Should You Consider ESG Investments In 2023?

In many ways, you may be discouraged from targeting ESG Investments options in 2023, after a turbulent 12 months and the rollout of increasingly stringent regulatory conditions.

Another key issue remains the widespread politicization of ESG criteria and investment markets, with some Republican officials ramping up their criticisms of such entities as part of wider attacks on so-called “woke capitalism”.

Subsequently, net inflows in ESG mutual funds and exchange-traded products sank by a staggering 76% through 2022, from $649.1 billion during the previous 12 months to just $157.3 billion.

But is ESG investment really a bad idea in 2023, or is there an opportunity for green assets and equities in the coming months?

The Challenges Facing ESG Investors

In addition to increasingly frequent attacks on ESG by anti-woke politicians stateside, increased regulatory issues have also taken their toll on the appeal of sustainable investments.

Certainly, heightened regulatory scrutiny from certain US states has been problematic, especially as this has resulted in mandatory ESG and sustainability disclosures.

Broadly speaking, disclosing ESG and sustainability information remains a voluntary practice in the US. However, this landscape is continuing to change, with the U.S. Securities and Exchange Commission (SEC) recently unveiling an ambitious agenda to establish mandatory disclosures and reporting procedures.

In fact, the agency has been a passionate proponent of creating mandatory disclosures of this type, particularly pertaining to the environmental and social elements of ESG. It hopes to announce its official plans in this respect by April of this year, while potentially replicating some European legislation and the highly controversial “carbon border tax”.

This creates uncertainty while placing a strain on firms that may struggle to meet specific ESG targets, potentially making them less profitable and appealing to investors over time. Similarly, overly regulated marketplaces tend to be eschewed by investors, especially if firms become increasingly cautious about committing to ESG objectives in the near term.

Given this and the fact that ESG investment inflows declined markedly through 2022, it’s easy to see why investors may not be inclined to sink their capital into such assets this year.

The Case for ESG Investing in 2023

However, these factors don’t necessarily discount ESG investing completely in 2023, especially if you prioritize potentially large gains over risk management and minimizing losses.

Certainly, the ongoing war in Ukraine has forced major countries to reconsider their energy needs, as a global need to decrease the reliance on Russian oil and gas becomes increasingly prevalent.

Of course, this remains difficult in the short term, especially as wholesale gas prices remain stable and energy supplies are already dwindling. So, attempting to further reduce gas importance would increase the risk of blackouts and shortages in the autumn and winter, which would compound an already difficult period for households.

In the medium and longer term, however, we should expect to see developed economies increase their use of sustainable and renewable energies, driving ESG stocks higher and generating significant interest in this type of investment.

Interestingly, the changing ESG landscape is compelling businesses to seek out advice and consulting services to help them meet their environmental, social, and governance commitments. This is creating a significant spike in demand for specialist consulting services, creating an alternative option for investors who want to identify stocks with a focus on sustainability.

According to a report by research firm Verdantix, investment in ESG and sustainability consulting will reach $16 billion by the year 2027. This is indicative of a high-growth market, and one that will offer value to investors over time.

Another trend in favor of ESG investment is the rise of green economies, especially in the developed world. Both the US and the UK are legislating aggressively to meet their respective 2050 ‘Net Zero’ targets, which aim to balance and offset carbon emissions while incorporating innovative methods of renewing and removing carbon from the environment.

This is part of a wider and ongoing desire to green the entire economy, rather than simply develop sustainable initiatives as a subset of the existing economic model that relies heavily on fossil fuels.

The Last Word

There’s no doubt that ESG investments and asset classes will appreciate in value in the medium to longer term, especially as developed economies continue in their quest to achieve ‘Net Zero’.

However, the question that remains is whether ESG investing is a good idea in 2023, especially given its negative capital inflows recorded last year and an increasingly volatile regulatory backdrop.

Much depends on your outlook and appetite for risk, of course, but if you’re a little conservative and looking to minimize losses through 2023, you may want to eschew ESG investing for now or at least consider assets that will appreciate over time.