Every week there are reflections and learnings in the world of sustainable investing. The events of 2022 and the understandings of the post-pandemic landscape are massive forces shaping the standards of 2023 and beyond. But what can we expect from 2023? When it comes to sustainable investing, there are emerging trends. Most notably:
- Focus on impact
- ESG under inspection
- Climate risk and net-zero
- Green energy transition
- TCFD reporting
- Active ownership
- Activists joining forces
1. Focus on impact
Investors understand the need to drive capital to impactful solutions to tackle today’s crises. What’s more, is that people understand that sustainable investing strategies don’t all do this the same way or to the same extent. From socially responsible investing (SRI) to ESG investing, companies making a positive impact are slipping through the cracks. SRI only screens out the bad guys and ESG assesses the financial risk posed by environmental, social, or governance issues – these approaches focus on reducing harm rather than increasing positive solutions. Impact investing combines financial returns and intentional and measurable positive impact and is a sustainable investing strategy to watch. In 2022, the impact investing market hit $1 trillion, and it has been increasing ever since. Investors want to see that their investments are making a difference in the world, and impact investing is rising to the challenge.
2. ESG under inspection
After the politicization and anti-ESG fallout in 2022, what can we expect for 2023? Despite the headlines, there seems to be a resilience of ESG frameworks. So perhaps ESG is here to stay, but investors are keeping a closer eye on things. Not only are people scrutinizing which companies make the cut for a “best in class” ESG fund, but also investors will apply greater scrutiny to how the scores are calculated. For example, how do the likes of Chevron and Exxon Mobil make it into the leading ESG funds? The bar is being raised, and ESG funds will have to adjust too.
3. Climate risk and net-zero
We are seeing public policy developments that demand efforts from councils, businesses, and infrastructure to mitigate climate risks and pursue a net-zero path. Companies will have to adjust to the legislation their operations reside in, whether on a state-by-state basis or overseas. Prime example, California has proposed a new bill requiring companies to disclose total value chain emissions. Businesses will have to wise up and start taking these things seriously if such laws come into effect.
4. Green energy transition
If it wasn’t clear before, it certainly is now – we need to transition to green energy. Whether it’s the horrific reality of climate change, the risks of geopolitics and single-state monopolies on energy resources, or the energy crisis in the face of recording break profits from oil companies. Something needs to change. It won’t happen overnight and will need to occur at a pace that doesn’t cripple any one country or state’s economy, but to address the climate crisis, a green energy transition must occur. It will require a divest-invest strategy that pulls capital away from fossil fuels and into renewable energy, but it is necessary.
5. TCFD Reporting
Across the globe, sustainability reporting standards are tightening and becoming mandatory. In 2022, the European Financial Reporting Advisory Group (EFRAG), the U.S. Securities and Exchange Commission (SEC), and the newly formed International Sustainability Standards Board (ISSB) drafted various proposals for disclosure standards relating to sustainability or climate-related issues. The final drafts of these standards should be adopted in 2023. In all of these, the TCFD (Task Force on Climate-related Financial Disclosures) framework is referenced for climate-related issues; however, there remain differences in their requirements for meeting this framework. Since 2017, TCFD has seen a steady increase in disclosures that is anticipated to continue. In 2023, we can expect companies and investors to prepare for reporting under several different guidelines and complex sustainability disclosure standards and adapt as the frameworks evolve. Hopefully, this translates to better transparency in business operations allowing investors to be informed about their investment choices.
6. Active ownership
Active ownership is a strategy whereby investors can use their shareholder rights to make changes from within the companies they are invested in. As You Sow is the leading shareholder advocacy organization that engages with global corporations on critical issues, including climate change, racial justice, and environmental health, among many others. They mobilize the power of shareholder advocacy to build coalitions and push for change within corporations. In other words, they represent people who own equities in a publicly traded firm to raise important issues to management, advocating for change from the inside. As You Sow’s 2022 Shareholder Impact Review provides an excellent overview of the various shareholder advocacy wins, and working progresses the non-profit has led. Advocacy will be a crucial strategy for investors driving change in 2023.
7. Accountability and activists joining forces
In recent exciting news, 2023 kicked off to a great start, with ClientEarth revealing they are taking Shell to court. ClientEarth is the world’s first law firm solely representing the Earth as their client (as the name suggests!), which is taking oil company Shell to court over the mismanagement of the climate crisis. They are utilizing the U.K. Companies Act and the board’s duty to mitigate future risks to the business’s success as a way to join law, finance, and environmentalism to force these companies to change. If you hold shares with Shell, they have a section on the website advising shareholders on what this court case would mean for them. Regardless of the outcome of this case, we can only expect to see more examples of accountability and joined forces across industries to make a change, whether that’s finance and the public sector, law and policy, or grassroots and shareholder advocacy. We can and will make a change, especially when we come together.
It’s an exciting time in sustainable investing and as you can see, change is coming. To learn more about the fundamentals of sustainable investing check out our thorough guide What is Sustainable Investing? . See what all the fuss is about and understand in greater detail where these investment trends are coming from!
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Footnote 2: FLIT Invest does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
