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Sustainability: Emissions are rising – and will continue to rise

‘A look ahead to 2023’ download our full report below

Globally, we will emit more this year, than last year, and more next year than this year. And, so with emissions still rising, increased severity and frequency of weather events is inevitable – as are attempts by policy makers to address climate change. Forecasting is therefore challenging, with multiple, often, contradictory push and pull factors.

Prepare for political uncertainty

In Europe, Russia’s invasion of Ukraine has precipitated an increase in near-term fossil fuel use but has also brought forward of a longer-term shift to renewables. In the US, policymakers passed the inflation reduction act – the largest public investment in environmental solutions – but at the same time climate policy remains highly politicised, particularly as we near the 2024 presidential election.

Presidential hopeful, Ron DeSantis described ESG as “woke capital”, directing fund managers to ignore “considering the ideological agenda of the ESG movement”. We expect the “anti-ESG backlash”, which so far in the US is primarily a media challenge, to continue through 2023.

International policy mechanisms are, on the whole, not working

With a challenging backdrop, financial regulators turned their attention to sustainable finance disclosure. Internationally, policy mechanisms have had some success, for example, in Indonesia or South Africa, but on the whole, are falling short. This was clear at COP27 where, with the exception of a loss and damage fund, the negotiations were largely unsuccessful.

In the UK, EU and US, regulators undertook steps to address greenwashing of sustainability-labeled funds. The UK’s Financial Conduct Authority intervened with a proposal to limit labels to three terms, sustainable focus, sustainable improvers and sustainable impact, with specific KPIs.

Focus on biodiversity and human rights

Next year we expect further progress on disclosure initiatives. With growing focus on biodiversity, the TNFD (the nature equivalent of TCFD) will publish its disclosure framework, and the ISSB, the international sustainability standards board, is consulting with investors to set a global baseline, which is expected to include Scope 3 emissions reporting.

The EU’s corporate sustainability due diligence requirements, under discussion at time of writing, require companies to identify, prevent – and if necessary – mitigate human rights and environmental impacts in operations and supply chains.

Will Martindale, Co-Head of Sustainability

When done well, regulation rewards first movers, raises standards and can lead to efficiencies. But while capital markets remain unsustainable, further attention to sustainability is inevitable.

Focus on collaborative engagements

We also expect further attention towards stewardship, with investors establishing clear engagement targets, increased collaboration, and focus on outcomes.

In the past year we have seen the UK Department for Work and Pensions introduce additional requirements on pension schemes’ oversight of ‘most significant votes’ and investors have continued to subscribe to the UK’s stewardship code.

Collaborative industry engagements will continue. Cardano ACTIAM will participate in ADVANCE, the PRI-run (Principles for Responsible Investment) collaborative engagement on human rights, engaging companies to fully implement the UN Guiding Principles on Business and Human Rights, align political engagement with the company’s responsibility to respect human rights and, address human rights issues in the company’s operations and supply chains.

A look ahead to 2023

A year of reflection, consolidation and recasting strategies.

A look ahead to 2023

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