2022 in the rear-view mirror
2022 in the rear-view mirror
Almost a year ago, in early 2022, most of us anticipated a period of relative recovery from the consequences of pandemic lockdowns and a consequential uptick in economic activity. The first half of the year was, indeed, especially active – particularly in the commitment of capital towards ‘building back better’ – with numerous digital infrastructure companies completing financings, including two of the largest debt issues to date by UK fibre broadband operators (Liberty and CityFibre).
In a similar vein, those companies building the next generation of energy infrastructure obtained substantial commitments from institutional investors committed to the decarbonisation agenda. In fact, in 2022, approximately £22bn was invested into infrastructure subsectors such as wind, solar, battery storage, energy from waste (‘EfW’), and elective vehicle (‘EV’) charging.
2022 was, though, a year of two halves with a European energy crisis, triggered by Russia’s invasion of Ukraine, driving UK inflation and base rates to 10.5% and 3.5% respectively by December, which directly impacted asset values and even triggered disengagement in Q4 by certain lenders from exploring any new client business.
Encouragingly, however, the last twelve months also saw record levels of investment into almost all areas of ‘next-generation’ infrastructure. The pivot of capital away from the carbon-heavy economy towards renewable and sustainable investments, which was regarded as merely noteworthy in 2020, has become seismic and mainstream as governments, communities, and companies focus on sustainable growth. In the fourth quarter of 2022, flows into the European sustainable funds rebounded (after a three-consecutive-quarter decline) and stood at almost $40bn. In comparison, European conventional funds suffered outflows of $33.3bn in the final quarter of 2022.
It is worth noting that at the end of 2022, 83% of all assets held in sustainable funds globally are held in the European sustainable fund universe*
2023 – the road ahead
From a macro perspective, while the energy challenges of 2022 have continued into 2023, the drive for ‘Green’ investments continues to accelerate. The US Government’s move to boost the pace of its energy transition with the introduction of the Inflation Reduction Act is a once-in-a-generation initiative of extraordinary scale. Slightly less ambitious, but significant, the EU response is taking shape with a package of additional incentives for Green investment (building on its existing ‘Green Deal’) as the Commission strives “to make Europe the home of cleantech and industrial innovation on the road to net zero”**.
At the corporate level, “sustainability”, which might have been bandied about (by some) as ‘greenwash’ two years ago is definitely ‘mainstream’ now and here to stay, underpinned firmly within the EU by the Sustainable Finance Disclosure Regulation (‘SFDR’). This regulation is significant for public and private companies alike and, despite its name, its impact is not confined to the EU states. The SFDR came into effect on 10 March 2021 and has since been boosted by the establishment of specific environmental reporting and disclosure obligations in January 2022 and is expected to see a further enhancement to its environmental and social taxonomy in Q1 this year. It provides for greater transparency on behalf of investing and lending institutions on the environmental and social characteristics of their investments and establishes common standards for reporting and disclosure. It makes it considerably harder for asset managers to brand a product with an ESG or sustainable label without being measurably transparent with regard to how this is achieved.
The UK market is not exempt from the SFDR’s impact. Investing institutions which are deploying capital across the European markets generally will almost all be reporting on an SFDR basis irrespective of precisely where their underlying investments reside. In the UK, the sustainability disclosure requirements for asset managers are established and governed by the Financial Conduct Authority (‘FCA’) and, much like its continental European counterpart, the requirements cover product labelling and disclosure at a product and entity level and, in many cases requires more granular levels of disclosure than the SFDR.
These reporting regimes represent an irreversible tide bringing ESG into the heart of financial reporting for every company – an outcome that Cameron Barney and its clients welcome.
Sources: * Morningstar Global Sustainable Fund Flows report
** Ursula von der Leyen at the World Economic Forum, Davos
