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Ten predictions for sustainable investing in 2023: Goldman Sachs

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Analysts at Goldman Sachs have identified ten upcoming trends in the sustainable investing space in 2023, as the world progresses from aspiration to action.

  • Goldman Sachs expects further progress on the sustainable investing front in 2023.
  • It needs, however, to align the sustainability STARS: supply, transition, affordability, reliability and security.
  • Analysts suggested potential ways for investors and corporates to navigate the debate around ESG.

The predictions

Analysts have placed their predictions into three categories: shifts in investor allocation and strategy, shifts in corporate, consumer, and government investing and policy, regulatory, and geopolitical impact. 

Shifts in investor asset allocation and strategy 

  1. The sustainable investable universe will broaden. 
  2. Demand for improvers and forward-looking approaches will rise. 
  3. Greater weighting on social goals such as affordability and accessibility.
  4. Net zero path, plan, and performance to receive greater focus. 
  5. Asset managers to initiate more topical Sustainable funds. 

Shifts in corporate, consumer and government investment 

6. Green Capex: remains a global theme with mix shift towards the US on the back of the Inflation Reduction Act.

7. Corporate spending on circular economy and biodiversity is likely to increase.

8. Adaptation-related investment also to increase.

Policy/Regulatory/Geopolitical impacts 

9. EU Taxonomy disclosure to illuminate underappreciated green exposure at diversifieds.

10. Divestment dilemma: increased engagement over exclusion.

Aligning to the STARS

According to Goldman Sachs, inflationary pressures, regulations, fiscal stimulus and continued climate events have pushed forward “fruitful debates” over how to achieve the United Nations’ Sustainable Development Goals. These debates need to align the sustainability STARS – supply, transition, affordability, reliability and security.

Action has to match supply with demand to mitigate economic volatility, accelerate the energy transition, and mitigate inflationary pressures on lower-income populations, which allocate a disproportionate percentage of after-tax income towards bills and food. Reliability is about preventing risks of potential energy disruptions as a result of excess demand or supply outages and security involves optimising sources of product supply to limit political risk, stimulate inclusive growth and minimize environmental impact.

Analysts expect further progress in turning the aspiration into action in 2023, which will lead to a broadening of the investable universe, higher weighting towards social goals, and a rising focus on themes such as adaptation, circular economy and biodiversity. There are also forecasts of greater engagement and emphasis on the overlapping links between ESG metrics and financial fundamentals.

Navigating the ESG debate 

Fear of Misaligned Exposure (FOME), is likely to continue as ESG debates grow louder in 2023. FOME is a concern among asset managers that owning stocks beyond market bellwethers and pure-play impact companies could draw asset allocator and/or regulatory pushback. Goldman Sachs said that analytical tools that quantify impact, improvement and performance are critical to mitigating these fears.

According to the analysts, investors and corporates can navigate the debate by continuing to focus on linkages between ESG and financial fundamentals, pivoting away from exclusion and toward innovation, engagement, and more forward-looking assessments in order to stay connected to the real economy and help drive solutions. Carrying out more granular, transparent and thoughtful ESG assessments to deliver on increasing societal expectations and comply with rising regulatory demands.

“We remain bullish on the opportunity for high-quality companies levered to Sustainable goals — including those reinvesting a disproportionate percentage of cash flow back into capex/R&D — to receive rising credit in ESG funds,” the analysts concluded. “We believe the volatility and inflationary pressure of 2022 continued a trend started with energy outages in 2021 that is leading to a greater urgency to accomplish Environmental and Social goals simultaneously. We think this will improve capital allocation and prompt further action in 2023 that we believe will broaden the investable universe.”

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