2022 Sustainable Investing Outlook

ABRDN SUSTAINBLE INVESTING PODCAST

Amanda Young: Hello, welcome to our podcast today. I'm Amanda Young, your host and you are listening to abrdn's Sustainable Investing podcast, discussing all things relating to responsible and sustainable investment.

Now, I am absolutely delighted to have four very distinguished internal colleagues with me today, all subject matter experts on the issues of sustainability, who are going to give us their view on what we should expect on sustainability agenda for 2022.

So a very warm welcome to Eva Cairns, who is our head of climate change strategy, and she's going to give us an outlook on the climate agenda. So welcome, Eva.

Eva Cairns: Hi, Amanda. Great to be here.

Amanda: We've also got an Anne Meoni who is one of our senior analysts with responsibility for our environmental research. Welcome, Anne

Anne Meoni: Hello, Amanda. Thank you.

Amanda: And Ben Holden is joining us to give us the governance view on what to expect for 2022.

Ben Holden: Hi Amanda, thank you for having me on.

Amanda: And finally, certainly, last but not least, Steph Kelly, who is the deputy head of the Research Institute, and leads on all our ESG research within the Research Institute, Steph, lovely to have you on board.

Steph Kelly: Great to be here Amanda

Amanda: I'm going to start by handing over to Eva, who is going to take us through her outlook for 2022 for the climate agenda

Eva: Thanks, Amanda. For 2022, I was gonna highlight three specific things.

The first one is following on from COP 26, we saw a huge amount of targets that were announced by the financial industry, including asset managers and ourselves. And I think what we will see in 2022, is that, you know, these targets need to be put into practice, into actions and actually really demonstrate how they've been implemented and actually, maybe even by the end of the year, what progress has been made against the target set.

So I think really the theme of putting the words from 2021, and the Race to Zero, and the commitments that were made as part of that, into action and into practice and demonstrating how this is done, not only in terms of target setting, but also in terms of the types of solutions that are being developed across different asset classes. That's one thing we want to do and I think we'll see more of that in the industry net zero solutions across different asset classes.

The second thing I'd highlight is reporting, I think we have seen a huge increase in regulation and in demands for certain types of reporting from regulators, but also from clients. So in 2021, we saw, for example, an updated TCFD recommendations, the Task Force on Climate Related Financial Disclosures. We've also seen the launch of the new greenhouse gas emission standard PCAF for financed emissions, and at COP as well, there was an announcement there would be an international sustainability standards board launched. So all of these things in 2022, I think will be reflected in really an increase in the type of reporting that we will need to develop.

And one of the key questions is how we demonstrate portfolio alignment. And that's also been something the industry has been working on. But there's not really a very clearly defined answer to that yet. So how do you show that a company or portfolio is really netzero aligned or aligned with the goals of the Paris Agreement. It's a really complex, complex calculation to do that, or complex methodology. in order to kind of demonstrate real world impacts, I think that's going to be another key area of focus.

And the third area I'll highlight is just how the landscape is evolving in terms of risks and opportunities related to climate change across regions, across sectors, it's so wide reaching, and if we will see the policy or the promises made during COP 26 put into practice, and we'll see policies strengthen across different regions - this will also impact the risks and opportunities across regions and sectors that we will see. So I think we need to be very carefully assessing this on an ongoing basis. And I think there will also be an increased focus on physical risks, because we've talked a lot about the transition to net zero, and the Race to Zero, and now there's also a ‘Race to Resilience’ and actually understanding that we also need to really focus on our exposure to physical risks.

So these would be the three areas I would highlight we really need to focus on in 2022.

Amanda: It's certainly going to be a busy year and the climate agenda and certainly from a responsible investment perspective, Eva, I'm sure you’d agree with me, it has been the number one topic that our clients have been asking us about.

I'm now going to move on to the environmental agenda. So the one thing I would say, you know, Eva's already highlighted a lot of action that's happening in the climate space. But we as responsible investors need to recognise that it’s not just all about climate change. So we started with perhaps the hot topic, but I think there's a lot happening in the environmental space that we need to be thinking about. So I'm going to hand over to Anne, who leads our environmental research internally, with our investors. Anne, what are the key things we should be looking out for in 2022?

Anne: Thank you, Amanda. I think there were kind of two main topics that I think we'll see movement on in 2022.

The first one is around biodiversity loss and the second one is around circle economy, and in particular, single use plastics.

On biodiversity loss, its the next great environmental crisis after climate change. And it's an area of increasing climate interest as well. There's also a lot of the movement in terms of regulation and policy change.

Climate change and biodiversity loss are very interlinked, both in positive and negative ways - but I'll start with a negative. So if you get negative impacts from climate change, you do get impacts on biodiversity loss - thinking things like forest fires, and coral reef bleaching - they're just a few examples.

But there's also a positive to this as well, which is that because of climate change, we're seeing an increased interest in nature based solutions. So that's the ability of natural systems to absorb and sink large volumes of carbon. And what we're likely to see is more investment in biodiversity improvement projects, so they can act as carbon sinks through the offsetting mechanisms.

The main changes around biodiversity loss that we saw in 2021, are high level pledges emerging from both the initial phase of COP15 and COP 26.

So COP 15, for those that don't know, is the biodiversity equivalent of COP 26. And in the initial phase, we saw a high level commitment to put nature on a path to recovery by 2030, and at COP 26 we also saw 120 countries commit to halt inverse deforestation by 2030. Now that is very initially positive because those 120 countries represent 90% of the world's remaining forested areas. But just like climate, what we really need to do now is move those high level pledges into stronger commitments and actions.

The EU is definitely moving in that direction, with some proposed regulation that's taking aim at six forest based commodities. And those forest based commodities are responsible for more than 70% of global deforestation each year. And those are palm oil, timber, beef, soya, coffee and cocoa. And the legislation to prevent the sale of these commodities into the economic blog if it can't be proven that no deforestation has taken place in their production. In order for real change to happen, investors need better disclosure, and Eva has already mentioned TCFD, but what we have in the nature area, is nature related financial disclosure, and that's aiming to basically duplicate what we've seen TNFD do to get better corporate disclosure, and we're really hoping for the same kind of level of action and disclosure coming from that in the next few years.

And going back to single use plastics, this is a topic that's definitely moving back up the agendas as regulators look to ban more unnecessary single use items. But bans are not the only transformation happening in this area. We're seeing company and regulatory commitments to increase the recycled content in packaging items. And there's also some really interesting technologies coming into the market, that’ll help enable better quality recycled materials, which has been one of the main issues, and that all helps to move towards more circular economy models.

So we'll have more regulation, probably more bans, but the real changes will be around increasing recycled content.

Another area aside from the regulation, which is looking to ban single use plastic items, and very positively, the movement towards more recycled content, are more government's looking at deposit return schemes, which help promote circular economy. And what they do is they add a lot more value to recycled items and increase recycling rates dramatically.

Amanda: So I see quite a lot of similarity in the climate space in terms of regulation reporting. And but I do think that you've highlighted some very key areas that we as investors need to be thinking about for our individual portfolios.

 But obviously, climate and environment are just one part of the ESG chain, if you like. And so I'm delighted also to be joined by Ben Holden, who is one of our senior governance experts within the ESG investment function here at abrdn. Ben, what would you like our listeners to hear about in terms of what you're going to be looking at for 2022.

Ben: Thanks, Amanda. I'm going to focus mainly on diversity and then I'll note a couple of other topics we're likely to see in the next year.

We've seen the focus on social issues increased during 2020 and 2021, in part due to the expansion of the Black Lives Matter movement after George Floyd's death, and also due to the unequal societal impacts of COVID.

In 2022, we expect social issues to remain in focus, and in particular, diversity and inclusion.

Workplaces worldwide remain in balance and subjected to different regulatory and market practices and these imbalances vary by country. If we take gender diversity, for the simple reason that it should be near uniform across the globe, we find that Japan's boardrooms on average are 10% female in comparison to 44% in France, and these figures are more advanced than those for executive committees, which stands at 3% in Japan, and 19% in France.

Furthermore, it is particularly striking that women were 24% more likely than men to lose their jobs during the pandemic. Meanwhile, in some countries, attention will rightly turn to other aspects of diversity.

For companies aiming to create inclusive businesses fully reflecting their customer base, and local markets, all aspects of diversity should be considered. Whilst companies are starting to develop broader diversity, inclusion and equity policies, corporate data and policies on these additional aspects are in their infancy. Moreover, there are limitations in a number of countries as to the gathering of additional diversity data, with it being illegal in both Germany and France to gather data on ethnic origin for example.

Despite these hurdles remaining, we expect progress against these and we expect attention on boardrooms in the UK to shift to ethnic diversity. After the Hampton Alexander review, and previously the Davies review saw FTSE 350 boards jump from 8.8% female representation in 2011 to 34.3% as of the latest updates in January - we've started to see the impact of the Parker review, and its targets of one person of colour on FTSE 100 boards by the end of 2021, and on FTSE 250 boards by 2024. This will continue to remain a key area of focus for ourselves and for other investors.

Furthermore, we expect to see more ENS resolutions focused on diversity in 2022. We saw 42 diversity related resolutions in 2021, up from 28 in 2020, and of the 42 we saw in 202 - 10 focused on racial equity audits, having seen very few if any of these before.

These resolutions are nuanced, and require diligence to ensure that our clients votes are effective and considered.

For example, some focus on measuring the outcomes of internal DNI initiatives, which are within the control of companies. Others have focused on bank lending practices being discriminatory, sometimes reflecting wider socio-economic conditions.

We also expect to see more say on climate resolutions - another trend which has been gathering steam. After Chris Hohn’s TCI put forward a resolution at EONIS AGM for say on climate vote in 2020, we've seen many more companies putting these resolutions forward. We expect this to continue into 2022 and in the future, but we hazard against companies using these resolutions to effectively sign off on their climate strategies. The votes on these resolutions are advisory only, and many will be put to vote once every two or three years. So companies must remain focused on evolving their climate strategies appropriately.

Finally, I'll just quickly note a couple of other things we expect to see in 2022. Firstly, the continued evolution of audits, which has been subject to many reviews, and more and more focused on issues such as incorporating climate into corporate reporting. Secondly, a continued focus on executive pay. And thirdly, there is a head of steam building around client directed voting by UK pension schemes, which will develop further in 2022.

Amanda: Ben, that was really helpful and really interesting, certainly the rise in ENS resolutions that we're seeing. And I'm glad to see that pay after 20 years is still up there on the agenda. And perhaps what we need to do is think about having a podcast specifically on that subject matter in 2022, to really get a sense of what the pay issues still continue to be for companies.

I'm finally going to hand over to my last guest that is Steph Kelly. She is the deputy head of the Research Institute and also leads on our ESG research and helps coordinate ESG research across abrdn's investment teams. So Steph, welcome today, perhaps you can give us your take on some of the social issues that we might be looking at next year.

Steph: Yeah, absolutely, thanks so much, Amanda, for having me. I think when I look to 2022, I'm really excited, I mean, some of what Ben just talked about, it's so relevant to the research agenda as well. And that's around increasingly understanding and incorporating the ‘S’ - and indeed the ‘G’ when we talk about ESG issues. And for me, that's going to look two ways.

First is a continuation in 2022, of the importance of gender equality in the context of the investment space. And in particular, we're really excited we surveyed FTSE 350 companies to try and understand what parental leave policies look like, this was built off of our A Woman's Place research, that was published earlier this year. And the idea was to try and understand beyond the existing disclosures, not just what the levels are in terms of management and executive female participation. But actually, what are the policies in place, creating a pathway for women to remain in the workforce and indeed, continue through and continue to their careers up to executive level.

And so what we did is surveyed FTSE 350 companies and ask them specifically, what are your parental leave policies? What's your paternity leave policy? What's your maternity leave policy? What's driving you setting those policies, and why you know, what's limiting you in terms of offering even more in cases where that seems appropriate. And we're really excited, we're going to be publishing the results of that survey early in the new year, and we can't wait to share that information with the industry, because I think it is a really important way for us to think about gender equality as investors, is around, as I said, the pathway as well as, as well as those headline figures that the industry is increasingly asking companies about.

And beyond the gender equality research, we're also increasingly interested in this question of - what are the consequences of climate change for social and governmental factors? So really linking up ‘E, S and G’. So rather than necessarily treating them in isolation, but increasingly talking about them as connected factors. You can think about that in terms of adaptation. So what are the social consequences of climate change? And what will be needed? So for example, greater proliferation of pandemics is a good example of a potential consequence of climate change. And what does that mean for investors? What sectors might do well, what sectors are likely to struggle? Or how do they need to change?

On top of that - just the social factors - also governmental. So things like the geopolitical consequences of climate change? What are the regional and sector dispersions that come from that? And what does it mean for investors?

And then finally, when we think about the energy transition itself, I'm a hugely passionate advocate for the just transition. And that idea that when we talk about the energy transition, that the conversation goes beyond purely the specifics of the energy transition and carbon metrics, which are absolutely crucial, but go beyond that, to the question of, well, what does it mean for workers and for consumers to see this energy transition take place? And crucially for those who are nervous, and we know that there is political opposition to taking dramatic action on energy transition, precisely because of the fears of the damage it might do to existing communities and countries that are reliant on fossil fuels. And the question marks around how do we move that conversation on and bring those people along and ensure that those damages are mitigated insofar as is possible. And I think that's a question for both governments and for companies. And I'm really excited that in 2022, we're going to have that on the research agenda to try and develop better frameworks for investors to think about these issues going forward.

Amanda: So a massive thank you to my guests for their insights. This should hopefully give listeners a view as to what we can expect during 2022 pending any uncertain surprises.

You've been listening to the abrdn Sustainable Investing podcast, a podcast relating to all things responsible and sustainable investing. Thank you for tuning in. You can find all of our previous episodes on various podcast channels such as Spotify and Apple, as well as on the abrdn website. Until our next podcast goodbye for now.