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Outlook 2022: Sustainable investment

According to analysis by Bloomberg, ESG assets soared to an unprecedented $37.8 trillion by the end of 2021 and are predicted to grow to $53 trillion by 2025, which would be a third of all global assets under management.

This rise is mirrored by a growing interest in ESG more generally. For example, the number of Google searches of the term “ESG” has grown exponentially in the last couple of years.

That escalating interest is reflected in demands on investment managers. There are no ifs and buts about sustainability anymore. It is now all about how you do it, how you implement it, and how you report on what you have done. This is why we expect an intensifying debate on what a robust sustainable investment process should look like. This underpins the investment we have made over many years in research, analysis, active ownership and information systems.

The connection between investment returns and sustainable outcomes is becoming deeper and stronger. Companies’ licenses to operate, the sustainability of their business models, and the returns to their investors are increasingly interconnected.

How companies impact societies and the environment is not just an academic question, it is an increasingly tangible issue. Carbon pricing, plastics, minimum wages, tax avoidance – these are all factors that are translating into corporate financial statements, not just social costs.

ESG priorities to watch – including climate change, biodiversity and natural resource constraints

Climate change has long been a focal point for sustainable investment and is, undoubtedly, a critical concern. But exponentially increasing pressure on finite environmental resources is exposing cracks across a spectrum of environmental dimensions, bringing a wider range of natural capital issues into focus.

The UN’s COP 15 summit – the biggest biodiversity summit in a decade, which is focused on drawing up a plan to slow and reverse damage to nature – is due to reconvene in April this year in China after Covid-19 delays. We will be watching for a Paris-style agreement for nature considering how dramatic the increase in human impacts on the environment has been since the 1970s.

Last year’s COP 26 climate summit in Glasgow underlined the growing expectations on the private sector to pick up the mantle of action. So it is now companies rather than governments making commitments around sustainability issues such as carbon emissions, deforestation and methane.

For example, a growing number of companies – more than 1,000 including Schroders – have adopted climate action targets through the Science Based Targets initiative (SBTi) in line with the Paris Agreement goals to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.

Asset managers have an ability to engage with companies to drive change and different outcomes, and to hold them to account. We welcome the role we have to play in pushing portfolio companies to transition as the global economy decarbonises.

Our active ownership team has set climate change and biodiversity and natural resource constraints as key priorities for engagement in 2022.

We will also be looking at the S and the G parts of the equation. We see human capital management as well as diversity and inclusion and human rights as critical factors for the sustainability of our investments. And governance – which has long been a focus of the asset management industry – will remain a focal point, particularly in light of increased scrutiny of voting records and shareholder resolutions.

Laggards will no longer have a place to hide. Our own demands for action are rising and the industry voice is getting louder. For example, we have already announced that from 2022 we will be voting against nominations committee chairs of FTSE 100 firms not meeting diversity recommendations of the Parker Review (the Parker Review is an independent review looking at the ethnic diversity of UK boards).

Increasing regulatory scrutiny globally hitting all parts of the value chain

While companies’ sustainability practices and ambitions are becoming subject to greater scrutiny by asset managers, the sustainability practices of asset managers themselves are coming increasingly under the regulatory lens.

Sustainable finance regulation keeps evolving at a dizzying pace and 2022 will be no different to last year. Indeed, one pattern that we see is that what used to be a predominantly EU phenomenon is increasingly “