Some call it “being woke.” Most think of it as being practical in this age of the impractical. It, in this case, is ESG investments. According to the Securities and Exchange Commission, ESG stands for environmental, social, and governance. ESG investing is a way of investing in companies based on their commitment to one or more ESG factors. It is often also called sustainable investing, socially responsible investing, and impact investing.
- The environmental factor might focus on a company’s impact on the environment, or the risks and opportunities associated with the impacts of climate change on the company, its business and its industry.
- The social factor might focus on the company’s relationship with people and society, or whether the company invests in its community.
- The governance factor might focus on issues such as how the company is run and executive compensation.
Different investments may weight environmental, social and governance factors differently and may focus on different specific criteria within a factor. Investments that don’t have “ESG” in the name may still incorporate elements of ESG investing into their portfolios.
Rising geopolitical tensions, rising, and falling inflation, and increasing regulatory changes are all considerations when making an investment in any company—or defining your company’s position in the ESG landscape.
These same factors underpin MSCI’s 11th annual ESG & Climate Trends to Watch report – an analysis of more than 30 emerging risks set to impact corporations and investors worldwide in 2023 and beyond. MSCI is a provider of critical decision support tools and services for the global investment community, and has over 50 years of expertise in research, data, and technology. Based on research conducted by MSCI ESG Research analysts worldwide, the MSCI report highlights what ESG, and climate, investing is today and what could be its impact in 2023.
The expanse of emerging ESG and climate issues will increase the number of financial risk considerations for both companies and institutional investors, such as pension funds, sovereign wealth funds, endowments, and asset managers. Key themes covered in the 2023 list of ESG and climate investing trends include:
- Innovations in the supply chain, including the prospects of tracking goods through blockchain technology and the mining of e-waste that could reshape the dynamics of controversial raw material sourcing,
- Changing governance, with exploration of how new corporate board demographics could play a role in say-on-climate and other proxy voting trends,
- Responses to regulation, including tangible impacts of new rules on asset managers, institutional investors, and corporations,
- Work life changes, such as the proliferation of railroad strikes and labor rights movements globally,
- New frontiers in measurement and transparency, with insurers and banks set to expand scope of emissions tracking,
- Emergence of new investments, ranging from lab-grown commodities to carbon as an asset class,
- And turning points for ESG assets, including green bonds and nuclear energy.
Politics, Inflation, and War
In 2022, with the mid-term elections dominating the news, politicians increasingly amplified partisan views on the concept of ESG. With 2022 policy debates as a backdrop, investors must continue to evaluate how ESG, and the climate crisis, will impact their portfolios in 2023.
ESG and climate investing were also thrust into the spotlight as regulators introduced proposals aimed at reducing greenwashing in the fund industry. In addition, requirements for financial institutions to conduct climate stress tests were introduced along with deforestation-free market-access rules and potentially mandatory requirements to report on the SFDR (Sustainable Finance Disclosure Regulation) Principle Adverse Impact indicators.
For example, researchers in ESG and climate trends note that the ongoing war in Ukraine and record levels of inflation globally may limit near-term pressure to reduce global greenhouse-gas emissions as governments prioritize energy security and affordability. However, MSCI ESG data reveals that major power companies are keeping their eyes on longer-term decarbonization trends and expanding deployment of renewables.
The MSCI report delves into these significant geopolitical and macro risks, examining how they will transform the ways in which investors evaluate the impact that companies in their portfolios have on society and their bottom line. ESG risk is financial risk, and the ESG and climate research showcased in the report was conducted to support investor needs to synthesize previously unseen risks and incentivize companies to better manage both emerging issues and the longstanding, expansive threat of the climate crisis.
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