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2023 mid-year outlook: Responsible investors need to stay vigilant of potential risks and opportunities
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Roger Lewis
Head of Sustainability and Responsible Investing
Solar and wind technology are driving the renewable energy sector's upward trajectory
Investor engagement remains positive and impactful despite the greater likelihood of exceeding the 1.5°C global warming limit
The EU's Sustainable Finance Disclosure Regulation (SFDR) comes into force this year
The integration of nature considerations into investment decisions has gained prominence
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As we reach the mid-year mark, it is essential for responsible investors to assess the current landscape and identify key factors that can significantly impact their investment strategies. In this review, Downing's Head of Responsible Investment, Roger Lewis delves into four critical areas impacting the UK—energy, climate, regulation, and nature—to provide valuable insights and alert investors to potential risks and opportunities.
Energy
The renewable energy sector continues its upward trajectory, driven primarily by solar and wind technologies. In addition, national-level targets and investment opportunities are contributing to the rapid deployment of renewable energy.
However, there are potential threats - one recent example is the reports of cash and production issues affecting major wind turbine manufacturer Siemens Gamesa. Additionally, concerns over mining, geopolitical challenges, and human rights issues related to battery materials like nickel and lithium pose further potential risks to the adoption of renewable technology.
Furthermore, delays in permitting renewable installations and grid connectivity also present a significant risk of clean power generation being lost. However, streamlining administrative complexity can mitigate this risk.
It is important for policymakers to exercise a delicate narrative around energy security, decarbonization and costs of living, as they each can lead to fluctuating attitudes toward fossil fuels.
Climate
Despite efforts to limit global warming to 1.5°C, recent extreme weather events and rising temperatures suggest that achieving this target is becoming increasingly challenging with certain regions, such as the Arctic, already experiencing the effects of climate change disproportionately.
Worryingly, monitoring atmospheric CO2 levels reveals that we have surpassed the crucial threshold of 420ppm, indicating a greater likelihood of exceeding the 1.5°C limit.
However, it's not all bad news. While setbacks have been observed in the net-zero carbon agenda, investor engagement remains positive and impactful, including votes on climate transition plans this AGM season. Climate transition plans and the launch of Phase 2 of Climate Action 100+ indicate sustained momentum toward climate action. However, funding gaps for adaptation and mitigation efforts remain, necessitating increased collaboration between the public and private sectors, especially in emerging and developing economies.
Regulation
Asset managers have begun disclosing under the EU's Sustainable Finance Disclosure Regulation (SFDR) for the full year in 2022. This disclosure process has shed light on various indicators, including the social impacts of infrastructure - such as increasing job opportunities - and this has prompted deeper consideration of these factors. Ongoing developments, such as proposed rules for ESG ratings, future climate targets, and non-financial sustainability reporting, warrant continuous monitoring.
In the UK, attention is focused on policy advocacy and regulatory changes, including governance structures, effective stewardship, ESG professional competencies, ESG ratings and looser listing rules.
Nature
Following COP15 and the adoption of the Kunming-Montreal Global Biodiversity Framework, the integration of nature considerations into investment decisions has gained prominence.
Investors are increasingly incorporating biodiversity metrics into their ESG scorecards, emphasising the preservation and improvement of ecological conditions in investments.
For example, Downing has incorporated plans to enhance biodiversity on our solar sites. On our Andover Solar Site, we will be focusing on a substantial roll out of installations which support local wildlife: bird boxes, mouse boxes, bat boxes, beehives and hibernaculas (shelters occupied by dormant animals during the winter).
In addition, active ownership and investor engagement initiatives, such as Nature Action 100 and the Finance for Biodiversity Pledge, are gathering momentum. Reporting and disclosure at both corporate and investment levels are becoming more important, with the forthcoming launch of the Task Force on Nature-related Financial Disclosures (TNFD) expected to be a significant milestone.
As we evaluate the mid-year landscape, it is crucial for investors to remain aware of the prevailing trends and potential risks within the responsible investing sector. While renewable energy continues to thrive, challenges demand vigilance.
Climate change remains a pressing concern, necessitating sustained investor engagement and collaboration to drive meaningful action. Regulatory developments, such as SFDR and UK policy advocacy, require continuous monitoring.
By staying informed and responsive to these factors, investors can navigate the evolving landscape and make informed decisions to achieve their financial and sustainability goals.
