With the world continuing to emerge from Covid-19 lockdowns, cracks in economies, societies, and environmental ambitions are becoming clearer. Looking ahead to the sustainability outlook for 2023 and beyond, the debt legacy from that crisis limits governments’ capacity to continue supporting societies through difficult times.
We’re likely to see more interventions, and businesses will be expected to play a greater role in tackling critical issues, from climate challenges and biodiversity threats to the cost-of-living crises. In short, 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.
Sustainability Outlook For 2023: Five Trends To Watch
1. Climate Change And Political Will
First, climate change is an inevitable question. All investors are exposed to the impact, not just of global warming and environmental damage, but of political and economic action to tackle their causes. Investors must make sure any exposures to these risks are contemplated and managed alongside opportunities in solutions to the climate challenge.
At Schroders, we committed to transitioning toward net zero over the coming decades, including setting a Science-Based Target, validated by the Science-Based Targets initiative earlier in 2022. But setting a target is the easy part. How we, and other businesses, decarbonise is critically important to the value we will create for our clients. Our Climate Transition Action Plan outlines our roadmap.
Political momentum 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. In November, the COP27 climate summit in Egypt 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.
Our focus has been on using our voice and influence to engage the most exposed companies and pushing them to lay out transition plans. In the year ahead, we will be intensifying those efforts.
2. Natural Capital
In that context, 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.
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.
3. Cost Of Living And Other Social Stresses
At a human level, a cost-of-living crisis has taken a 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 protect vulnerable workers – whether through wage increases and benefits for their 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 ourselves. 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. These are core themes for active ownership for us at Schroders.
4. 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. We published our Engagement Blueprint early in 2022, laying out our expectations of the companies we invest in and plan to build on that foundation in the future.
As our focus on impact investing continues to grow, active ownership will also be an important component of those strategies. Our survey of more than 700 institutional investors in 2022 found that 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.
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; the antidote is honesty, transparency and consistency. For example, ahead of COP15, we’ve signed Business for Nature’s Make it Mandatory campaign, calling on mandatory disclosure for all large businesses and financial institutions of nature-related impacts and dependencies from 2030.
We are determined to help our clients navigate our investment products and understand what they can expect from different strategies.
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. Developing the analysis and 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 add to those demands.
None of this will change in 2023, and there you go with the sustainability outlook for 2023.
Andy Howard is the global head of Sustainable Investment at Schroders.