Reasons to be cheerful in 2023
2022 was certainly eventful. It started with the largely successful rollout of the Covid-29 vaccination, which was soon overshadowed by Russia’s invasion of Ukraine.
Inflation was back with a vengeance – reaching its highest point in the UK in more than 40 years and sparking a cost-of-living crisis.
And, of course, who could forget that in one four-month stretch, the UK had four chancellors of the exchequer, three prime ministers and two monarchs?
The year concluded with a series of walkouts by nurses, postal staff and railway workers in the worst strikes the country has seen in more than a decade.
What next?
Financial markets thrive on certainty and, whichever way you cut it, this was a challenging year.
The good news is, we can be much more positive for 2023.
Better times ahead
While still too early to see a peaceful resolution for Ukraine, there are signs the outlook is rosier for some of those other challenging areas.
Many experts believe we’re at or near peak inflation. The Bank of England (BoE), which has raised interest rates to counteract rising prices, believes inflation will start to fall from the middle of 2023 – although it will still be around two years before it is back around the BoE’s target level of 2%.
In politics, the UK government seems to have finally recovered a bit of stability, with its latest prime minister Rishi Sunak aiming to restore calm and confidence.
As for energy prices? Bills are still likely to remain high, but many are hopeful that these will start to moderate and ease slightly as the year goes on.
Importantly, from an investment perspective, even though we’ll still be feeling the pinch this year, much of the bad news is already ‘priced in’. Stock prices include all the negative things investors think will happen. In theory at least, this means there’s less chance of a nasty surprise that could send share prices down again.
The year in sustainability
From my perspective, 2023 is going to be an interesting year to watch when it comes to environmental, social, and governance (ESG) investing.
After a year where uncertainty has forced these considerations to take something of a back seat, we should now see sustainability becoming embedded deeper and deeper into the bedrock of investing.
- The heat is on for companies not acting on climate
We can expect to see more investor pressure on companies dragging their heels on climate change.
While COP27, the global UN climate change conference disappointed some in its achievements, investors aren’t letting up in their demands for businesses to decarbonise their operations and help the transition to a global ‘net-zero’ economy.
There’s already been progress in 2022. Climate Action 100+, an investor-led initiative that holds companies to task over cutting emissions in line with the 2015 Paris Agreement, reported in 2022 that 75% of its ‘focus companies’ have now committed to achieve net zero emissions by 2050 or sooner. Even more encouragingly, 92% have some level of board oversight of climate change, and 91% are aligned with the recommendations of the Taskforce on Climate-Related Disclosures.
What needs to happen now though is commitments have to be matched by credible plans. This year we’ll expect to see more initiatives like these holding companies’ feet to the fire.
- A broader and deeper understanding of ESG
Climate change is undoubtedly a vital face of ESG, but it’s not the only one. There will be more emphasis on other key areas affecting natural or social capital (the impact on our planet and its people).
Among the highest profile is likely to be deforestation.
The rate at which the world’s forests are destroyed has slowed, but still not enough to meet the target of zero deforestation by 2030. The UN’s Biodiversity Conference (COP15) at the end of 2022, culminated with a landmark agreement from nearly 200 nations to halt activity that is damaging the earth’s ecosystem, which gives them a clearer set of targets of how they can limit their impact on nature.
For investors, the COP15 agreement should give greater transparency on company value chains – for example, the forestry implications for beef farming, or manufacturing involving rubber. The number of listed companies currently disclosing a deforestation policy is currently extremely low – with only 12% of food production companies having one, and others such as textile companies and luxury-goods producers and auto-components producers at around 4% or lower.[1]
- Greater transparency over regulation and reporting
One hugely important area for investors in 2023 is the Financial Conduct Authority’s decision to consult on regulating ESG ratings, a big step forward for increasing transparency on how sustainable companies really are.
We’ve written previously that attempts to score companies on their relative ESG strengths can sometimes be misleading, meaning companies can potentially have a high ESG score despite some continuing unsustainable practices.
But now the UK government is considering bringing ESG ratings providers under the umbrella of regulation, as part of a series of wide-ranging series of measures and reforms aimed at replacing European Union laws.
We see this as a hugely significant move for the industry. Greater regulation over how ratings agencies score companies on ESG will give greater clarity over reporting, more assurance to investors on the ratings that are offered, and ultimately helping investors integrate ESG into their decision making.
As the year just past shows, long-term financial planning can be challenging. But there are still reasons to remain positive and upbeat on what’s to come. If you want to discuss anything I’ve mentioned here, please get in touch.
[1] Sustainable Investment Lab-grown fur and regulatory step-changes - a look at sustainable investing in 2023