ESG in 2023
event in Glasgow, some of the world’s largest companies made net-zero commitments. “The theme in 2022 for us was under- standing how they plan to achieve those com-mitments and what activity enables those transitions,” says Rhys Petheram, an investment manager in the envi-ronmental solutions team at Jupiter Asset Management. So, instead of investing in Tesco, for example, Jupiter’s en-vi- ronmental solutions team could invest in the suppliers that help enable it to be sustainable, such as packaging companies’ alternative solutions to plastics. “Companies are thinking about their carbon footprints in an increasingly sophisticated way through looking at their supply chain, which supports the companies we invest in,” Petheram says. “Alongside that dynamic, taxonomies highlight the ena- bling investment activity, which asset managers will start reporting on in 2023.
“The taxonomies and data requirements are going to make it more obvious who is doing what in driving sus-tainability, and where the solutions are. In 2023, we will see a greater focus on the development of these enabler universes,” Petheram says.
Making an impact Environmental investing discourse looks set to broaden out be- yond climate change in the year ahead, a result of the introduc- tion of broader taxonomy objectives and cor-porate sustainabil- ity goals starting to incorporate biodi-versity and natural capital risks. Petheram says. “There will be more focus on companies with products that im-pact on multiple policy domains. “Another regulatory shift is fund labelling, which is in-creas- ingly recognising impact and helping define it. “We will have a clearer idea of the regulators interpreta-tion of what impact is in 2023, which could sharpen the minds of asset managers in terms of how they in turn think about impact,” he adds. This “clearer idea” includes defining how to differentiate impact investing funds from broader environmental portfolios or ESG-compliant portfolios. “It could be an interest-ing year for impact funds,” Petheram says.
Bond…green bond
In 2022, the economy deteriorated, and so did green bond issuance. In the third quarter of 2022, volume reached $152.3bn (£127bn), 45% lower than in the same period 12 months earlier. It was a slow year for green bond issuance because of the broader market backdrop and going into 2023, this does not look set to change. With taxonomies being implemented globally, Petheram hopes to see more transparency in green bonds, which could make the market more attractive. “Taxonomies are going to play an increasingly important role in trying to improve the quality of
40 | portfolio institutional | December-January 2023 | Issue 119
the green bond market. That will help underpin growth in mar- ket share because it gives in-vestors more confidence in the instruments,” he adds. But could issuance be driven by the US? The world’s largest economy has been under-represented in raising funding from the green bond market, with it being home to less than half the funds raised. But with the Inflation Reduction Act passing in 2022, could this prove to be the catalyst for the green debt mar- ket to grow once again? “With the momentum we are seeing in terms of policy sup- port for green investment, support for green investment in the US, I would expect to see more green bonds issued out of the USthat market,” Petheram says. “If the market wants to keep growing, it cannot be Europe that underpins its growth. The US needs to come to the fore,” he adds.
Time to Act
Under the Inflation Reduction Act, the US will spend $369bn (£302bn) making the country more sustainable. Could this en- courage more capital in sustainability beyond green bonds? “That bill was important in terms of its symbolic nature,” Men- nie says. “When there is a clear signal from governments that they are investing in the transition, you are making the case for companies to invest in line with that. “The Act makes our work easier, because you can point to that clear alignment, which has existed here in Europe and clearly exists in the legislative framework the US has now set up,” he adds.
Rules and regs
There is one topic which always dominates ESG strategies: reg- ulation. And in 2023, there are two pieces of regulation that will likely feature in such conversations: Sustainable Finance Disclosure Regulation (SFDR) in the EU; and Sustainability Disclosure Requirements (SDR), which is in consultation and is designed to tackle greenwashing in the UK through improved disclosures and fund labelling. “What the FCA is trying to tease out is what an ESG fund is,” Mennie says. “The FCA’s new framework is quite interesting in that it brings in this idea of sustainability impact and sustainable improve- ment categories,” he adds.
These labels are designed to identify certain funds, but there will still be questions over which key performance indicators (KPIs) are used and how focused is a fund on stewardship. “That is going to be a big focus on regulatory activity next year, which is all for the good,” Mennie says. BNP Paribas AM’s Pieter Oyens agrees that regulation will be the hottest topic in ESG during 2023. “Institutional investors in Europe will be deciding how they want to align with SFDR,” he says. “Is Article 8 or Article 9 the best way to manage their
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