Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
THE pandemic may have pushed sustainable investment into the mainstream, but it is still a work in progress. For investors, a lack of standardisation makes comparisons difficult, while measurement and reporting remains heavily focused on the ‘e’ (environment), rather than ‘s’ (social) or ‘g’ (governance). Could that change in 2022? Here are five sustainable investment trends for the year ahead.
An end to greenwashing?
It has become uncomfortably clear that for a number of investment groups, their commitment to environmental, social and governance analysis is superficial at best. To date, investors wanting to see whether fund groups are really committed to this change have had to really do their homework. This represented a real threat to the whole industry – could investors trust what they were being told?
However, regulators, rating agencies and institutional investors have recognised the problem. Increasingly, a common vocabulary is emerging, alongside proper independent ratings. This should improve transparency and call time on greenwashing across the industry.
Reducing carbon emissions has been the immediate priority for governments, regulators and the corporate sector. This is perhaps understandable, given the urgency of the problem. However, with carbon targets well-established and well-understood, attention is likely to turn to other areas. Biodiversity and methane targets emerged from COP 26, but there is also an increasing focus on social issues such as diversity and inclusion, or labour rights. The pandemic has shone a light on how companies treat their workforces and a greater emphasis on wellbeing may expose those with poor practices.
A common language?
A recent report from Morningstar showed that there were at least 34 regulatory bodies and standard setters across 12 markets undertaking official consultations on ESG in 2021 alone, adding “it’s no wonder that companies’ and investors’ heads are spinning”.1 While there is only scant evidence of it yet, it might be hoped that sense will prevail in 2022 and country regulators would start to co-operate. This would make it far easier for the companies that need to conform these standards, many of whom are operating across international borders anyway.
The trickle down effect
The more pressure is brought to bear on individual companies, the more it creates a virtuous circle. Companies put pressure on other companies in their supply chain, rather than be tainted by association. Powerful buyers with net zero targets can bring about change from the top, while suppliers with strong green credentials have a competitive advantage. In this way, good environmental practice should become routine.
The easy way to get rid of a carbon problem in an individual portfolio is to sell the polluting stock and move on. However, there is a growing realisation that this simply moves the problem elsewhere rather than bringing net zero a step closer. As such, there is a growing emphasis by many investment groups on engaging with companies to push them to change their behaviour. In areas such as board diversity, large asset management groups are now routinely voting against big companies that do not have a minimum number of female and minority board members. This should be a powerful catalyst to change corporate behaviour in the year ahead.
1 2022 ESG Trends to Watch, December 2021
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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