Sustainable Finance Round Up Part 2: 2023 Sustainability Outlook

Sustainable debt will likely continue to be resilient relative to the broader bond market. TD Securities strategists project a mixed market outlook ahead for North American and European economies. Following the positive trendline in volume since 2018, sustainable debt activity across Europe is expected to labor under persistent elevated interest rates and inflation, while activity in the U.S. and Canada is anticipated to rebound. Carbon markets will likely continue to grow in prominence – gaining participants who are pushing for quality, responding to near-term incentives, and hedging against the risk of rising carbon prices. For 2023, there are six themes to watch.

Energy Transition

Energy security concerns and regulatory incentives are anticipated to drive diversification in the renewable supply mix with further growth of "in-country" production capacity across regions. With high interest rates and inflation remaining high, energy transition is being used to mitigate the energy crisis. Investors flows demonstrate a persistent focus to allocate capital towards energy transition opportunities. We do not see this changing in 2023 or in the near-term.

Nature & Biodiversity

In Q4 2022, COP15 was dedicated to negotiating common metrics to measure and manage impact on nature and biodiversity globally. The conference ended with a call to action by market participants, governments, companies, and investors. In 2023, the protection and restoration of natural ecosystems and their biodiversity will stay top of mind. With issuers responding to regulatory and investor demand for ambitious targets, this topic could come up more in KPI discussions.

Regulation

In 2023, the U.S. Securities Exchange Commission is expected to announce a decision on climate reporting requirements anticipated to inform the Canadian Securities Administration, potentially facilitating consistency across North America. In addition, the ECB and other central banks discussed climate-based capital requirements, something that Canada and the US are now also considering. In 2023, more countries may implement mandatory climate and ESG-related disclosure, but regulatory inconsistencies could remain across jurisdictions throughout the year.

Defensible Strategies

With growing concerns around greenwashing, we anticipate investors will increasingly look to design defensible strategies and as a result expect more of issuers. We expect improved ESG disclosures will expose companies to increased climate litigation risks. In response, investors will require strategies to legally protect themselves from greenwashing accusations.

Private Markets

While macro strategists largely project interest rate hikes to slow, there is no path back to the exceptionally low interest rates of pre-COVID. As regulatory bodies work to finalize reporting requirements (e.g., SEC, CSA, and others), we anticipate private markets will continue to expand into the ESG universe, attracting more capital and driving product diversification.

Carbon Markets

2022 saw more involvement by financial institutions in carbon markets to hedge risk. With the regulations such as the EU's CBAM, with impacts beyond their jurisdiction, there is an anticipation that there will be no place to hide for negative environmental externalities. Regulated markets, such as Canada, UK, Europe, and across APAC will require trade partners to fall in line for business. In 2023, we expect carbon markets to grow supported by increased standardization, stronger demand for offsets and higher carbon prices. More countries are anticipated to launch emissions trading schemes.

TD Securities' ESG Solutions team is the centralized ESG expert resource, delivering financing advisory services, thematic and investor insights, and carbon markets solutions to help clients reach their goals.

Our ESG Insights series presents clients with thematic trends, investor perspectives, as well as sheds light on carbon, debt, and equity capital markets, and more.