INSIGHTS

It is no secret that last year was tough on sustainability focused funds. Many sustainable funds tend to be overweight technology and underweight energy due to the nature of the businesses within each sector, making technology generally more attractive from a sustainability risk perspective.

While previously this tilting had paid off, the combination of oil prices peaking in 2022 together with the technology sector lagging as interest rates increase, caused the performance of sustainability focused funds to dwindle. Yet, keeping this in mind, last year flow of money into sustainable focused funds stayed positive whilst the wider fund universe saw outflows.

 1. Increased momentum towards renewable energy

The International Energy Agency has predicted based on existing policies changes and regulatory and market reforms, the next 5 years will have the same amount of renewable energy assets built as the last 20 years. The European energy crisis has added fuel to the fire, exposing the true reliance European countries have on fossil fuels, as well as the fast-forwarded agenda to decarbonise and become less reliant on other countries for energy sources. An investment we think will benefit from this transition to renewable energy is iShares Global Clean Energy ETF (ICLN). 

Renewable energy capacity in the next 5 years is set to match the previous 20

2. Raising awareness on biodiversity loss

Biodiversity loss and ecosystem collapse is viewed as one of the top five long-term global risks. To appreciate the scale of impact from biodiversity loss, it has been estimated by the World Economic Forum that more than half of global economic output, approximately $44tn of economic value generation is moderately or highly dependent on nature.

Recently, nearly 200 countries agreed to protect nature through the creation of 23 global targets, including the restoration of 30% of land and ocean by 2030. This should see major changes to supply chains, farming and the role of indigenous communities in conservation. Parts of the agreement will slowly trickle into legislation, however the financial community will be much quicker to act creating opportunities for investors. Brambles (BXB) and L’Oréal (OR) are two companies a step ahead in this space, attempting to minimise and even reverse the impact on biodiversity through sustainable business practices.

3. Greenwashing to decline with increased regulation

For the past decade, sustainable financial products (ETFs, bonds, loans etc) have operated with little guidance, allowing asset managers to advertise their product as sustainable when in reality they are not. The good news is that with incoming regulation, greenwashing is expected to decline.

At the forefront of regulation is the European Union, who have recently implemented its sustainable finance package. As part of the package, there will be mandatory ESG disclosures for all asset managers, regardless of whether or not their financial product has an ESG focus, and strict criteria of what constitutes a sustainable financial product. One fund we think that already has a good advantage with its sustainability themed investing is Impax Environmental Markets (IEM).

4. Increased scrutiny on companies to deliver as sustainability related disclosures grow

Worldwide sustainability, and particularly climate related disclosures are fast becoming the norm with almost every large corporate reporting annually on its climate risks, greenhouse gas (GHG) emissions, emission reduction initiatives and targets.

As part of building sustainability credibility, we think that scrutiny on companies to deliver on climate promises will continue to grow as investors become more aware of the increasing risk of greenwashing. This was observed in the US 2022 proxy season, with 21% of all ESG (environmental, social and governance) related shareholder resolutions filed with the Securities and Exchange Commission (SEC) focusing on climate related topics.

The 2022 US proxy season showed a good variation of ESG related shareholder resolutions

5. Lastly, and perhaps most importantly, we think businesses will need to focus on employee rights

Human capital management may prove to be a challenge in 2023 with a tightened labour market. Attracting and retaining talented staff will continue to be a key issue for most employers. However, ensuring a strong business culture, healthy remuneration, flexible working arrangements, and an emphasis on mental wellbeing will help with the retention of staff. Microsoft (MSFT) is one company that takes its human capital management seriously and as a flow on effect, is one of the most desirable places to be employed globally.