Sustainable Investing Trends for 2023 and Beyond

After a difficult 2022 for sustainable investing, driven in part by energy repercussions of the Russian/Ukraine war, Jens Peers, CFA^®, CEO, CIO, Portfolio Manager, Mirova US, sees signs that sustainable investments will become much more important in the new year. Here, he shares views on major ESG themes, regulatory changes globally, growth opportunities, and obstacles.

Global Trends Underway
There are some important long-term trends that will drive our economy going forward that we see accelerating in 2023. One of them, for instance, is driven by the Europeans' need to be more energy independent. We believe this will lead to an acceleration of investments in renewable energy, energy storage, and energy efficiency.

The second important trend is that companies have seen harmful supply chain breakdowns, caused by the pandemic and economic sanctions against Russia. As a result, many companies are looking to bring production closer to home. This, we believe, will also lead to opportunities for industrial automation and optimization of industrial processes. Another important trend is related to how we eat. We see a very slow trend of changing patterns as Gen Z becomes a bigger part of our population. Younger people tend to eat more plant-based food, more sustainably sourced food.

New Regulations Creating ESG Clarity
Regulators around the world are introducing better and stricter ESG or sustainability regulation – providing more clarity to investors to better understand how sustainability information is integrated and how people construct a portfolio. In Europe, we see a very important new regulation with SFDR. This regulation leads to classification of investment strategies into Article 9 and Article 8. In the US, the SEC is coming out with new regulation creating more clarity, as well. Also, the US Department of Labor, recently announced a final rule that says sustainability information is a very important factor that should and could be taken into account when making financial decisions. That's also going to help workplace retirement plans in the US to be more familiar and feel comfortable investing in sustainability solutions. We see the same thing happening also in Asia, with Singapore and Japan, for instance, introducing new regulation and creating more clarity.

Readying for a Recession and Recovery
We expect a recession in Europe and the US during the first half of 2023. However, we believe valuations are already reflecting a lot of that. This is why we continue to favor European equities.

We also want to make sure portfolios are ready for both a recession and the recovery after that. Areas like utilities, health care, food, and beverages appear attractive as we believe those sectors are very defensive in recessionary environments. We also know that because of trends like population growth and generational shifts, these sectors tend to do well in a normal economic environment, as well. But if you do have that recovery, we also believe that renewable energy and digitalization of our economy will lead to a lot of investment opportunities.

In general, we favor high-quality companies, especially when interest rates are high. We think companies that have a lot of debt on their balance sheet and need to refinance that debt, will find it more difficult to generate a lot more earnings growth. That's why we continue to focus on high-quality companies with strong balance sheets.