Not shaken, despite the stir Not shaken, despite the stir http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\sailboats-stormy-weather-small.jpg January 12 2023 January 12 2023

Not shaken, despite the stir

Three things to watch in 2023.

Published January 12 2023
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Beaten but unbowed Last year, sustainable investing entered the culture wars in a big way, and it will remain contentious in 2023. Many critics unfairly—some intentionally—conflate it with energy exclusions, but is a diverse space, with many investment approaches. ESG can be an input to investing or an investment objective unto itself. The former integrates material nonfinancial information about a company, seeking a 360-degree view of risk. The latter may sit in the political crosshairs because it includes products with specific themes or goals, such as clean energy, environmental impact and biodiversity. But despite the blowback, both branches are growing in prominence. Why? Because investors want more information to make decisions, and many want to align their portfolios with their values. ESG can address both. Morningstar reports that sustainable assets were stickier during 2022 than much of the broad market, achieving positive net flows. ESG is here to stay.

Managers will up their game 2022 showed that some investment management houses with less sophisticated approaches to sustainable investing had a hard time navigating when the markets turned south. Many who relied primarily on publicly available data were caught in crowded trades, especially as they watched the fossil fuel boom from the outside. Expect managers to refrain from outsourcing all of their ESG research to data providers in favor of building in-house capabilities. More will appreciate unique insights of expert engagement. The value in proprietary analysis is not just the ability to make more informed investments, but to better understand—and articulate to clients—the potential long-term benefits of ESG. Responsible investing acumen will be at a premium for firms.

Regulations galore The Labor Dept. kicked things off in November with a rule that includes permitting fiduciaries to take ESG factors into account for client retirement accounts. Expect more regulatory activity in 2023. Not surprisingly, the SEC will be active. Its “Names Rule” looks to provide clarity for investors and helps them avoid greenwashing. The Transportation Dept. will weigh in with its National Electric Vehicle Infrastructure program and the creation of methodology for calculating greenhouse gas emissions across the auto industry. The EPA is creating its own emissions proposal, focusing on methane. These should not only further U.S. decarbonization goals, but should lead to additional data investors and managers can use or more informed decisions.

Tags 2023 Outlook . Responsible Investing . Politics .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Terminology such as “ESG integrated,” “sustainable” or “impact,” among other terms, is not uniformly defined across the industry. Investment managers may understand and apply ESG factors in different ways, and that the role those factors play in investment decisions also varies. Therefore, we recommend investors understand the role of ESG factors in a strategy to ensure that approach is consistent with their investment objectives. Like any aspect of investment analysis, there is no guarantee that an investment strategy that considers ESG factors will result in performance better than or equal to products that do not consider such factors. Investing and making buy-and-sell decisions that emphasize ESG factors carries the risk that, under certain market conditions, the fund or strategy may underperform those that do not incorporate such factors explicitly into the decision-making process. The application of ESG criteria may affect exposure to certain sectors or securities and may impact relative investment performance depending on whether such sectors or securities are generally in or out of favor in the market.

 

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