How Environmental Policies are Shaping International Fund Flows

As the world is reeling under an ecological downturn, a new financial revolution, i.e. green finance, is slowly evolving on the horizon, affecting the entire international community. This shift from a moral duty to an economic priority is paving the way for a sustainable future, replacing old practices.

In recent times, the alignment of investment avenues with environmental sustainability has emerged as a focal point. Here, we will see how environmental policies are shaping the direction of international fund flows.

All eyes on ESG
Environmental, social, and governance (ESG) criteria have become a key decision-making factor for institutional investors such as mutual funds and pension funds. Investors are also becoming aware of these factors and know that companies that are better placed on these parameters are most likely to perform better than others.

The expectation surrounding the ESG isn’t a fleeting sentiment. It perfectly aligns with a broader and progressive transition towards sustainable economies.

As a result, funds that prioritize ESG factors are attracting more capital. It is also influencing the flow of funds across the borders.

It is estimated that ESG assets are anticipated to have astronomical growth and are valued at $53 trillion, which is one-third of global assets, as specified by a Bloomberg report.

Going forward, ESG aspects will be seamlessly interwoven into the investment strategy fabric and will form the economic blueprint of corporations. We can expect economies to attract international investors by nurturing a conducive environment for ESG-compliant businesses.

Renewable Energy and Green Bonds
Investments in renewable energy are undergoing a significant uptrend globally, driven by both governmental and private sector initiatives.

Europe is likely to be the core of all renewable energy projects as mandated by the EU and has a huge chunk of its investments in climate change objectives. In addition, the G20 leaders have agreed to triple their renewable energy capacity by 2030.

Such projects are typically financed by green bonds specifically designed to fund environmentally friendly projects such as renewable energy projects, sustainable agriculture, and clean transportation.

In the last few years, the popularity of green bonds has surged as investors are interested in their dual benefits of returns and environmental impact. If we look at the numbers, the green bond market grew rapidly and issued green bonds near $500 billion in 2022. That’s not it. Barclays is forecasting a 30% growth trajectory in 2023. So, we can expect a higher issuance of green bonds in the near future.

This means that green bond investments might benefit economies that strategically pivot towards renewable energy.

The combination of renewable energy and the green bond market will create a positive loop of good investment with a better environment, resulting in stronger economies.

Regulatory Changes

Many countries are bringing in stringent environmental regulations, such as carbon pricing and emissions targets, to approach the 2050 net-zero emissions target. Companies that fail to meet these standards are likely to face legal challenges that might also damage their reputation.

It is essential for regulatory authorities to establish consistent environmental standards, particularly regarding carbon pricing and emissions targets across various countries.

This would foster a conducive environment as such frameworks would instil confidence, enhance transparency, and incentivize private investors to invest in sustainable and low-carbon projects.

Conclusion
Going forward, environmental rules and the sustainable investment environment will determine international fund flows. Nations and companies focusing on making eco-friendly moves and making it an integral part of their business might attract more funds from international investors.

The author is Chairman of the Hilshaw Group. Views are personal.