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Four sustainable investment themes for 2023

13 January 2023

Last year brought a number of new sustainability challenges, from devastating wars to energy security and the cost-of-living crisis. The issues affecting people – through displacement and migrations – and the planet – through higher emissions and more extreme weather events – were unprecedented.

Royal Exchange

Siobhan Archer, Sustainable Investing Specialist

2022 was the hottest year ever recorded for the UK, with summer temperatures exceeding 40⁰C in some places in the UK, and the winter brought with it floods and stormy conditions. 

However, importantly, these issues also brought opportunities: energy security worries created accelerations in the adoption of renewable energy technology, innovation in energy efficiency measures and a renewed commitment to climate through COP27 (the annual climate conference).

2023 is likely to only accelerate the importance of sustainability issues, so what will be the key sustainable investment trends in 2023 to look out for? We outline the four themes that we think the new year will bring greater attention to.

Climate remains #1 issue for businesses, governments and investors

With over 4,000 issuers now committed to net-zero[1], representing 35% of global market cap, it is no surprise that the climate remains the top priority for 2023. As these trends advance, we can see new areas beginning to emerge:

  • Net-zero portfolios are not enough: net negative will be the new gold standard. As investment managers ramp up their actions on climate, clients will look for their wealth managers to go a step further than offsetting emissions, and invest in technology which will remove and reduce CO2 emissions: think LGT’s ten-year partnership with Climeworks[2]. Within their investment portfolios, clients will be looking for specific net-zero enablers, businesses that not only have low emissions themselves but ones that are investing in negative emissions technology or natural capital solutions to sink carbon. We expect to see more on avoided emissions or the newly coined ‘Scope 4’.
  • Climate adaptation: the theme of COP27 was moving from mitigation (the lowering of emissions) to adaptation and resilience. Increased flooding, food shortages, extreme heat, wildfires, and other developments are already proving calamitous for millions of people worldwide.8 Businesses are hardly immune to this pain. A group of nearly 7,000 companies reporting to the Climate Disclosure Project estimated that they faced nearly US$1 trillion in climate change-related risks, many of which they assessed were highly likely to occur and would affect them in the next several years.[3] Climate change adaptation is about business resilience. Without adaptation, businesses will not be in the position to survive.

Biodiversity and nature-based solutions

Halting and reversing nature loss by 2030 is a requirement for achieving net-zero by 2050, so the increased attention to the topics of natural capital and biodiversity has been warmly welcomed. December 2022 saw the 15th UN Conference of Parties on Biodiversity held in Montreal Canada, moved from its initial location of Kunming, China, due to COVID restrictions. Many left the pivotal meetings with a renewed sense of optimism following the agreement of a ground-breaking new Global Biodiversity Framework, including a monumental target to “protect and restore 30% of land and sea by 2030”, now dubbed the 30 by 30 target.

The framework includes other important milestones such as cutting global food waste in half to reduce overconsumption and waste generation, as well as reducing the pesticides and hazardous chemicals used in mass scale farming. Wealthy nations also committed to pay an estimated $30 billion a year until 2030 through the creation of a new biodiversity fund created under the Global Environment Facility, with investments due to be made into national parks, agriculture and nature-based barriers to the effects of climate change (e.g. mangroves and forests as flood prevention).

New standards to fight greenwashing

With statements like “one in every three dollars is managed in a sustainable strategy”[4] and Tariq Fancy’s infamous “Secret Diary of a ‘Sustainable Investor’”[5], there is no doubt that greenwashing claims have grown and, with them, calls for stronger regulation.

In 2021, The Chancellor’s Mansion House speech announced a new regime for the classification of sustainable investments in the UK: the Sustainability Disclosure Requirements (SDR). In November 2022, we saw the first proposals for SDR come through. The FCA’s regulation looks to curb greenwashing and applies to pension schemes, investment products and asset managers and owners, extending to product distributors and investment managers.

The new regulation includes both a disclosure regime, requiring firm and product-level reporting on sustainability, as well as a labelling scheme, allowing retail and professional investors alike to understand the sustainability approach of the fund or product. The proposal also includes a ban on marketing materials with no label from using words like “green”, “sustainable” or “ESG” as well as an interesting additional disclosure on “unexpected” investments, allowing clients to really see what is under the bonnet of their sustainable portfolio.

People remain at the centre of the green transition

As we move to a low carbon economy, many have called for a ‘just transition’ ensuring that the benefits and societal changes are evenly distributed across societies and that lower income populations do not lose out economically.

Placing this just transition within policy is key, and we have seen a focus on social issues in the European Union’s Green Deal and across President Biden’s Inflation Reduction Act (formerly Build Back Better Act). This emphasis on the social side is not going anywhere: here in the UK we have seen a wave of strikes and stronger demands from workers. From train workers, postal officers to nurses, strikes have now become a common tactic in workers’ toolboxes to combat rising inflation and the cost-of-living crisis. In Pakistan, dangerous flooding has affected over a third of the country with over 10 million people being displaced[6] from their homes. Overall, the UN High Commissioner for Refugees predicts there could be 1.2 billion climate refugees by 2050, forced to leave their homes due to flooding, storms, wildfires and extreme temperatures.

As the world becomes more aware of social inequalities – not only pay packages and working conditions but also home environments – these strikes could be a premonition of what is likely to come in terms of people risk. 

[1] https://unfccc.int/climate-action/race-to-zero-campaign#eq-4 

[2] https://www.lgt.com/asia/en/news/lgt-and-climeworks-sign-ten-year-co2-removal-agreement/

[3] https://www.cdp.net/en/articles/media/worlds-biggest-companies-face-1-trillion-in-climate-change-risks

[4] https://www.bloomberg.com/news/articles/2021-08-18/-35-trillion-in-sustainability-funds-does-it-do-any-good

[5] https://www.dropbox.com/s/bvskswxwkro41rh/The%20Secret%20Diary%20of%20a%20Sustainable%20Investor%20-%20Tariq%20Fancy.pdf?dl=0

[6] https://www.iom.int/news/nearly-10-million-people-displaced-pakistan-iom-urges-sustained-humanitarian-assistance-pace-shelter-distribution-increases

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