What are the main market risks for sustainable finance?
The ESMA highlights in its Trends, Risks and Vulnerabilities Report the major market developments to compare them across market and over time, including a specific focus on sustainable finance.
In spite of the unstable economic environment, geopolitical conditions and high inflation, ESG markets keep growing, showing great resilience and further opportunities for 2023:
- Net-zero commitments have come under scrutiny after the recent energy crisis, as the greater use of coal as substitute for Russian gas has driven up emissions from energy consumption.
- Recent streams of controversies regarding climate pledges and greenwashing from financial institutions has fostered public scepticism, and rebuilding trust will require serious transparency efforts.
- After many funds relabelling their SFDR status over 2022, article 9 funds keep attracting investors in spite of the recent downgrade of many of them to article 8 before January 2023's reporting (see picture).
- Sustainability-linked bonds still struggle to prove they contribute to more sustainable projects, as penalties and coupon rates remain uncorrelated and most of these bonds still include a call option.
Beyond sustainable finance, many risks remain at the highest level: uncertainty and low market liquidity are limiting the resilience of the financial system against external shocks.
Investors should therefore be prepared for further market corrections resulting from this fragile market environment, with sustainable finance standing out as a rather stable field.