Not shaken, despite the stir

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.