As we start a new year, it is a good time to take stock of what responsible investment topics and issues we expect investors and companies to focus on in the months ahead. While the direction of travel on most of the issues below is clear, the speed, scale, and ways in which these issues will evolve over time remains to be seen.
- Climate change remains a priority, with adaptation and resilience top of mind. With the ambition to reach net-zero by 2050 set by both scientists and governments alike 1, the focus through 2023 will remain on the practical realities of implementing policies and practices in the complex geopolitical and economic environment that we face today. In the European Union (EU) and the United Kingdom (UK)., previously established government regulations and programs will come into effect this year, bringing with them hard questions about what approaches are most effective at driving reductions in emissions in the real economy. At the same time, the need to adapt to changing climate patterns and to build resilient infrastructures and communities becomes all the more important as the world continues to experience extreme weather events like the heat waves, droughts, and floods experienced in 2022. This will continue to drive the focus on climate adaptation and resilience for governments, companies, and investors in the year ahead.
- Nature and biodiversity move to the mainstage. In 2023, the role of nature in stabilizing climate change and the importance of reducing biodiversity loss will move to the mainstage as governments, regulators, and industry bodies advance key frameworks and expectations on the topic. Guiding this work is the recently established Kunming-Montreal Global Biodiversity Framework (GBF), which was agreed upon at the United Nations biodiversity conference (COP15) held in December 2022. Similar in ambition to the Paris climate accord of 2015, the signing of this framework has been called a “Paris moment for nature.” Importantly, for the first time, the COP15 meetings included a significant focus on the role of the financial sectors in addressing nature-related risks as well as enabling nature-based solutions. With nature and biodiversity firmly on the agenda, the focus will now be squarely on how to measure and manage nature-related risks and biodiversity loss. This will require new data and metrics, as well as advancements in disclosure frameworks to accelerate information sharing. As with climate change, collaborations and partnerships will be essential for scaling and accelerating knowledge and action. Read an Investor’s perspective on biodiversity and COP15.
- Social issues remain at the heart of it all. Political division, rising inflation, high food prices, the energy crisis, geopolitical tensions, and issues such as cybersecurity, corporate governance, and climate change all have an important social dimension that can affect broader dynamics. We believe that it is not enough for companies to simply make commitments on issues such as diversity and inclusion, data security and privacy, and labour rights and inequality; they must also demonstrate progress in meeting these. In 2023, we expect that discussions on Board and management diversity will continue to expand beyond gender, and focus on racial, ethnic, or other forms of diversity to better reflect the community a company serves. We also expect to see data security and privacy remain top of mind as breaches pose serious risks to businesses and their customers. Labour rights and inequality remain a priority as employees face rising costs and economic pressures, and companies in some sectors face labour shortages. For companies and investors, the intersection of social issues with traditional business fundamentals is expected to prevail throughout 2023.
- Continued focus on responsible investment terminology and transparency. The past year has seen an increase in the scrutiny and focus on environmental, social, and governance (ESG) integration and responsible investment more broadly. In many ways the increased attention demonstrates the mainstreaming of ESG considerations, and opens the door for healthy and constructive conversations; that said, the headlines have also highlighted the confusion and misunderstanding that exists around the meaning of many responsible investment terms. This is understandable, as there is a lack of consistent definitions and terminology in this space. Regulators in Canada,
the U.S., Europe, the UK), and Japan are working to promote transparency surrounding these themes, and the industry bodies such as the International Sustainability Standards Board (ISSB) are looking to establish common sustainability- and climate-related disclosure requirements for companies. Until there is a global standard defining terminology or requirements however, it will be important for investors to be clear, transparent, and precise in the terminology and language they use, and to consider carefully the language that others are using when referring to ESG. In 2023, we should all expect increased attention and focus on transparency and disclosure as investors, and others, seek to confirm and clarify what responsible investment approach is being used by asset managers. Learn more about RBC Global Asset Management’s approach to responsible investment.
- Regulation divergence and convergence. Governments across jurisdictions will continue to enact or implement regulations in a range of ESG-related areas, using both carrots and sticks to encourage uptake. For example, the U.S. Inflation Reduction Act promises to deliver incentives across industries to spur investment and action on climate change. In the European Union (EU), the proposed climate border adjustment mechanism seeks to impose a cost on imports for carbon-intensive products or those that do not meet EU standards. Disclosure regulations that apply to companies and investors are also expected to advance in 2023. The EU sustainable finance disclosure regulation (SFDR) comes into effect in 2023, and the corporate sustainability reporting directive will be in effect the following year. We also expect to see the U.S. Security Exchange Commission (SEC) finalize their rule on climate-related disclosures this year, and the International Sustainability Standards Board (ISSB) to publish global sustainability- and climate-related standards. In addition to disclosure regulations, regulators are also focused on establishing ESG investment product labelling rules, with the EU, UK, U.S., Canada, and Japan all passing or proposing changes in this area. While there are commonalities in approaches across regions, there are also clear differences. In their current iterations, definitions and requirements lack consistency in meanings and approaches, which risks sowing confusion among investors. While it remains to be seen how these various regulations will evolve, we expect that ESG-related regulations will continue to be introduced. As the complexity of meeting regulations grows, so too will the need for clear guidance, consistent standards, and high-quality ESG data.
1 IPCC Sixth Assessment Report: Impacts, Adaptation and Vulnerability, Intergovernmental Panel on Climate Change, 2022, Link and The Paris Agreement, United Nations Climate Change, 2015, Link