ESG investment outlook: Making sense of data and regulatory challenges

1. Supporting our clients in navigating a complex ESG landscape

Innovation in products and solutions

In 2022 Invesco launched several ESG strategies including net zero and social progress. In 2023, we expect increased interest from our clients in these solutions.
 
Sturcturing the data landscape

Invesco uses more than 50 different ESG data sources. We understand the challenges around data and in 2022 launched ESGCentral to help our internal and external clients navigate this complexity. In 2023 we expect this to be a key enabler for portfolio disclosure.

The language of ESG

Invesco Consulting  surveyed 1,500 financial advisors in the US and provided advice on how to initiate ESG conversations with individual investors. In market discussions on MIFID II Suitability rules, 20-40% of customers tick “yes” for a clear sustainability preference. The Invesco Consulting study found that around 80% of individuals want to hear more about linking their values to investment options.

2. More conversations about (S)ocial

Social issues were part of our dialogue with companies around 40% of the time compared to closer to 60-70% for environmental and governance issuesⁱⁱ. There are good grounds to expect social issues to come to the fore in 2023.

Today, reporting on social issues and management of them globally varies. Data from the World Benchmarking Allianceⁱⁱⁱ  illustrates this. In January 2022, 1,000 companies globally were assessed against 18 social indicators under the broad umbrellas of decent work, ethical behaviours and respecting human rights. The average score was only 5.2 out of 20.

Human rights is another important topic. The EU published its action plan in August 2022 and the US introduced the human rights sourcing legislation, also implemented in the summer of 2022. These developments are putting additional pressure on investors to implement due diligence, which is limited by data availability.

In 2022, we expanded the data on our proprietary ESG research platform, ESGintel. It now includes a children's rights score, which is a proxy for human rights in operations and products and services. This score is generated from the Global Child Forum^iv.

Remuneration and a high number of shareholder resolutions are likely to be a theme that we are going to see in the 2023 shareholder voting season. The significant market turmoil could lead companies to issue shares to enable their workforces to receive some compensation for expected reduced cash awards.

Invesco’s policy on voting is that our investment teams will vote their shares with the guidance from the global policy, but subject to their own views of the company performance.

3.    Climate adaptation and transition plans

Climate adaptation refers to the ability for people and nature to adapt to climate change risks. In 2022, adaptation finance only represented around 10% of the issued green bond universe. But we are expecting this to grow significantly in 2023 with particular emphasis on use of proceeds for emerging markets^v.

We expect the final issuance of the Taskforce for Nature-related Financial disclosures (TNFD) in 2023, which will provide the base for corporate disclosure expectations on biodiversity. Another key component is the EU sustainable finance disclosure regulation principal adverse impact indicator number 7.

The interplay between climate, biodiversity and food security is significant. The rise of smart food comes with a debate around reduction in biodiversity. In 2023, the EU will allow gene modification in certain crops to ensure food security in the face of climate change^vi.

As popularity for biodiversity financing has grown, the connection between potential climate offsets and natural capital is becoming more apparent. Nature-based solutions (NbS) in the form of carbon offsets could help to reduce emissions and increase nature-based resilience. The World Economic Forum reported that NbS could provide 37% of the CO2 mitigation needed by 2030 to maintain global warming within 2°C and at a lower cost than other popular options. 

For companies, we’re closely watching the transition plan taskforce which was launched during COP27 in November 2022. The UK Transition Plan Taskforce (TPT) is also in consultation until February 2023. We’ve already seen companies issuing their versions of transition plans and expect more reports in 2023. The TPT, which has a greater focus on the just transition^vii, was launched in April 2022 asks companies to consider:

• high-level ambitions on climate change and resilience; 
• short, medium and long-term actions; 
• governance and accountability mechanisms;
• measures to address risks to the environment and stakeholders. 

4. Defining ESG

We expect to see greater consolidation of standards on items such as sustainable investments.

In 2022, firms spent a lot of time implementing the EU Sustainable Finance Disclosure Regulation (SFDR).

The UK Financial Conduct Authority (FCA) issued its own guidelines for ESG labels and disclosures in Q4 2022 and will be consulting on these into January 2023. The proposed rules are different to SFDR and are more closely aligned to the US Securities and Exchange Commission proposals. These are also expected to be launched during the first half of 2023.

Similarly, the Canadian regulator is setting out its stall on ESG. Within Asia, regulators in Hong and Singapore have released ESG fund disclosure circulars in the past two years.

The way for global firms to navigate these different frameworks is to have a proprietary internal standard that sits across the geographies. At Invesco, we’ve been transparent about how we map definitions and expect to spend more time on education in this area in 2023.