La Française Sustainable Investment Research
In 2022, ESG remained in the spotlight. Given economic turmoil, the war in Ukraine, stubbornly high inflation, shifting investor, political and regulatory sentiment across the globe, the ESG space has been marred with news, controversies, and debates. As sustainable investors, we are so to speak stuck between a ‘rock’ (fund performance & alpha generation) and a ‘hard place’ (evolving regulations and policies). In 2023, we expect the generic term ‘ESG’ to be completely rewired, taking on a whole new meaning well beyond traditional Environmental, Social and Governance criteria.
E - for Evolution, Engagement and Environment The term ‘ESG’ came under scrutiny during 2022.
While in the US, we saw a growing conservative backlash to ESG investing, rising energy and food prices will continue to raise the question of sustainability vs security across the world. But these developments need not be considered as headwinds to ESG investing. It is, on the contrary, the catalyst we need for change. ESG must evolve from a niche strategy to an overarching investment philosophy. In 2023, we expect asset managers, companies and regulators to broaden the scope of ESG and further enforce regulations.
In 2023, we expect a growing focus on engagement and stewardship among investors. Investors need to act as partners with their investee companies in order to generate a meaningful impact on overall returns and portfolio value. A major obstacle to investors effectively deploying their influence as active owners and to delivering long-term value is the limited resources that the investment industry currently dedicates to stewardship. To address this, the Principles for Responsible Investing (PRI) have launched a ‘Resourcing for Stewardship project’ to research and assess the appropriate level of resources that institutional investors should be prepared to dedicate to stewardship activities and to address systemic sustainability issues. The increase in the number of collaborative initiatives being launched to address these issues – PRI Advance (human rights), Nature Action 100 (Biodiversity) – should continue.
The concept of environmental sustainability is no longer synonymous with climate change. It is now commonly accepted that climate action is doomed to fail unless the negative externalities on biodiversity, water, and waste (circular economy) are addressed. The UN Biodiversity Conference in December brought nature into the limelight, while COP27 dedicated specific days to Biodiversity and Water issues. The second and third sessions of the Intergovernmental Negotiating Committee (INC) to develop an international legally binding instrument on plastic pollution will take place in 2023, with an ambition to deliver the document by the end of 2024. We expect more investments to be redirected to natural capital and circular economy strategies, and their interplay with climate transition.
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