After several years of strong returns for ESG investors, 2022 was an inflection point. The natural-style bias towards faster-growing areas like alternative energy and tech favoured by ethical investors was particularly hit by post-lockdown inflation and interest rate rises.
As fears of recession grew, smaller companies providing solutions to environmental and social challenges began to go out of favour. While ‘unethical’ sectors like oil, gas and defence began performing strongly as Russia’s invasion of Ukraine drove up supply constraints.
Despite such a challenging year, 2023 has already seen the impact of both higher inflation and style headwinds start to abate, reinforcing our confidence in ethical investing and performance improvements going forward.
Continued hope
Investing naturally comes with risks and while many investment trends and fads quickly appear and disappear, environmentally friendly investing is intrinsically linked to our hopes for a positive future. Those are not going to go away.
Real changes
Greenwashing is one of the main criticisms of ESG investing, and it’s one that regulators worldwide are keen to address.
Investors should see greater clarity around investment solutions and funds’ sustainability claims following the introduction of the UK’s Sustainability Disclosure Requirements (SDR). This, along with Taskforce on Climate Related Financial Disclosures (TCFD) regulations asks financial-services businesses to:
- Clearly set out the environmental impact of the activities they finance
- Improve and increase reporting of climate-related financial information
- Give investors information about what they're doing to mitigate the risks of climate change
More climate consciousness
We expect ESG investing to become mainstream, pushed by an ever-increasing climate-conscious and socially-responsible population.
The combination of consumer expectations and public policy shifts should nudge - or force - companies to improve, or face failure. This makes ESG key in risk mitigation, be it legal, reputational or physical as companies deal with increasing regulatory standards, transitionary moves away from fossil fuels and increasingly severe, tangible, impacts of climate change.
The interest in ESG and ethical investing will continue to grow, so now’s the time for businesses to embrace ethical, sustainable, and responsible ways of working and investing. By doing so, they’ll become the leaders of tomorrow. Being on the right side of that transition will create plenty of opportunities to attract new and existing investors.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.
Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.