Sustainable Investing Trends to Watch in 2023
To kick off 2023, we are watching five sustainable investing themes that we believe will be critical in the coming months.
Notably exempt from these trends is the politicization of sustainable investing, particularly the term ‘ESG’. We’ll address that topic throughout the year, but for now, we’re focused on the reality that the investment landscape and financial advice continues to evolve, and sustainable investing is intrinsically part of that evolution.
Lost in translation: regulators demand transparency
2022 was a confusing year for investors. U.S. regulators proposed new rules to improve transparency within fund disclosures for sustainable investment approaches, and globally, the EU, the U.K., China, and others developed their own frameworks to achieve similar goals. In the U.S., we expect the SEC to finalize rules, based on comments received from industry participants, in the first half of this year.
Clarification around what investment managers should be disclosing, and consistency in what’s being disclosed, will give investors the information they need to find investment opportunities that align with their sustainability related goals.
With concerns around greenwashing crowding the media headlines, remember that ESG is just more information and we need to stop conveniently oversimplifying ESG. These developments are a rite of passage for any new big investment theme and are a sign of maturity across the sustainable investment landscape.
Let’s get explicit: what’s your flavor?
Surveys show that advisors are planning to increase their client allocations to sustainable investing1. With this shift, it’s imperative that we understand the wide range of approaches to sustainable investing, in order to implement the approach that meets client sustainability goals with aligned and demonstrable outcomes. Each investor will have their own set of sustainability related objectives, whether it’s to minimize risk, to achieve impact, or some degree of both. Does your client want to invest in a world that’s changing, or invest to change the world? As investors gain more clarity on which approaches align with which specific intended outcomes, concerns around greenwashing will lessen.
What we need to make this work:
Advisors: need to be better educated on the wide range of sustainable investment approaches so that they can identify solutions that match client motivations.
Asset Managers: need to be more transparent in translating the intent of their investment philosophies and tying that to specific outcomes, using clear and consistent language. Regulation will help with this.
Investors: need to know their “why” and what their sustainability goals are with their portfolio.
Race to net zero: show me your transition plan
The private sector captured countless headlines with net zero climate pledges last year. In 2023, we’ll be following how those pledges translate to plans, how those plans get implemented, and what gets measured along the way.
And, equally important, how will those pledges become investment opportunities? Which companies will come out on top in the transition to a low carbon economy? The watershed $370 billion Inflation Reduction Act will catalyze these shifts, as will scientific breakthroughs and technological advancements. Developments in solar, wind, carbon capture technology, green hydrogen, and nuclear fusion are promising and exciting. Decarbonization will require electrifying everything we can, while also decarbonizing the power grid. And for everything that can’t be electrified, use of alternative fuels like biofuels and green hydrogen will become essential. Capital is already steadily flowing, with asset managers launching new decarbonization, energy transition, and climate-oriented funds, targeting issues like agriculture and water.
Companies are taking meaningful steps to decarbonize their operations, supply chains, and products and services – and are viewing these efforts as a value creation strategy, by delivering cost reductions, efficiencies, and enhancing resiliency. S&P data shows that over 90% of the world's largest companies will have at least one asset financially exposed to climate risks such as wildfires or floods by 20502. This isn’t some distant far off concept. When evaluating the risks of climate change impacts, scenario analysis of both transition and physical risks are becoming more frequent.
Beyond climate: nature as an investment opportunity
Natural capital is undoubtedly part of the path to decarbonization. At the U.N. Biodiversity Conference (COP15) in December, governments reached an historic agreement to collectively commit to conserve at least 30% of lands and waters by 20303. The UN Environment Programme and the World Economic Forum have also estimated that the world needs $8.1 trillion investment in nature by 20504. And 50% of the global GDP is dependent on nature5. Biodiversity loss and ecosystem restoration are quickly gaining more traction as areas of investment risks and opportunities.
In our conversations with investment managers, some key themes they’re focused on are agriculture (regenerative agriculture, land degradation, food systems), forest-based solutions (management, conservation and restoration), and fisheries and aquaculture solutions.
Natural capital and biodiversity can be incorporated into investor portfolios through:
- ESG integration: allocate to fund managers that have an investment approach that considers the risks of biodiversity loss to companies.
- Values alignment: avoid investment in companies that are involved in, for example, the production or use of palm oil, a major driver of deforestation, or extraction of fossil fuels, which result in habitat loss and pollution.
- Impact: allocate to fund managers that seek to capture investment opportunities in targeted nature based solutions.
Your voice matters: making voting personal
The proxy voting process is antiquated and ripe for an overhaul. Technology is now making it easier and more accessible for investors to execute on their voting power.
Blackrock, Vanguard, Schwab and State Street have already made moves to give investors the power to engage more directly in how shares held in the funds they own are voted. Larry Fink is calling it a shareholder democracy revolution. While these tools are initially being offered to institutional investors, operational and technical barriers are being addressed in order to give individual investors access to personalized voting as well. This type of access gives investors choice – a seat at the table, if they want it – to inform the strategic direction of the companies they are invested in.
In 2023, we expect to see continued innovation to better serve the individual investor, leveraging technology to streamline the process operationally, and further enhance the ability to customize voting preferences. There is some evidence building that investors that feel more connected to their money are more likely to stay invested in volatile markets. Putting the voting power in investor hands, demonstrating that ownership, is one way to achieve that connection.
1 Cerulli Report—U.S. Environmental, Social, and Governance Investing 2022
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