ESG investing: 6 trends to watch out for in 2023 and beyond

Investing that considers environmental, social, and governance (ESG) issues has gradually become more popular over the last decade. It can be a way to better reflect your values in the investment decisions you make.

Here are six trends that could change ESG investing in 2023 and beyond.

1. There will be a greater emphasis on defining ESG

One of the challenges of ESG investing is defining what it covers. There are often numerous terms that could be used to describe an ESG investment opportunity, such as “responsible” or “sustainable”. However, without clear definitions, it can be difficult to compare them and even understand if they match your ESG goals.

This lack of definition means that “greenwashing” can occur. This is where an unsubstantiated claim is made to make it look as though a company is more environmentally friendly or has a larger positive impact than it does. For an investor, greenwashing can make it difficult to understand which companies align with your ESG criteria.

Creating new measures and setting out when sustainability labels can be used is something that the Financial Conduct Authority (FCA) proposed in 2022.

The FCA says the proposed rules would protect investors and improve trust in sustainable investment opportunities. Following a consultation, the FCA expects to publish the rules in the first half of 2023.

2. Calls for standardised reporting could make comparing investment opportunities easier

Like defining ESG, standardised reporting would make it easier for investors to compare different ESG investments.

While many companies publish corporate sustainability reports that contain information about ESG initiatives, the way they put the information together can vary significantly. This was an issue that was addressed at the UN Climate Change Conference in Egypt in 2022, better known as “Cop27”.

Calls for a clear, consistent way of measuring ESG outcomes are likely to gather pace. While it may be some time before standardised reporting is in place, making information more accessible to investors is set to be a trend this year.

3. The energy transition will gain momentum

Another key topic at Cop27 was energy transition. The current energy crisis means it’s a topic that’s at the forefront for many countries.

From switching to renewables to reducing energy use overall, the energy transition could present opportunities for investors. As governments around the world take steps to reduce carbon emissions and reliance on fossil fuels, there could be new investments and incentives to consider.

4. Supply chains will come under closer scrutiny

The last couple of years highlighted how interconnected businesses are around the world. Regional Covid-19 restrictions affected businesses thousands of miles away and significantly disrupted supply chains. This year, the war in Ukraine has again demonstrated how supply chain disruptions can affect businesses.

As a result, supply chains are likely to face closer scrutiny in 2023 and beyond.

Improving supply chain due diligence can protect a business by mitigating risks. It also presents businesses with a chance to ensure their ESG values are reflected in the businesses they choose to work with.

5. Demand for improvements in carbon offsetting could be the catalyst for positive change

Carbon offsetting is a process that reduces or removes carbon to offset emissions made elsewhere. It could mean investing in projects like reforestation, renewable energy, or carbon storing.

While carbon offsetting has become a common way to balance emissions, there are criticisms of the practice, including that some initiatives don’t have the effect they claim. However, there is a growing demand for carbon offsetting from consumers, investors, and businesses that could lead to better options.

Another criticism of carbon offsetting is that some businesses focus on this rather than taking steps to reduce their emissions. So, businesses with an ESG focus could step up efforts to make their operations more energy-efficient.

6. More companies will embrace ESG business practices

The number of companies that embrace ESG business practices has been rising, and it’s a trend driven by demand that’s set to continue.

A report in Forbes found that younger generations believe the world had reached a tipping point on issues such as racial justice, inequality, and the environment. As millennials and Generation Z take on leadership positions and increase their wealth, embracing ESG issues could make sense from a commercial perspective.

For investors, it could mean a wider choice over the medium and long term when considering ESG.

If you’re interested in making ESG criteria part of your investment decisions in 2023, please contact us. We’ll help you balance your ESG values with other important factors, such as your financial goals and risk profile, to create an investment portfolio that suits your needs.

Categories: Financial a​rticles

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