This year, MSCI ESG analysed the main trends for 2023, asking what could significantly impact companies’ challenges and opportunities, and which trends could shape the investment environment.
Governance change
Today, it is imperative for companies to assess their leadership and governance. Engaging directors with expertise in climate issues and devoting time to environmental issues will help companies address the risk of climate transition and reduce actual emissions. Furthermore, it is increasingly important to focus on the presence of women on boards of directors. Data show that, on average, companies with at least one female director have higher human capital management performance. In developed markets, with an abundance of directors with an average age of 60, ‘onboarding’ programmes should be promoted to maximise the contributions of younger directors.
Responses to regulation
Changes in ESG fund designations and labels, with stricter and more precise reporting requirements, could mean more informed decisions for investors, but also a challenge for those seeking a common ESG objective across jurisdictions. Improved due diligence and supply chain monitoring programmes for companies with high exposure to deforestation will be necessary to align with the new proposed regulations. Products made or based on land that has been deforested after the end of 2019 will no longer be accepted in the EU common market. The digital world also presents major challenges. Companies will have to adapt quickly to the new regulations (Digital Markets Act (DMA) and the EU’s Digital Services Act (D SA)) and act to anticipate possible moves by other jurisdictions. The DMA specifically targets large technology companies to open up their ‘Walled-Garden’ ecosystems (platforms that restrict users’ access to competing services), facilitate competitive practices and ensure transparency of their advertising services. The DSA aims to manage misinformation and illegal content on consumer-facing platforms.
Supply chain innovation
Innovation in supply chains goes through various activities, involving many companies, from textiles to food. In the textile world, it is important to promote the use of sustainable cotton and to develop alternative sources of sustainable fibres. The development of processes to recycle post-consumer textile waste into new fibres is an important goal for 2023. In the field of technology, efforts to extract secondary metals from e-waste will have to be stepped up, while complying with regulatory authorities, in order to increase access to critical metals for clean energy technologies. This would lead to a reduction in the dependence of mining on foreign countries, while reducing emissions. We will also need to prepare for the emerging opportunities towards GMO food crops, which combined with the adoption of regenerative agriculture, could allow for changes in land use and agrochemical policies. We will all need to exert pressure by including ethical considerations in the choice of products, so as to incentivise projects focused on the use of a blockchain for transparent and traceable supply.
Working life
Rail communications will have to improve, while also trying to stem internal problems such as a growing wave of union strikes caused by COVID-19-related reductions in pay packages and inflationary pressures. All of us will have to strive together for clean air. We cannot overlook the fact that even companies that generate minimal pollution may be affected by deteriorating employee health or difficulties in retaining talent in polluted regions. More and more attention will have to be paid to the new winners and losers. Very high inflation and the consequent rise in the cost of living have contributed to an increase in hourly wages for workers, putting sectors with low-wage employees (e.g. retail, hotels and restaurants) into serious crisis. In 2023, we will observe how further changes in media attention may provide insights into ESG risk perceptions and issuer engagement priorities evolve in different markets. During 2020, the glut of human capital news has been driven directly by the impact of COVID-19, while business operations and the future of work have changed dramatically.
Turning points
2023 will be an important year for green bonds. We will observe whether they can maintain a credible growth path in the face of rising interest rates, shrinking spread premiums and growing concerns about greenwashing. The focus will also be on national energy security and the production sector. Continuing energy market disruptions affect the global transition to clean energy use of several countries and their companies. In 2023, we will also observe whether the nuclear industry, which has made a comeback in recent years, will be able to handle high costs, long project delivery times and labour constraints. Looking at the current patent portfolios of energy companies, we see that they are still based on a traditional fossil fuel and petrochemical business. In 2023, as energy companies look to continue to benefit from high oil prices, we will be watching to see what they will do with their coffers full of cash: double down on existing business models or channel more towards investments in clean technologies.
New frontiers of measurement and transparency
For banks, the greenhouse gas (GHG) emissions associated with their loans are key to analysing climate transition risk. Until recently, estimates and disclosures were limited. While banks in Europe have already started to report the GHG emissions associated with their loan books, banks in emerging markets have yet to follow suit. It will be interesting to observe, whether the increasing regulatory and investor pressure felt by banks in developed markets will be sufficient for them to disclose emissions spreads on loans. On the other hand, ‘insured issues’ are new on a global scale. It will therefore be important to understand which global insurers will act first to measure their insured footprints in order to prepare for future requirements. After a year of market volatility, investors face the challenge of accounting for funded issues associated with their portfolios. They will be able to adopt new analytical models to understand the changes in their emissions and thus remain aligned with long-term decarbonisation paths. In the meantime, we will watch which companies will up their game on climate targets in the face of what will be increasing pressure from institutional investors who have their own net-zero portfolio targets to meet.
New investments
2023 will also be an interesting year for the steel industry. As of October 2022, 17 companies (51.6 per cent of the Steel Global Industry Classification Standard (GICS©)92 sub-sector in the MSCI ACWI index) had declared their commitment to achieve net zero or carbon neutrality by 2050 or earlier. This is an important step for an industry that accounts for about 8% of the world’s carbon emissions, but there remain major economic and technological obstacles to achieving these goals. Other industries will also undergo profound changes. It will be observed which companies will invest in lab-grown raw materials, considering the potential environmental and social benefits as reason enough to spend, while consumer appetite is still, for the most part, to be tested. COVID-19 has put stocks front and centre, with stakeholders stepping up their efforts to better manage the environmental and social risks of their portfolios. We will see which new leaders in green building emerge amidst a confluence of forces, including benchmarking of building performance, electrification and finance incentivising decarbonisation. Even if global warming is limited to less than 2°C, the world will still face an increase in extreme weather conditions, such as heat waves, heavy rainfall and tropical cyclones. As operational risks and opportunities for solution providers increase, we will see which companies and investors will seek an advantage by adapting to a profoundly changing climate. Meanwhile, the emergence of carbon markets, which have grown to over USD 300 billion, have entered the sights of many investors. And, indeed, we have seen the emergence of a new subset of funds that focus specifically on carbon price exposure over the past year. In 2023, we will see whether the novelty of investing in emissions will gain enough momentum to influence decarbonisation or whether we will have to wait.
Source: MSCI Inc.
