For Professional investor use only, not suitable for use with a retail audience. This is a marketing communication. Please refer to the prospectus of the Fund and to the KIID and/or offering documents before making any final investment decisions. Please refer to the sustainability-related disclosures for information on the commitments of the portfolio(s).

Industry Voice: Wellington Management's 2023 ESG & Sustainability Outlook

Focusing on value amid rising global challenges and opportunities

clock • 8 min read
Industry Voice: Wellington Management's 2023 ESG & Sustainability Outlook

This is an excerpt from our 2023 Investment Outlook, in which specialists from across our investment platform share insights on the economic and market forces that we expect to influence portfolios in the year to come.  Find out more about our approach to sustainable investing.

2023 ESG & Sustainability Outlook

  • Focusing on sustainability value opportunities  
  • Five key ESG topics for private companies  

From a war that has created humanitarian and energy crises, to rising inflation that pressures consumers, to ongoing supply-chain challenges, to the devastating effects of climate change, 2022 was a trying year. While we anticipate additional market headwinds in 2023, our Sustainable Investing (SI) Research Team remains focused on identifying opportunities to deliver value for our clients. Here, we offer a high-level view of our 2023 SI research and engagement priorities.

Climate change transition risks

We see the low-carbon transition as a major economic transformation and thus our climate-related research is ongoing. We plan to expand our work with the MIT Joint Program on the Science and Policy of Global Change to assess climate transition risks beyond public equities and fixed income, to include sovereign debt instruments. Over time, we intend to establish data sets, metrics, and frameworks that are as robust as those used with corporate equity and debt instruments today.

Given global progress on decarbonization (with renewed urgency stemming from the energy crisis), we expect to expand our research and engagement activity to help companies quantify and disclose the transition risks they face and ultimately have a plan for navigating the transition. Climate engagements with companies in fossil-fuel-heavy industries will continue to be a primary focus in 2023.

Our Climate Research Team expects to conduct materiality-based analyses of the relative impact to credit quality from physical and transition risks in emerging markets (EMs) versus developed markets (DMs). While EMs are disproportionately exposed to physical risks (heat, drought, floods, etc.), DMs carry greater transition-risk exposure, given accelerating policy activity and their financial capacity to support the low-carbon transition

Our engagement with policymakers continues as well. We try to bring a practitioner's perspective to these discussions. We generally support policymaker efforts to enhance climate-risk transparency, as this helps market participants more accurately analyze and price risk. In 2023, the US Securities and Exchange Commission (SEC) and the International Sustainability Standards Board (ISSB) are set to release new climate disclosure standards. We hope to help companies navigate the changing regulatory environment.

Biodiversity

Related to our climate work is our expanding biodiversity research and engagement — specifically on the causes, effects, and potential solutions for preserving natural capital and mitigating biodiversity loss. While human activities have had the greatest impact on biodiversity to date, climate change will likely be an increasing factor. Worsening climate conditions could threaten the world's natural capital, with potentially significant and unpredictable value-chain risks to many sectors.

Working with Woodwell and the MIT Joint Program, our SI Research Team aims to study biodiversity and the potential effects of biodiversity management on capital markets. Our Biodiversity Working Group is developing a research and engagement agenda that prioritizes the measurement of specific areas within biodiversity, so companies have a more tangible way to engage on the subject.

While broad-based data remains scant, metrics related to land-use change — primarily deforestation for logging or agriculture — are available today. For now, we can engage with companies on their biodiversity impacts and risk exposure in this context. As more data becomes available, we expect to improve our understanding of how companies are considering their biodiversity impacts, what actions they are taking to mitigate those impacts and improve outcomes, and how their actions — or lack thereof — may affect their future value.

Biodiversity fits squarely within our overall ESG engagement approach. Historically, biodiversity loss has been an externality from which producers and users of nature-based products benefited, with the costs borne by the rest of society. This may no longer be the case in the long term. Many sectors, including consumer, utility, and construction companies, already have direct gross value added (GVA) that is highly dependent on nature. Companies in many other sectors have "hidden dependencies" on natural systems throughout their supply chains. We expect to engage with companies on their potential biodiversity risk exposure, including the physical risks of weakening ecosystem services and the transition risks of business activities that can negatively affect those same ecosystem services.

Modern slavery

As many market participants and regulators intensify their focus on social (S) issues in the ESG landscape, one area we plan to do more work on is modern slavery. Our select portfolios that consider modern slavery are committed to formally assessing and promoting the adoption of policies and procedures by investee companies geared toward reducing modern slavery risk across their operations and supply chains. Improving modern slavery risk-management programs to raise awareness and reduce prevalence of forced labour, child labour, debt bondage, and human trafficking is a well-articulated objective of international agreements and polices, including the International Labour Organization and the 2011 OECD Guidelines for Multinational Enterprises. Within EMs, reducing modern slavery risk can potentially be both an alpha driver and a risk-control device.

Our SI Research Team informs a structured risk-assessment approach and develops an operational process for our "in scope" portfolios. Their process includes company engagements by members of our ESG Research Team, as well as certain portfolio managers and global industry analysts. We are also creating education programs and Custom Integration Plans (CIPs) for investors whose portfolios face the highest risk of exposure to modern slavery. Notably, our process for reducing modern slavery risk will rely heavily on a combination of data collection, engagement, and, if appropriate, escalation.

Additional areas of focus for 2023

We plan to increase our support of our growing sustainable platform by focusing on the following areas in 2023:

Impact measurement and management

Impact measurement and management (IMM) is a core component of our impact investing approach, critical for evaluating a company's or issuer's holistic impact — specifically, how its products and services contribute to our impact objectives. In 2023, our Impact Investing Team will focus on building out infrastructure to support a widening list of strategies that incorporate key performance indicators (KPIs) and impact tracking into its investment process. The team expects to concentrate on data integrity and infrastructure, specifically improving our internal IMM processes for ensuring accuracy and transparency about the impact of our holdings.

Emerging markets impact

EMs face outsized challenges in today's market and macro environment. At the same time, these large, diverse markets are often hubs of innovation and long-term growth potential. Our Impact Investing Team now includes an EM-dedicated strategy. Companies domiciled in or primarily serving consumers in EMs often feature innovative business models and management teams with extensive understanding of local needs. To improve our understanding of how our impact investments affect end-market beneficiaries, we plan to conduct "grassroots" research trips across EMs. As the two largest EMs, India and China are of particular interest, but our work spans the rest of Asia, Latin America, and Africa as well.

Private markets

Sustainable investing in private markets continues to take shape. Our ESG Research Team partners with select private portfolio companies with a mix of proprietary and third-party data and resources to enhance public market ESG readiness, share benchmarking insights and analysis, and collaborate on in-depth ESG roadmaps to help companies improve their ESG profile over time. Our climate-focused private-equity investors partner with Woodwell and MIT scientists and our climate research team on thematic "deep-dive" analyses of innovations at private companies under consideration.

Looking forward

We expect 2023 to be another year of change and opportunity in capital markets. Through our research-based approach to sustainable investing, we hope to continue to improve our understanding of issuers and to contribute to better informed investment decisions.

 

 ‘Explore more of our Unique Perspectives' Why Wellington? A different kind of investment partner | Wellington UK Intermediary

 

Disclaimer:

This material and its contents may not be reproduced or distributed, in whole or in part, without the express written consent of Wellington Management.  This document is intended for marketing purposes only. It is not an offer to anyone, or a solicitation by anyone, to subscribe for units or shares of any Wellington Management Fund ("Fund"). Nothing in this document should be interpreted as advice, nor is it a recommendation to buy or sell securities. Investment in the Fund may not be suitable for all investors. Any views expressed in this document are those of the author at the time of writing and are subject to change without notice. Fund shares/ units are made available only in jurisdictions where such offer or solicitation is lawful. The Fund only accepts professional clients or investment through financial intermediaries. Please refer to the Fund offering documents for further risk factors, pre-investment disclosures, the latest annual report (and semi-annual report), and for UCITS Funds, the latest Key Investor Information Document (KIID) before investing. For each country where UCITS Funds are registered for sale, the prospectus and summary of investor rights in English, and  the KIID in English and an official language, are available at www.wellington.com/KIIDs. For share/unit classes registered in Switzerland, Fund offering documents in English, French, Swiss French can be obtained from the local Representative and Paying Agent — BNP Paribas Securities Services, Selnaustrasse 16, 8002 Zurich, Switzerland. Wellington Management Funds (Luxembourg)  and  Wellington Management Funds (Luxembourg) III SICAV are  authorised and regulated by the Commission de Surveillance du Secteur Financier and Wellington Management Funds (Ireland) plc is authorized and regulated by the Central Bank of Ireland. The Fund may decide to terminate marketing arrangements for shares/units in an EU Member State by giving 30 working days' notice.

In the UK, issued Wellington Management International Limited (WMIL), a firm authorised and regulated by the Financial Conduct Authority (Reference number: 208573).  

©2022 Wellington Management. All rights reserved. As of 30 September 2022. WELLINGTON MANAGEMENT FUNDS ® is a registered service mark of Wellington Group Holdings LLP

This post is funded by Wellington Management

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