Our top 3 sustainable investing trends – how investors could benefit

Sustainable investing is an ever-changing landscape and 2023 will be no exception.

With inflationary forces and the energy crisis carrying over from last year, we’re likely to continue seeing speed bumps in some areas that had been gaining momentum. This opens the door for long-term opportunities for investors with their sights set further into the future.

There are plenty of supportive forces ahead as well in the shorter to medium term as awareness and regulation sharpen the teeth of existing sustainability initiatives.

With that in mind, here’s a look at our top three sustainable investing trends for 2023.

This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice. All investments can rise and fall in value, so you could get back less than you invest.

Energy security sets renewables back, but not forever

Conflict in Ukraine has unfortunately dragged into the new year, with some predicting it could spill into 2024 as well. The conflict’s changed perspectives on a range of topics from diplomacy to grain supply chains. But one major shift that will likely endure is the pressing need for energy security.

Russia has become somewhat of a lynchpin in the global energy trade, so weaning off their supply has become a top priority for just about every western nation. Given that renewable and clean energy isn’t quite developed enough to offer a quick fix, we’ve seen a backslide toward upping domestic fossil fuel production.

This is a trend we expect to continue in 2023 as countries look inward at ways to shore up their energy supply chain.

2021 global energy consumption by fuel type

Scroll across to see the full chart.

Source: BP Statistical Review of World Energy.

On one hand, this is a setback for sustainable investors who’ve been looking at renewables as a growth opportunity. Although this development sets back progress toward more clean energy, the intention is still there.

The COP27 conference saw a recommitment to net zero by 2050, and countries are being asked to set out interim 2030 targets now. A major part of that pledge is increased investment in renewables – this could bring opportunity.

How can this fit into an investing strategy?

From oil and gas majors to utility providers, everyone’s working to plug the energy gap as quickly as possible. Using fossil fuels alone isn’t the answer, and too much focus on the short term will increase transition risk for energy providers.

Companies that continue expanding their exposure to renewables and clean up their fossil fuel production, will be better placed as the longer-term decarbonisation trend plays out. The current environment makes it much harder to balance. But those that get it right will be poised to take advantage of a much longer growth runway.

Regulation makes labels more meaningful

More regulation in the environmental social and governance (ESG) space has been an ongoing call as sustainable investing gains traction. While there’s still a long road ahead, 2022 yielded some big regulatory wins.

We’re expecting the regulatory ball to keep rolling through 2023. This should help make it even more important to understand and evaluate the sustainability and ESG credentials of the investments in their portfolios.

One area we expect to see sweeping changes in is funds. Labelling funds as ‘ESG’ or ‘green’ has come with very little red tape in the past. But the European Union’s (EU) work to make sustainable funds more transparent kicked off a wave of regulatory activity.

In the UK, new sustainability disclosure requirements are being finalised and similar rules are being drafted across the pond in the US.

These new reporting regulations make it more difficult to classify your fund as ‘sustainable’ and task fund managers with proving they’re doing what’s necessary to market them that way. In the UK, these rules are expected to be finalised by the end of June. This will likely see the number of sustainable investing products shrink – but their quality should improve.

How can this fit into an investing strategy?

The good news for investors is more stringent rules about how fund managers can market their products should make it easier to identify funds aimed at sustainable investing. It means there could be less choice available, but should theoretically cut down on the instances of greenwashing.

Greenwashing – what is it and how to combat it

The ongoing discussion of what warrants a ‘sustainable’ label should also give responsible investing more teeth and make it easier to determine what’s right for your portfolio.

Net zero alignment

In 2023, talk is cheap – especially when it comes to climate change. The general consensus over the past year has been to do everything possible to limit global warming to 1.5 degrees Celsius or lower. To do that, we’ll need to collectively achieve net zero by 2050 – a big ask given the current estimated trajectory.

You’d be hard-pressed to find any company out there that isn’t in agreement that fighting climate change is important. And pressure from environmental advocates means there are also very few who haven’t made some sort of net-zero pledge.

However, companies actively making sure they’re on track to meet their net-zero commitment are few and far between.

A study in 2022 found that almost all companies with a net-zero target are on track to fall short if they don’t at least double their emissions reduction efforts by 2030. That doesn’t even include indirect emissions, which aren’t always included in net-zero targets.

But this will start to change in 2023.The push to clamp down on greenwashing means regulators and investors alike are looking to see companies back up their claims with measurable action. It’s led to a number of initiatives that evaluate the credibility of net-zero pledges, giving investors more visibility over their investments’ progress toward net zero.

How can this fit into an investing strategy?

It’s impossible to develop a credible net-zero strategy overnight. So, in 2023 we could see the cream start to rise to the top.

There are lots more tools available to understand how trustworthy a particular company’s pledges are. Companies that aren’t keeping pace are becoming more visible, leaving them exposed to reputational and regulatory damage.

Finding which companies are making progress toward net zero has long-term benefits for investors. At the end of 2022, we saw the EU bring in the world’s first carbon tax on imports – it’s not long until this sort of legislation expands. That will put polluting companies at a disadvantage. Those that already have reduction plans in place will be in a stronger position and investors could benefit.

To keep up to date with developing ESG trends and other sustainable investing themes, visit the Responsible Investment section on our website.

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