ESG in 2023 It could be an interesting
year for impact funds. Rhys Petheram, Jupiter Asset Management
portfolios and how do they connect with the new disclosures? “In the UK, the draft regulation of SDR is going to be a topic of discussion,” Oyens says. “The key difference between SFDR and the draft regulation SDR under consultation is that SFDR is disclosure focused. You get all the information which you need to digest, but then you need to make sense of, for exam- ple, the sustainable investment definitions from one asset manager to the next and bring it all together. On the other hand, SDR may add minimum standards for different catego- ries of funds.” Newton’s Niklasson believes that the SFDR regime will be challenging. “I describe this as a Rubik’s Cube. At the centre of it you have your own taxonomy, your philosophy, and now you need to solve this Rubik’s Cube of needing to look perfect on all fronts. That is not an easy task,” she adds. At the heart of this is the greenwashing debate. “It is a compli- cated landscape to navigate,” Niklasson says. “That brings it to compliance. I have never in my career spent as much time as I do today with legal and compliance teams.
“It is needed,” she adds. “There is a clean-up exercise to do internally around language and around marketing, which is overdue. It is creating a degree of fear and paranoia, but that is not necessarily a bad thing. I suspect that is going to dominate in 2023. “For me, being the head of sustainable investment is very dif- ferent from a couple of years ago,” Niklasson says. “The skillset needed is changing. Demand for people from legal and com- pliance backgrounds will be huge.” At Newton, this is a core part of how those teams are led. “You cannot just create language and develop frameworks and defi- nitions in isolation anymore, you need to understand the lan- guage that is being formed from a regulatory perspective,” Niklasson says. “It might not be the most exciting aspect of our work in 2023, but it is materially important.” Asset managers will continue to be under pressure when it comes to disclosures and reporting. “Our clients want to see more information, but they want it simplified. This is a chal-
lenge which we are trying to solve. To an extent, it is also what the labelling regime in the UK is trying to solve,” Niklasson says. “The trend that we expect to see is that TCFD-compliant reports will hopefully go from being quite long to being crisp- er and to the point, because people will be looking for specific information,” Niklasson says. “The days when it was simply about describing the issues and why they are important are behind us.”
Keeping score Mennie believes regulators could have ESG ratings in their sights during 2023. “Sounds like a good idea,” he says. “Rat- ings are comparatively uncorrelated, but it will be a difficult task because no one has decided what ESG ratings are for.” “When they were created, there was a sense that they were fill- ing a gap because corporate disclosure was low. But for climate change, in particular, there is now a lot more data. So, what are they trying to do now? Predict some kind of outcome?” he adds.
The difficulty with ESG ratings is that providers are trying to condense a broad set of characteristics into a single number. “Getting to the point where you can say this is good or bad is difficult,” Mennie says. “Focusing on the specifics of what you are trying to do with a particular product will increasingly come to the fore, rather than trying to match some average tar- get across a whole range of sustainability issues,” he adds.
The voice Jupiter’s Sandra Carlisle is interested to see how the emerging debate around voting rights and giving individual investors the ability to express their views will evolve in the next 12 months. “The world of corporate governance proxy voting is obscure to most investors,” she says. “But people care about what their money is doing, what it is contributing to, positively or nega- tively, and the way in which they can influence companies through the exercise of a vote. “And the technologies that are developing to enable perhaps more direct expression of end investor wishes is maybe not something we will see in 2023, but it is definitely emerging as a live topic,” Carlisle says.
Looking to the future
ESG is a broad church and it appears that while some issues will always be with us, new areas in need of attention will come to the fore in the 12 months ahead. The story of investing to make the world a safer, cleaner and more equitable place is one of evolution and 2023 will be no exception.
It will be interesting to see what the world looks like a year from now and what our ESG Club panel will say when I ask: “What ESG trends do you expect to see in 2024?”
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