Five key themes for sustainable investing:
- Renewable energy
What’s next for renewable energy? How will biodiversity contribute to net zero? What are the major milestones that will solidify this generation’s place in climate history? Burning questions that Downing’s Head of ESG, Roger Lewis, tackles in his latest insight, which summarises the main environmental, social and governance (ESG) themes for 2023.
Much like material changes in investment markets, the economy and real estate cycles are more noticeable over decades rather than individual years, the top sustainable investment themes for 2023 are not dramatically different to 2022, or indeed 2021. Perhaps this is not surprising given the inherently long-term nature of ESG investing strategies.
We are, however, now one year closer to two major 2030 milestones: the initial net zero emissions reduction target, and the newer Montreal biodiversity commitment. This may prompt material changes to the top sustainable investment themes and areas of investor focus up to and beyond the 2030s.
In our upcoming sustainability report, we summarise the top themes for this year into five categories. Energy. Climate. Regulation. Biodiversity. Circularity.
1. Energy: conflicting commitments?
Decarbonising national grids will continue under the first theme: energy. 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
Second, climate. The global stocktake of NDCs* takes place at COP28 in Dubai. The location itself is noteworthy because it’s 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 (Brazil) and fossil fuel burning (Indonesia, India), or mining (Australia). It may reveal whether countries are willing to spend more on green- and clean-tech (US & Europe). COP28 will also signal what the NDCs of other major emitters (China, Russia) may look like.
The breakthrough logic of the Paris Agreement was for each country to drive its own emissions targets. Peer reviews and pressure ensure these are ambitious enough to mitigate climate change and limit warming. This logic will be tested in November 2023 at COP28 and 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, SFDR should continue to gain momentum as asset managers focus on launching or re-classifying funds as light or dark green (known as Article 8 or 9.) SFDR is a significant aspect of the third major theme of regulatory scrutiny - 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 - one recent example is Amundi, which you can read more about here.
An acid test new 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 £20bn 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
Fourth is the ‘little brother’ of COP. COP27 was front-page news, but there was another COP that concluded in December 2022. This is 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 nature as there is with climate change (emissions), 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% 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 (TNFD) framework for disclosures will help and should evolve over 2023 with testing and pilots ahead of formal launch.
5. Circularity: tying it all together
The final theme is circularity. 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?
Downing remains very active in all the above. Our own milestones for 2023 include investing in renewable energy infrastructure; contributing to collaborative engagements on further integrating emissions, biodiversity and circularity to our investments; and being an active owner for the three M’s (measure, monitor & manage) of sustainability risk and opportunity. And, of course, transparency and reporting outcomes on what we have achieved.
So, five themes, four important signals – the Green Finance Strategy, COP28, the DWS verdict, TNFD – and one exciting year for sustainable investors.
* Nationally Determined Contributions are a core component of the Paris Agreement 2015: each country sets its plans for emissions reductions that it intends to achieve