Andy Howard, Global Head of Sustainable Investment at Schroders, considers five trends he sees for ESG in 2023.
Climate change and political will
All investors are exposed to the impact, not just of global warming and environmental damage themselves, but of political and economic action to tackle their causes. Investors must make sure any exposures to these risks are considered thoughtfully and managed alongside opportunities in solutions to the climate challenge.
Political momentum clearly slowed in 2022, but importantly the private sector continues to push ahead, helping close some of the gap between the ambitions global leaders have laid out and corporate readiness for transition.
The COP27 climate summit in Egypt in November did little to cement global commitments to action. That said, agreement on a “loss and damage” fund to help developing nations should ease one key challenge to delivering the changes needed to reach the goals laid out in Paris in 2015. Attention will turn to COP28 in the UAE later in 2023.
Natural capital
Climate threats are symptomatic of the structural and growing tensions between escalating demand from a larger, wealthier and hungrier global population and the world’s finite resources to support that population. Today we use resources equivalent to those provided by 1.7 Earths every year, pushing us further into natural capital deficit and intensifying the threats degrading global ecosystems create.
By some estimates, roughly $10 trillion of natural capital value is lost every year, underlining the hidden liabilities building in the global economy.
The reality is stark: nature risk is fast becoming an integral factor to investment risk and returns. That’s why we released our first company-wide Plan for Nature in late 2022, drawing together our action to date and setting a future direction for the action we are taking to tackle the causes and implications of nature loss.
Cost of living and other social stresses
At a human level, a cost-of-living crisis has taken grip in many countries and while the most acute pressures may abate in 2023, poverty is a threat we will be monitoring. Few governments have the fiscal capacity to absorb shortfalls in household budgets and social stresses could intensify. Companies are coming under pressure to ensure vulnerable workers are protected – whether through wage increases and benefits for their own employees or their responsibility to workers in supply chains.
While climate change and nature have dominated headlines, particularly in the run-up to COP27 and COP15, we expect a bigger focus on social issues, including human capital management, human rights and diversity and inclusion in the new year.
Active ownership and impact
As the forces shaping value in financial markets multiply, stock-picking will be only a partial solution. Our ability to engage with the companies and assets in which we have invested will be a critical lever and a necessary one to create value for clients.
Few companies are prepared for the world we are heading toward and encouraging or pushing them to adapt will be important to protect their value. As the focus on impact investing continues to grow, active ownership will also be an important component of those strategies.
Our own survey of more than 700 institutional investors in 2022 found around half (48%) are focusing on the impact of their investments, up from about a third (34%) in 2020. We expect that trend to continue.
Regulation
These trends are playing out against a backdrop of an industry under more intense scrutiny and scepticism than ever. Regulation is spreading from the EU to other parts of the world and demands for transparency and clarity in product promises are rightly likely to increase.