Key trends 2023
As we’re starting off the new year, we have asked our specialists what they believe to be some of the key trends in ESG in 2023. Here’s what they said:
Renewables will see faster growth – The energy crisis, triggered by Russia’s invasion of Ukraine, has rapidly accelerated growth in the renewable sector. According to a report published by the International Energy Agency, the next five years will see renewable infrastructure grow as much as it did in the previous 20. By 2025, renewables will overtake coal as the greatest source of energy globally.
Evidence for the transition can be found around the world. In the UK, renewables and nuclear already dominate the energy mix, comprising 48.5%, compared with gas and coal at 40%. 2022 also saw a new record for UK wind power production. On the other side of the Atlantic, US President Biden’s Inflation Reduction Act has widely been received as the most important climate legislation in the country’s history and includes a $370bn investment in renewables, carbon-free travel and clean technology tax credits.
Adapting to climate change – The multitude of extreme weather events observed across the world in 2022 has exposed the lack of effective adaptation measures, meaning that these will play a greater role – alongside climate change mitigation – in the future. At COP27, Egypt launched the global Adaptation Agenda with 30 targets to protect the most vulnerable communities by 2030, while countries hope to adopt a Global Goal on Adaptation framework at COP28 in Dubai. The idea is to establish an international adaptation goal to drive collective action, similar to the targets of keeping global average temperatures “well below 2C” and ideally around 1.5C.
At the same time, low-income countries are expected to keep pushing for more funding from wealthier nations. Setting up a fund for Loss and Damage at last year’s COP was an important first step, but world leaders still need to figure out the details – who contributes, who receives the money, and what will the new funding arrangements look like.
Focus on health equity – Health equity gained growing attention throughout 2022 and will remain a hot topic this year. Health care providers, insurers and other organisations are expected to come under growing scrutiny for how they address the issues that impact health outcomes for different populations. For example, New York’s Department of Financial Services recently issued a mandatory information request asking insurance companies to provide details of the efforts they are making to gather race, ethnicity and language data, and of the programmes they have designed to improve health equity.
Meanwhile, a group of 35 investors managing $5.7tn formed an alliance called the Long-Term Investors in People’s Health Initiative due to concerns that public health is not being adequately addressed as an ESG issue. Led by ShareAction, the group will put pressure on companies to focus on improving the physical and mental health of workers, consumers and communities. This month will also see the launch of the Health Equity Network, which has been created by the Institute of Health Equity in partnership with Legal & General. The UK-based initiative aims to encourage public and private organisations, community and voluntary groups, and individuals to share their work on health equity and engage with others with similar interests.
Growth in biodiversity-related financial products – Throughout 2022 there has been a growing focus on biodiversity-focused products from asset managers in response to increasing demand from investors. The likes of Gresham House, Jupiter and Aviva have all launched biodiversity products and the market is predicted to be worth $93bn by 2030, compared to $4bn in 2019, according to the Paulson Institute.
It is likely that this trend will continue and accelerate in 2023, particularly after COP15 where negotiators agreed that the finance sector must invest in ways to halt and reverse nature loss by the end of 2030. While there are currently 14 funds managing around $1.6bn with biodiversity-focused strategies, there are about 1,100 funds with $350bn in global assets that focus on climate, according to Morningstar. It seems likely that this will gap will narrow in 2023.
Rise in climate litigation – With the number of climate lawsuits filed globally more than doubling since 2015, environmental litigation is rapidly growing as a strategy to enforce greater climate action and responsibility from polluters. This trend is likely to continue in 2023. For instance, the outcome of an ongoing case led by a small-scale farmer against RWE, which seeks corporate compensation for climate impacts, could set a legal precedent. Future cases arguing for a clean and healthy environment will be bolstered following the UN General Assembly’s passing of a resolution stating that a healthy environment is a human right.
Alongside environmental groups and activists, engagement from climate-vulnerable groups including Indigenous communities, small island communities, youths and individuals in developing nations will continue to increase. In 2022, the Australian government lost its first climate litigation case for insufficient climate policy based on the cultural rights of Torres Strait Islanders. Additionally, more areas of the world are starting to engage in climate litigation – including Russia, which recently saw a group of local activists file its first ever climate lawsuit and demand stronger emissions reduction targets.