Focus On 2023 Outlook For Sustainable Investors – Downing

Editorial Staff 27 January 2023

Focus On 2023 Outlook For Sustainable Investors – Downing

Roger Lewis, head of ESG at Downing, a sustainable investment manager, outlines what 2023 is likely to hold for sustainable investors.  

With ESG being a key theme in the wealth management industry, Roger Lewis at Downing looks at key themes for sustainable investing, highlighting what’s next for renewable energy and how biodiversity will contribute to the net zero goal.

He also discusses the major milestones that will solidify this generation’s place in climate history.

Although the move away from fossil fuels, for example, has taken a more challenging turn since the spike to energy prices in 2022 before and during the Russian invasion of Ukraine, the ESG/sustainability narrative continues to be a dominant theme in the wealth management industry. 

Important matters include client reporting on ESG and ways to avoid problems of so-called "greenwashing" – a topic that has also drawn attention from financial regulators.

Lewis believes that the top sustainable investment themes for 2023 are not dramatically different from 2022, or indeed 2021 – perhaps not surprising given the long-term nature of ESG investing strategies.

We are, however, one year closer to two major 2030 milestones: the initial net zero emissions reduction target, and the newer Montreal biodiversity commitment. Lewis thinks that this may prompt material changes to the top sustainable investment themes and areas of investor focus up to and beyond the 2030s.

In view of Downing’s upcoming sustainability report, Lewis discusses the top themes for this year in the following five categories, namely renewable energy, climate, regulation, biodiversity and circularity.

1. Energy: conflicting commitments?
Decarbonising national grids will continue under this theme, Lewis said. Initiatives include increasing renewable power capacity while lowering cost from economies of scale; remedying intermittency with technological advancements in long duration energy storage, nuclear and hydrogen; and maintaining the ‘gas-as-a-transition-fuel bridge’ party line.

However, new risks not foreseen in January 2022 were the government U-turns and a retreat of environmental commitments, including net zero, in response to energy security priorities. This can be formularised as war = coal. 

Viewed as more immediate, these priorities become more urgent than climate change, which might be seen as something that won’t be felt until the second half of this century. Following a call for evidence in October, the UK government’s updated Green Finance Strategy will signal future climate commitments.

2. Climate: shining a light on progress
The global stocktake of Nationally Determined Contributions takes place at COP28 in Dubai. They are a core component of the Paris Agreement, where each country sets its plans for emissions' reductions that it intends to achieve. The location itself is noteworthy because it is a major oil nation promoting green initiatives. 

COP28 too will provide important climate signalling. It will shine a light on whether countries, their voters and major corporations, are willing to slow deforestation in Brazil, fossil fuel burning in Indonesia and India, or mining in Australia. It may reveal whether countries in the US and Europe are willing to spend more on green-and clean-tech. COP28 will also signal what the NDCs of other major emitters like China and Russia may look like.

The breakthrough logic of the Paris Agreement, which will be tested in November 2023 at COP28, will prove to be a major climate milestone this year.

COP28 sits alongside the continuing integration by investors of physical and transition risks into ESG research, reporting and understanding portfolio emissions. Investors are also engaging on subjects like net zero ambitions, GHG reduction targets, strategy, capex, lobbying, governance and TCFD disclosures.

3. Regulation – SFDR: transparency and credentials
In the EU, the Sustainable Finance Disclosure Regulation should continue to gain momentum to protect against so-called “greenwashing,” as asset managers focus on launching or re-classifying funds, known as Article 8 or 9. 

Lewis believes that SFDR is a significant aspect of the third major theme of regulatory scrutiny, arguing that the objectives of SFDR are important in order to demonstrate transparency and ESG credentials. However, there have been examples of asset managers voluntarily demoting their funds from Article 9 given the obligation this creates.

A new acid test for 2023 will be the quality of periodic disclosures, taxonomy alignment and adverse impact indicators from 2022 that many will have to report on for the first time this year.

Another regulatory acid test expected this year is the outcome from the investigation of DWS for its greenwashing accusations, as this may set a precedent for future.

But policymakers don’t just provide scrutiny. The prime minister’s plan to build an innovative economy includes £20 billion ($25 billion) for artificial intelligence and life sciences, which can bring societal benefits.

In his New Year speech, the PM also highlighted the importance of green technology in delivering positive environmental progress. All are opportunities for venture capital investors seeking return and diversification, alongside ESG.

4. Biodiversity: natural capital
COP27 was front-page news, but there was another COP that concluded in December 2022. This was the ‘Conference of the Parties to the Convention on Biological Diversity’, or COP15 on biodiversity, which took place in Montreal.

While there is no single villain for the destruction of nature or for climate change, a proper environmental strategy should consider the complexities of natural capital plus climate, net zero, air, water, carbon and waste as one framework – rather than individual, siloed solutions.

The Montreal Agreement’s objectives include protecting 30 per cent of land and oceans, providing a Global Biodiversity Fund to finance these objectives, and promoting disclosures. These are important for policymakers, corporates and investors – all of whom have a role to play in monitoring implementation and progress of the Agreement ahead of the next COP on biodiversity in 2024. 

For investors specifically, this role includes using the power of a louder voice through collaboration and engaging with other investors through the new Nature Action 100 initiative and integrating biodiversity impacts of assets to investment activity. The taskforce on Nature-related Financial Disclosure framework for disclosures will help and should evolve over 2023 with testing and pilots ahead of the formal launch, he said.

5. Circularity: tying it all together
This can be viewed as a major component within the themes above. Regulatory policies can be expected, including from China. These will help to promote the regeneration of natural systems, designing out waste and keeping materials in use for as long as possible – with tech and data enhancements acting as an important enabler. These are all massive improvements on old ‘take, make, waste’ models of production.

Achieving circularity contributes to mitigating and adapting to climate impacts. Increasing focus on Extended Producer Responsibility as an area for investment and engagement activity will help this theme progress over 2023. Thinking about Scope 3 – the category for greenhouse gas emissions – who is responsible for the total lifecycle of a plastic bottle, including stages such as cracking hydrocarbons to make it, consuming its contents and handling what happens next?

Looking ahead
Downing remains very active in all the above, Lewis said. The firm’s own milestones for 2023 include investing in renewable energy infrastructure; contributing to collaborative engagements on increasing the integration on emissions, biodiversity and circularity to our investments; and being an active owner for the three M’s (measure, monitor and manage) of sustainability risk and opportunity. 

So, five themes, four important signals – the Green Finance Strategy, COP28, the DWS verdict, TNFD – and one exciting year for sustainable investors.

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