- Head of Sustainable Investment
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From a war that has created humanitarian and energy crises, to rising inflation that pressures consumers, to ongoing supply-chain challenges, to the devastating effects of climate change, 2022 was a trying year. While we anticipate additional market headwinds in 2023, our Sustainable Investing (SI) Research Team remains focused on identifying opportunities to deliver value for our clients. Here, we offer a high-level view of our 2023 SI research and engagement priorities.
We see the low-carbon transition as a major economic transformation and thus our climate-related research is ongoing. We plan to expand our work with the MIT Joint Program on the Science and Policy of Global Change to assess climate transition risks beyond public equities and fixed income, to include sovereign debt instruments. Over time, we intend to establish data sets, metrics, and frameworks that are as robust as those used with corporate equity and debt instruments today.
Given global progress on decarbonization (with renewed urgency stemming from the energy crisis), we expect to expand our research and engagement activity to help companies quantify and disclose the transition risks they face and ultimately have a plan for navigating the transition. Climate engagements with companies in fossil-fuel-heavy industries will continue to be a primary focus in 2023.
Our Climate Research Team expects to conduct materiality-based analyses of the relative impact to credit quality from physical and transition risks in emerging markets (EMs) versus developed markets (DMs). While EMs are disproportionately exposed to physical risks (heat, drought, floods, etc.), DMs carry greater transition-risk exposure, given accelerating policy activity and their financial capacity to support the low-carbon transition
Our engagement with policymakers continues as well. We try to bring a practitioner’s perspective to these discussions. We generally support policymaker efforts to enhance climate-risk transparency, as this helps market participants more accurately analyze and price risk. In 2023, the US Securities and Exchange Commission (SEC) and the International Sustainability Standards Board (ISSB) are set to release new climate disclosure standards. We hope to help companies navigate the changing regulatory environment.
Related to our climate work is our expanding biodiversity research and engagement — specifically on the causes, effects, and potential solutions for preserving natural capital and mitigating biodiversity loss. While human activities have had the greatest impact on biodiversity to date, climate change will likely be an increasing factor. Worsening climate conditions could threaten the world’s natural capital, with potentially significant and unpredictable value-chain risks to many sectors.
Working with Woodwell and the MIT Joint Program, our SI Research Team aims to study biodiversity and the potential effects of biodiversity management on capital markets. Our Biodiversity Working Group is developing a research and engagement agenda that prioritizes the measurement of specific areas within biodiversity, so companies have a more tangible way to engage on the subject.
While broad-based data remains scant, metrics related to land-use change — primarily deforestation for logging or agriculture — are available today. For now, we can engage with companies on their biodiversity impacts and risk exposure in this context. As more data becomes available, we expect to improve our understanding of how companies are considering their biodiversity impacts, what actions they are taking to mitigate those impacts and improve outcomes, and how their actions — or lack thereof — may affect their future value.
Biodiversity fits squarely within our overall ESG engagement approach. Historically, biodiversity loss has been an externality from which producers and users of nature-based products benefited, with the costs borne by the rest of society. This may no longer be the case in the long term. Many sectors, including consumer, utility, and construction companies, already have direct gross value added (GVA) that is highly dependent on nature. Companies in many other sectors have “hidden dependencies” on natural systems throughout their supply chains. We expect to engage with companies on their potential biodiversity risk exposure, including the physical risks of weakening ecosystem services and the transition risks of business activities that can negatively affect those same ecosystem services.
As many market participants and regulators intensify their focus on social (S) issues in the ESG landscape, one area we plan to do more work on is modern slavery. Our select portfolios that consider modern slavery are committed to formally assessing and promoting the adoption of policies and procedures by investee companies geared toward reducing modern slavery risk across their operations and supply chains. Improving modern slavery risk-management programs to raise awareness and reduce prevalence of forced labor, child labor, debt bondage, and human trafficking is a well-articulated objective of international agreements and polices, including the International Labor Organization and the 2011 OECD Guidelines for Multinational Enterprises. Within EMs, reducing modern slavery risk can potentially be both an alpha driver and a risk-control device.
Our SI Research Team informs a structured risk-assessment approach and develops an operational process for our “in scope” portfolios. Their process includes company engagements by members of our ESG Research Team, as well as certain portfolio managers and global industry analysts. We are also creating education programs and Custom Integration Plans (CIPs) for investors whose portfolios face the highest risk of exposure to modern slavery. Notably, our process for reducing modern slavery risk will rely heavily on a combination of data collection, engagement, and, if appropriate, escalation.
We plan to increase our support of our growing sustainable platform by focusing on the following areas in 2023:
Impact measurement and management
Impact measurement and management (IMM) is a core component of our impact investing approach, critical for evaluating a company's or issuer’s holistic impact — specifically, how its products and services contribute to our impact objectives. In 2023, our Impact Investing Team will focus on building out infrastructure to support a widening list of strategies that incorporate key performance indicators (KPIs) and impact tracking into its investment process. The team expects to concentrate on data integrity and infrastructure, specifically improving our internal IMM processes for ensuring accuracy and transparency about the impact of our holdings.
Emerging markets impact
EMs face outsized challenges in today’s market and macro environment. At the same time, these large, diverse markets are often hubs of innovation and long-term growth potential. Our Impact Investing Team now includes an EM-dedicated strategy. Companies domiciled in or primarily serving consumers in EMs often feature innovative business models and management teams with extensive understanding of local needs. To improve our understanding of how our impact investments affect end-market beneficiaries, we plan to conduct “grassroots” research trips across EMs. As the two largest EMs, India and China are of particular interest, but our work spans the rest of Asia, Latin America, and Africa as well.
Sustainable investing in private markets continues to take shape. Our ESG Research Team partners with select private portfolio companies with a mix of proprietary and third-party data and resources to enhance public market ESG readiness, share benchmarking insights and analysis, and collaborate on in-depth ESG roadmaps to help companies improve their ESG profile over time. Our climate-focused private-equity investors partner with Woodwell and MIT scientists and our climate research team on thematic “deep-dive” analyses of innovations at private companies under consideration.
We expect 2023 to be another year of change and opportunity in capital markets. Through our research-based approach to sustainable investing, we hope to continue to improve our understanding of issuers and to contribute to better informed investment decisions.
Climate mapping in action: Investment case studies
We describe our Climate Exposure Risk Application (CERA), which can help our investment teams visualize and quantify physical climate risks.
Private investing portfolio company interview with AMP Robotics CEO
Dr. Matanya Horowitz, CEO of AMP Robotics, highlights how the company integrates AI and robotics into the recycling industry and explores the “actionable guidance” Wellington provides on ESG and other strategic issues.
Decoding impact expectations: best practices for impact investors and companies
We share three recommendations each for impact investors and companies to help them better understand and manage each other's expectations.
Why sustainable food systems matter to investors
Our climate research expert explores insights from our joint work with Woodwell Climate Research Center on the pivotal relationship between food systems and biodiversity and highlights potential investment opportunities.
Why climate change matters in private markets
Power hungry: Why the energy transition may depend on storage and flexibility
See why our utilities experts see demand for large-scale batteries and flexible-power generation growing more than consensus.
Shareholder activism in Japan: Integrating ESG within the investment process
In the final article within our series on shareholder activism in Japan, ESG Analyst Soo Ho Jung shares how the Japan equity team integrates ESG to help realize value for investors.
When extreme weather becomes the norm: what’s next for climate investors?
Climate investors can play a crucial role in accelerating mitigation and adaptation solutions. But finding investable opportunities requires a deep understanding of the climate investing landscape.
WellSaid: The economic significance of biodiversity
In this short clip from his WellSaid podcast interview, Dr. Zach Zobel of Woodwell Climate Research Center discusses the economic importance of coral reefs — lynchpins of marine biodiversity and vital to fishing, tourism, and other industries.
Green horizons: How the shift toward sustainable finance may reshape fixed income markets
Three sustainability trends have the potential to reshape fixed income markets, leading to a range of new opportunities for investors.
Building resilience: Key questions equity investors need to ask today
Yolanda Courtines explores how equity investors can re-assess the resilience of their core portfolio against higher interest rates and more adverse macro conditions.