Faced with increasing challenges, Andy Howard, global head of sustainable investment at Schroders, discusses the future of ESG and impact as it matures and evolves across asset classes and geographies.
As the world emerges from Covid-19 lockdowns, Andy Howard from Schroders, the UK-listed investment manager, believes that the cracks in economies, societies and environmental ambitions are becoming clearer to see, requiring more efforts from business to come up with answers.
According to Howard, the debt legacy from that crisis is limiting governments’ capacity to continue supporting societies through difficult times.
“We’re likely to see more interventions and business will be expected to play a greater role in tackling critical issues from climate challenges and biodiversity threats to the cost-of-living crises,” he said last week.
“In short, the future looks like it will play out very differently from the past. A fund manager’s ability to adapt investment strategies to the challenges and opportunities ahead will be more important to investment performance than ever,” he said.
Here are five sustainability trends that Schroders thinks are important to watch in 2023 and beyond:
1. Climate change and political will
The COP27 climate summit in Egypt in November did little to cement global commitments to action. That said, agreement on a “loss and damage” fund to help developing nations should ease one key challenge to delivering the changes needed to reach the goals laid out in Paris in 2015. Attention will turn to COP28 in the UAE later in 2023.
The private sector plays a key role here, helping to close the gap between the ambitions global leaders have laid out and corporate readiness for transition, Howard said.
“Our focus has been on using our voice to engage the most exposed companies and pushing them to lay out transition plans. In the year ahead, we will be intensifying those efforts,” he said.
2. Natural capital
The role of natural capital and wider biodiversity threats are seen as being central to climate change.
Climate threats are symptomatic of the structural and growing tensions between growing demand from a larger, wealthier and hungrier global population and the world’s finite resources to support that population. By some estimates, roughly $10 trillion of natural capital value is lost every year, underlining the hidden liabilities building in the global economy.
Howard thinks "nature risk" is fast becoming an integral factor to investment risk and returns, and highlighted Schroders' Plan for Nature, which sets out focus areas to help the firm minimise nature risk in investment portfolios and help make nature-based solutions more investable. This includes engaging with companies to reduce their exposure to nature risk and deliver positive impacts on nature. ("Nature risks" are risks recognised in risk management that are related to the loss of natural assets, such as species of flora and fauna.)
3. Cost of living and other social stresses
The cost-of-living crisis has taken a grip on people in many countries and, while the most acute pressures may abate in 2023, he sees poverty as a threat to keep an eye on. Howard thinks few governments have the fiscal capacity to absorb shortfalls in household budgets and social stresses could intensify.
“Companies are coming under pressure to ensure vulnerable workers are protected. There could be greater pressure on the political systems. This could undermine investors’ faith that political leadership will clearly define priorities, pushing responsibility back to companies and investors,” he said.
While climate change and nature have dominated the headlines, particularly in the run-up to COP27 and COP15, Howard expects a bigger focus on social issues, including human capital management, human rights and diversity and inclusion in the new year.
4. Active ownership and impact
As the forces shaping value in financial markets multiply, Howard said that stock picking will be only a partial solution.
“Our ability to engage with the companies and assets in which we have invested will be a critical lever and a necessary one to create value for our clients. Few companies are prepared for the world we are heading towards and encouraging or pushing them to adapt will be important to protect their value,” he said.
"As the focus on impact investing continues to grow, active ownership will also be an important component of those strategies," Howard continued. Schroders' recent survey of more than 700 institutional investors in 2022 found that around half are focusing on the impact of their investments, up from about a third in 2020. Howard expects that trend to continue.
With greenwashing hitting the headlines, Howard said regulation is spreading from the EU to other parts of the world.
The EU recently published its Sustainable Finance Disclosure Regulation while the UK’s Financial Conduct Authority released a consultation paper on the Sustainability Disclosure Requirements, in a bid to crack down on so-called greenwashing.
Demands for transparency and clarity in product promises are likely to increase, Howard added. “The antidote is honesty, transparency and consistency,” he said.