rising US power demand in twenty twenty six?
Speaker 11 (27:38):
Thanks Eric. Yeah, there's certainly a lot going on in
the AI power space. Power demand is going up quite
a bit in the United States about four percent a year,
and prior to the administration's scaling back up subsidies for
renewable power, a lot of that power would have gone
to help.
Speaker 1 (27:56):
Fill that gap.
Speaker 11 (27:57):
The need to actually power these data centers and more
going forward from here. So the administration has certainly been
trying pretty hard to rein in the renewables sector as
a whole. But given the demands for not just AI
deriven power, but power growth in general and kind of
(28:18):
LNG as another power export from the United States, it's
really going to be kind of an all hands on
deck operation beyond just the subsidies to fulfill the power
needs of the open aiyes that googles the metas of
the world. So we think there's quite a bit of
a possible upside surprise for some of these renewable energy
companies going into next year. Across the board really, so
(28:41):
you're talking about on the storage side, companies like Fluence.
On the project side, companies like a next Era who
may see a lot of projects that were abandoned by
other companies that just don't have the wherewithal to kind
of see through the next several let's say, eighteen twenty
four months and really get some additional projects online that
(29:03):
will be pretty valuable to them as well, all electrons
sort of for the next five years or so. And
then on the panel side as well, so kind of
the first solos of the world. US company will probably
should see a re analysis of their business case going
forward towards the end of the year, when really power
demand becomes kind of primal.
Speaker 2 (29:23):
Awesome and maybe shifting topics a little bit, but of
course staying within climate, Climate costs hit a record high
of about a trillion dollars. How have firms in bi's
Prepare and Repair Index fared in the year twenty twenty five.
Speaker 11 (29:40):
So we've seen, as you mentioned, significant rise in climate costs.
At the beginning of this year, we had Hurricane Helene
and we had the LA wildfires generating a significant amount
of costs. Insurance costs rose to about three hundred and
fifty billion dollars this year, which was a record high.
So there's been a significant cost we saw with associated
(30:02):
with the climate and extreme weather this year, and the
index that we built around that the idea that there's
a lot of spending and there's this sort of a
big wealth transfer taking place between the companies that are
trying to help prepare and repair for the next storm, fire, flood,
and storm and those that have to pay the bills
and they're seeing certainly outsized margins in these businesses have
(30:26):
performed fairly well this year. There are about three hundred
and forty basis points relative to their index on the year,
which again another strong performance this year, going on sort
of nine out of the last ten years. Companies like
Quanta and die Com, mass Tech all in that index
doing extremely well. We did see towards the end of
the year that companies that were more reliant on the
(30:48):
federal government, where we've seen the federal government such as
FEMA really starting to scale back on spending related to
climate and disaster recovery, starting to fall off a bit.
Companies like ACoM. We also saw a very unusual year
in the United States. It's not super uncommon, but we
didn't have a major hurricane hit. That's about a twenty
(31:09):
percent case in the United States. We do not see
major hurricanes. But if you think about a company like
Generak that has really built much of their business on
the fact that people are very nervous about power outages,
hurricanes being a primal one, a primary one, they did
see some pullback this year as well.
Speaker 2 (31:29):
Wonderful Andy, It's such a pleasure to have you here
in New York. Thanks so much for taking the time
to chat.
Speaker 1 (31:33):
Thank you seen.
Speaker 2 (31:34):
You're the expert unsustainable funds. Curious to hear if we
look at sustainable funds, where's the market right now, what
themes are seeing the most interests, and any particular theme
that you're ultimately most excited about.
Speaker 3 (31:49):
Sure, so, Eric, if we think about where the market is,
so I track sustainable funds with sustainably as she related
keywords in the name. So I know of about three
trillion right now, and it's very clear that this market
is dominated by Europe. So eighty five percent plus of
assets is is you have now expected it to be
a lot, but I didn't expect it to be so
(32:11):
much in terms of direction and what themes are seeing
interest you know, despite this whole rhetoric, we've seen the
CEO where people you know, are moving away from the
word ESG and towards climate flows at the opposite. So
in the first half of the year, we saw flows
actually move into ESG strategies a lot of money market
funds and away from climates. So a lot of the
(32:33):
climate strategies actually saw outflows, and that's something I'm actually
very excited about and interested in. So actually the flip side,
so clean energy in particular, clean energy is a strategy
which has seen this very interesting disconnect that's seen outperformance,
but the funds have seen outflows, and I think that's
starting to reverse and catch up. The funds are starting
(32:56):
to see some inflows now. I think the outflows driven
by this negative political sentiment around clean energy, Whereas you
know a lot of the performance is driven by the
whole AI story on renewables we needed to power and
the data centers and the AI driven power demand. So
I think people are realizing now that it's not just
(33:18):
about you know, politics and policy. There is a separate
story behind this, and we're starting to see that turn.
So I'm excited to see whether that completely turns or
how that goes here or out given.
Speaker 2 (33:32):
The air performance, very very interesting, and when we look
at what these funds ultimately hold, what can we discern
about what managers prefer and is there any risk of
divestment given all the ESG.
Speaker 3 (33:46):
Rollbacks, So what do man just prefer? So if you
look at the holdings, you know, the companies that are
top held and the most popular, it's very clear that
investors prefer or lean towards the environmental metrics. The first
you know, the sectors like utilities, materials, these carbon intensive
industries and sectors are always underweight in ESH funds, so
(34:09):
that's one. And then if we look at you Know
again the company is most held, it's very clear that
it's the environmental metrics that are driving this selection, whereas
governance metrics, like the company's most are very mixed. On
governance metrics, you have companies like Saint Gobain which are
very popular in ESG funds, but at the same time
(34:30):
they have let's just call it questionable governance structures, like
a dual CEO and chairman, they have dual voting class
or share class and voting class. So there are many
such companies and that picture is very mixed. It's almost
like governance doesn't matter. And you mentioned about divestment risks, right,
So I think divestment risks is actually one of the
(34:51):
things that probably the most important given where we are
right now with the current political environment. So when a
company you know rowse it's ESG goals. I think an
unintended consequence that not many people realize is divestment from
your ESG investor base. So take vals Fargo for example,
and when it rolled back it's climate it's net zero goal.
(35:14):
In February about zero point five percent of its market
gap was held by ESG funds. I say ESG, but
sustainable climate everything. Zero four five percent is not much.
But what if you have like an Ing or another
bank where over three percent of their market gap is
in ESG funds. So that's where the risk lies. So
(35:35):
I'm watching companies like Simmrize EEDP. These are companies were
over five percent of the market gap is in ESG
funds and they have very ambitious carbon goals, so that's
really great. But if they folter on their carbon goals,
I think that five percent would come into question. So
I think that's really this unintended consequence that and I
(35:56):
tell clients, you know, whether you're an ESG investor or not,
you should know the concentration you investigate. So I think
that's that's something that's pivotal. So I think for twenty
twenty six, it's the clean energy space that I'm excited about,
just because that disconnect and it's starting to reverse and
where that goes, and then the divestment risk is really pivotal.
And Erica, I'll throw you know, these questions back to you.
(36:19):
Is there a particular topic you know we haven't covered
today that you're particularly excited about for twenty twenty six.
Speaker 2 (36:27):
Yeah, thanks, Shane. I would say I think carbon removal
is a key one. I know Conrad talked a little
bit about carbon capture with respect to CORSA, but in
my mind, carbon removal is a little bit different, and
I really do believe it will continue to emerge in
the year ahead and well beyond. And I think, you know,
(36:48):
we all recognize the unfortunate reality is that we aren't
decarbonizing fast enough. In fact, twenty twenty five is likely
to be yet another record year for total greenhouse gas emissions.
So as a result, I think we're in a position
as a society where carbon removal ultimately needs to play
a bigger role, and there are strong signs kind of
pointing in this direction, including major investments from companies like
(37:14):
Occidental Petroleum and Black Rock, and also the fact that
tax credits for carbon capture and also removal were maintained
and even strengthened here in the US under the recent
tax law. So just to put this under context, I think,
you know, mckensey estimates that the removal market alone could
hit one point two trillion dollars by the year twenty
(37:35):
fifty from around six hundred and ten million in the
year twenty twenty three. So I'd say we're ultimately not
alone and kind of anticipating strong growth for the removal market.
Speaker 3 (37:45):
Interesting. So that's that's that's an interesting theme that you
touched upon. I guess from a more macroview, just what
are your thoughts on ESG going forward?
Speaker 2 (37:55):
Yeah, it's it's a good question. I think it's also
a tough question. I think ultimately there's a lot of
uncertainty related to politics and regulation, not only here in
the US but across other major markets. But what is
clear to me, and I think what the team has
done a great job throughout this episode of articulating, is that,
(38:16):
whether you want to put a label on it or not,
the underlying themes that we're ultimately looking at are changing companies, industries,
and societies at large, and that's not going to change.
And because of that, I think the work that we're
doing to analyze these themes and ultimately bring insights to
the market remains more critical than ever. Well want to
(38:37):
thank all of the team members for joining me here
in studio for today's episode. As a reminder, this will
be our last episode of twenty twenty five, but we'll
be back in the beginning of twenty twenty six. In
the meantime, you can find more information on all things ESG,
including our twenty twenty six outlook, by going to our
(38:58):
dashboard b bas ESGG on the Bloomberg terminal. And as always,
if you have an ESG quandary or burning question you'd
like to ask bi's expert analysts, please send us an
email at ESG currents at bloomberg dot net. Thank you
very much, and we'll see you in twenty twenty six.
Host
Eric Kane
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