At the start of December 2022, we shared our thoughts on the key investment trends for the year ahead. This was published in Private Banker International on 3rd January 2023.

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In the UK, latest ONS estimates indicate that UK GDP shrank by 0.2% in Q3 and the Bank of England is projecting that the UK economy may be in recession for 2 years. Globally, the IMF is projecting a significant slowdown with many advanced economies in recession or only slightly above zero growth, as more generalised inflation and the policy measures adopted to try to counter it bite. As investors and financial decision makers reckon with this reality, they might be tempted to streamline sustainability efforts, taking a view that these are a “nice to have” as opposed to a core part of an investing strategy.

This would be a mistake: recession and the energy crisis are an opportunity to fast-track, rather than decelerate sustainability efforts.

Whilst the risk/return trade-off looks unattractive for many traditional investments in an environment of negative or weak economic growth, stubborn inflation and higher interest rates, impact investments can deliver compelling returns through addressing long-term challenges and accelerating progress towards a more positive future for the planet and its people. Returns are typically less correlated with the risks affecting traditional asset classes and therefore can help to improve a portfolio’s diversification and stability.

Going forward, as markets begin to look past the current economic difficulties to the risks of stranded assets and disrupted or obsolete supply chains and business models arising from climate change, environmental degradation and social & political pressures, we anticipate that the risk premium for investments that are not “part of the solution” will rise and they will become increasingly harder to justify.

Going beyond ESG to investments which create positive impact

Noisy debate about the positives and negatives of ESG investing has dominated in the last twelve months and is likely to continue in 2023 particularly as a lot of anti-ESG rhetoric has become politicised. This debate is a distraction from the real question – which is how asset owners and asset managers can go further to create healthy financial returns and a positive impact on society. Discussions about ESG considerations in screening and evaluating the risk of investments are clearly important but they should be considered as an absolute minimum for financial decision makers – the starting point in developing new strategies, not the end goal.

Awareness of the value of integrating impact and financial goals in investing is at an all-time high and continues to gain traction within the financial system and with the end beneficiaries of financial assets. We anticipate that fully accounting for the social and environmental aspects of every investment, and aligning with and helping to drive positive impact along with financial returns will increasingly be viewed as the necessary next step beyond ESG investing.

Investment decisions today are being taken with incomplete information. For asset managers and asset owners, generating insightful impact data and using it well will be critical to investment performance, to growing their own businesses and to satisfying the demands of their end constituencies.

Greenwashing fears stall the conversation

COP27 has called for greater cross-regional standardisation with regards to ESG metrics. With new changes to. 2023 is going to see more urgent calls for internationally-recognised frameworks and standards that maximise transparency and minimise opportunities for impact- or green-washing, including for example the FCA Sustainability Disclosure Regime and investment labels in the UK.

Improved standards alone, however, will not be sufficient – investors will need to improve their own knowledge and critically evaluate their asset managers and underlying investments to determine which are truly contributing positive impact versus cherry-picking favourable metrics after the fact.

To be fair to asset managers (and allocators), many are on a journey and have to start somewhere, but the difference between those who leading from the front versus those taking rear guard actions because they feel forced to is likely to reflect itself in portfolios less exposed to the looming risks of the future and better able to deliver returns from being “part of the solution”.

Redressing unmet promises

Just before COP27, the latest United Nations Emissions Gap 2022 report stated that the current pledges made by the international community resulted in “no credible pathway” to restricting global warming to a 1.5⁰C limit and made an appeal for an urgent system-wide transformation to “avoid climate disaster”. In addition to international agreements and policy actions, impact investing will need to play an increasingly important role in effecting a green and just transition, enabling and financing the climate innovations and adaptations necessary to avoid and mitigate the worst-case outcomes.

Loss and damage was officially added to the agenda for the first time at COP27. This African COP has unleashed a new level of debate about how those with the greatest resources can collaborate with those who are less able to mitigate the near-term effects of the climate crisis, directing resources to where they can have the best payoff for us all, and recognising that our economies and ecosystems are inherently interrelated and that international progress will be held back by unfair distribution of costs and benefits. Whilst this is an important development, it should not delay or become a distraction to taking urgent action now and pursuing investments that contribute positively and where delivering attractive returns will help to show the way and attract further capital.

As the dust settles on promises made in this year’s conference, there is no doubt that 2023 will be a critical opportunity for private-sector investment to play its role in financing and driving progress in the global effort to mitigate and adapt to climate change.

Transparency and accountability offer a way forward

In scaling up finance for social and climate challenges, investors need tangible and meaningful measures to help mitigate against impact-washing and to evaluate where they can find the greatest “bang for the buck”. There is a key question investors can ask asset managers: when it comes to impact, do you mark your own homework?

As we move through 2023 we expect to see increased numbers of asset managers undertaking independent verification of their impact processes. We believe that “warts and all” transparency is important to allow investors to look under the bonnet and decide for themselves, and signals a commitment from investment managers to continuous improvement and open-mindedness, which usually aligns with superior long-term performance. In our own investment portfolio, we are looking for managers who will take the additional step of sharing these independent review findings publicly, demonstrating their commitment to transparency and honesty, and giving themselves a strategic advantage through accelerating their progress in a field which is evolving rapidly.

Let us know what you think on hello@snowball.im