We outline six key ESG-related areas of focus that our responsible investment team believe are important.
Biodiversity
It is widely acknowledged that biodiversity loss is accelerating. The Living Planet Index shows that 5,230 species have declined by an average of 69% in abundance between 1970 and 2018. The Forests Specialist Index, which comprises species that only live in forest habitats, declined by 53% on average between 1970 and 2018.1 Biodiversity is explicitly linked to climate change. Companies’ net-zero ambitions cannot be achieved if natural carbon sinks are weakening. The definition of biodiversity is very broad and is difficult to capture and measure in one simple measure. The challenge is also to obtain meaningful data. There is no agreed approach for looking at risks and opportunities, but investors’ focus on them is increasing.
Circularity
The circular economy has multiple aims: keeping materials in use, at the highest value possible, while reducing material extraction and use. Transitioning towards a circular economy is crucial from economic and sustainability perspectives. Circularity is linked to net-zero ambitions in terms of resource consumption, the waste of natural resources and emissions. According to Accenture, transitioning to a circular economy could be worth US$4.5 trillion2 as we move to a low-carbon and low-environmental-impact world.
Labour
According to McKinsey,3 the net-zero transition could result by 2050 in an increase in demand of about 202 million direct and indirect jobs across some sectors of the economy, and a simultaneous decrease of about 187 million direct and indirect jobs across other sectors. Concerns around social factors remain important, especially in the context of inflation and economic slowdown. This is also set to occur against the backdrop of most developed countries experiencing long-term demographic trends of aging populations. China recently had its population fall for the first time in 60 years, and Japan’s birth rate is declining.3
There are also challenges around skills levels, unionisation, and real and living wages. Furthermore, artificial intelligence and automation will affect the demand for labour. Spending on mental health continues to be a big health-care trend. Research from Deloitte4 suggests that employers’ spending on mental-health initiatives is a net positive, as it reduces the costs of absenteeism and presenteeism, and also slows employee turnover.
Supply-chain realignment
We expect supply chains to be realigned in a more localised way, primarily driven by governments pushing to gain greater control of their energy infrastructure and promote job creation. For most companies, cost containment, as opposed to growth, will be the top priority in 2023. The supply chain will be under more scrutiny as everyone tries to get costs under control. Many global firms with manufacturing operations are reviewing their manufacturing footprint. Linear supply chains could soon be replaced by circular supply chains as companies struggle to deal with the rising costs of raw materials and their volatile availability. More companies are choosing to break down their products and return them to their raw-material form.
Increasing regulation
We are seeing policy changes around the world designed to support the dual goals of energy security and the energy transition. With demand also increasing for sustainability-linked products, regulatory requirements are increasing. We expect investors to increase their demand for disclosure requirements to provide evidence that companies are keeping pace with regulations.
Climate / net zero
Climate and net-zero ambitions clearly depend on geopolitics and political will. The Inflation Reduction Act (IRA) is the most significant piece of climate legislation in US history, so far. The European Union has responded with the Net-Zero Industry Act, and there are many uncertainties and questions around this. The IRA will heavily influence sustainable investments and has the potential to move capital away from Europe.
We expect more focus on the analysis of emissions data and performance as we move away from lockdown emission levels to more normalised trends. Investor demand and expectations will also increase.
There is increased recognition that national targets are not on track. We expect that, as governments start to implement more adaptation strategies, this will be an impetus for investments to help build climate resilience.
We plan to return to these topics as our research evolves.
Sources:
- https://www.livingplanetindex.org/lpi
- https://newsroom.accenture.com/news/the-circular-economy-could-unlock-4-5-trillion-of-economic-growth-finds-new-book-by-accenture.htm
- McKinsey & Company: The net-zero transition, January 2022
- https://www.bbc.co.uk/news/world-asia-china-64300190
- https://www2.deloitte.com/uk/en/pages/consulting/articles/mental-health-and-employers-the-case-for-investment.html
Authors
Newton responsible investment team
Responsible investment team
This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Please note that holdings and positioning are subject to change without notice. Newton manages a variety of investment strategies. How ESG considerations are assessed or integrated into Newton’s strategies depends on the asset classes and/or the particular strategy involved. ESG may not be considered for each individual investment and, where ESG is considered, other attributes of an investment may outweigh ESG considerations when making investment decisions. ESG considerations do not form part of the research process for Newton's small cap and multi-asset solutions strategies.
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