Politics and ESG: how 2022 set the agenda for investors in 2023

Yet, while the effects on markets are still visible, the end of the year saw a glimmer of hope.

Global stock and bond markets rebounded strongly in the final quarter of 2022, with the prospect of peak inflation and a moderation in the Federal Reserve’s tightening cycle lifting the market’s mood. In 2023, no doubt investors will be asking whether this change in outlook will continue. UK politics, geopolitical tensions and the climate revolution remain front and centre, while questions from the last quarter still loom, many of which highlight some wider expectations for 2023.

UK politics 

In the context of 2022 overall, Q4 was relatively sanguine on the political front. However, for investors, UK politics remains a heightened risk factor. Following the change in premiership, the UK is hopefully now looking forward to a year during which politics is less in the foreground, although lingering negative real wages have prompted rolling strikes in many sectors, which will continue to have an impact in the first quarter of this year. 

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One of the UK government’s first actions this year was to publish its review of the UK’s net-zero targets. The overall message from the report is that policy gaps remain, and the government needs to do more to improve the regulatory backdrop (including planning) to make it cheaper, easier and more viable to install solar and wind power and to support rapid buildout of renewable energy infrastructure.

Along with the risk of missing its net-zero target, the UK risks being left behind by the likes of the EU, the US and China, undermining the country’s ability to compete and capitalise on the significant economic opportunity presented by the energy transition. This will be a key policy driver this year and will likely remain a point of contention for the government.

Geopolitics

Outside of the UK, 2022 has been a year of global geopolitical upheaval. The war in Ukraine has gone from being a black swan event to a known unknown, with Europe rapidly adjusting to life without Russian gas and core pressures around food and energy generally abating, in part due to wider economic weakness. There is a risk that Russia will drag Belarus into the conflict, which would mark a disturbing escalation of the conflict.

For investors, this backdrop means closer monitoring of geopolitical risk. Further deglobalisation of supply chains with ‘on-shoring’ and ‘friend-shoring’ continuing apace. This in itself is potentially positive and is creating new opportunities for investment, which should ultimately build greater economic resilience, with potential environmental benefits too in terms of shorter supply chains and better visibility in the value chain.  

ESG – the climate industrial revolution 

This year’s World Economic Forum Global Risks report, which compiles views of WEF members, shows that many of these societal and geopolitical risks have roots in climate change, suggesting the adoption of alternative energy and energy efficiency solutions will continue to accelerate.

The end of 2022 saw two important COP summits. In November, COP27 attendees agreed to create a new fund for ‘loss and damage’, which was seen as a breakthrough moment. However, the hosts ignored calls for the phased down of fossil fuels to be included in the final agreement.

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COP15 also produced something of a landmark agreement with the goal of conserving 30% of the world’s land and ocean by 2030. This came with a $30bn funding commitment from developed to developing countries by 2030. However, its ambition level was somewhat muted, with many decisions pushed to future discussions. While the COP27 headlines might have underwhelmed, the uplift in demand for solar since COP26 is impressive and cause for optimism. Net-zero pledges, combined with energy security concerns, have resulted in a near-doubling in the annual pace of installations globally between 2020 and 2022, with new solar capacity nudging 270 gigawatts in 2022; triple the entire UK power grid’s capacity of around 76 gigawatts.

Although China continues to dominate the market for renewables, demand has increased globally, effectively ending the longstanding dynamic of excess supply pushing prices lower. Supply bottlenecks and higher commodity prices have certainly contributed to market tightness, but net-zero-driven demand has been the key contributor to rising solar prices. The solar boom is also driving innovation and is making it easier to bring new cell technology to market.

Summing up

The prognosis at the start of 2023 is still relatively gloomy. That said, markets have adjusted significantly this year to a wide set of risks and possible outcomes. A reignition of the sense of urgency around the green revolution is gathering pace, supply chains are adjusting to a new normal and politics, especially in the UK, looks to be settling. While there are reasons to remain cautious, this should be a constructive period for active investors with a robust approach to responsible and sustainable investing.