An unavoidable question
With global climate change being a matter of growing concern for many people, Environmental, Social, and Corporate Governance (ESG) has become big and by some measure’s a successful investment movement in recent years.
FAnews spoke to Andy Howard, Global Head of Sustainable Investment at Schroders, about ESG in the investment arena, the trends will we see in 2023 and whether it has become a tick-box exercise or a true risk differentiator.
Tackling critical issues
With the world continuing to emerge from COVID-19 lockdowns, Howard said cracks in economies, societies and environmental ambitions are becoming clearer.
“Looking ahead to 2023 and beyond, the debt legacy from that crisis is limiting governments’ capacity to continue supporting societies through difficult times. We’re likely to see more interventions and business will be expected to play a greater role in tackling critical issues from climate challenges and biodiversity threats to the cost-of-living crises,” he said.
The only way to ensure profitability
The sustainability-focused findings of the Schroders Global Investor Study 2022, which has surveyed more than 23 000 people who invest from 33 locations globally, found that 68% of South Africans who class themselves as having “expert” investment knowledge believe that sustainable investment is the only way to ensure profitability in the long term. This same trend is reflected in the global data, where the same 68% or two-thirds of international investors believed the same.
“Therefore, the future looks like it will play out very differently from the past. In that context, a fund manager’s active management and ability to adapt investment strategies to the challenges and opportunities ahead will be more important to investment performance than ever,” continued Howard.
Important among SA investors
The study, according to Howard, also found that across the world, environmental impact was the main reason people are attracted to sustainable investing. However, investing according to social issues has grown in importance compared with previous years, ranking of second most importance among South African investors.
“Climate change is an unavoidable question. 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,” said Howard.
“Just under half (48%) of global investors and 71% of South African investors from the Schroders Global Investor Study 2022 highlighted that more education around sustainable investing would encourage them to allocate more sustainably. The lack of clear definitions of sustainable investments was cited as one of the most significant barriers to investing sustainably by all knowledge levels. Some 44% of people from the study stated that more data and evidence showing that investing sustainably delivers better returns would encourage them to increase their investments,” added Howard.
What trends will we see in 2023?
According to Howard, these are the trends we will see in 2023:
- Climate change and political will - As we look at 2023, a few areas stand out. The environmental lens is panning out beyond climate change to also encompass nature and biodiversity. 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.
- Natural capital - The role of natural capital and wider biodiversity threats are central. 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. The reality is stark: nature risk is fast becoming an integral factor to investment risk and returns.
- 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. We could see greater pressure on the political systems. This could undermine investors’ faith that political leadership will clearly define priorities, pushing responsibility back to companies and investors like us. 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 our 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 our focus on impact investing continues to grow, active ownership will also be an important component of those strategies. Our own survey 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. Greenwashing headlines have underlined the importance of transparency; and the antidote is honesty, transparency and consistency.
Keeping up has been challenging enough
“For those of us focused on sustainability in the investment industry, the last few years have felt incredibly busy. Keeping up with the scale and pace of regulatory change has been challenging enough,” said Howard.
“Developing the analysis, the models and adapting our engagement with portfolio companies to reflect our deepening understanding of the implications of structural social and environmental trends in the expanding volume of ESG data, all adds to those demands,” continued Howard.
None of this, he concluded, is going to change in 2023.
Writer’s Thoughts
Like Howard mentioned, we’re likely to see more interventions and business will be expected to play a greater role in tackling critical issues from climate challenges. Adapting strategies to the challenges and opportunities ahead will be more important than ever before. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
