Despite pushback against Environmental, Social, and Governance (ESG) principles in parts of the world and some outflows from ESG-focused products, the integration of ESG risks into investment strategies remains robust. This is what we continue to hear from our clients as they continue to strengthen the way they assess and monitor Fidelity’s approach to ESG integration and effective stewardship efforts.
This resilience is underpinned by the recognition among investors of the substantial opportunities arising from significant megatrends such as the energy transition, biodiversity loss, and the structural shift towards more sustainable practices.
Investors recognise that these trends are not merely fleeting interests; they represent fundamental changes in the global economic landscape that investors are keen to capitalise on. As such our conversations with clients are getting more sophisticated with regards to the multiple opportunities and access points to the energy transition, resource scarcity, and sustainable technologies.
Increasing focus on systemic risks: Engage the problem, not the company?
Despite the ESG pushback that we often see in media and public discourse, the conversations with large investors have only become more sophisticated, as the focus has moved from single company ESG issues to discussion of systemic risks like climate change and biodiversity loss. These risks are referred as such because of the potential for widespread disruptions in financial markets and economies, often stemming from interconnected factors that can trigger significant adverse effects across various sectors. These risks are typically complex and multifaceted, as well as hard to measure, therefore hard to price in and mitigate in portfolios.
Investors recognise that the companies they are invested in can often be core contributors to these systemic risks, and while they often are not necessarily affected directly, their impacts or externalities eventually can be felt by the whole economy. This is why those investors holding substantial shares in the world's largest companies, understand their pivotal role in influencing corporate behaviour but also advocating for ways of mitigating these risks with governments and regulators. This is what is often called Systemic stewardship or Beta stewardship, and it involves much more than traditional company engagement. It seeks to use investors’ influence to address systemic problems through policy advocacy and engagement with the broader ecosystem.
Key policy developments
In Australia, the ESG industry is hoping to be supported by the win of the Australian Labor Party (ALP) in the federal election. The ALP has been focused on supporting Australia’s transition to a low carbon economy and demonstrating its ambition for global commitments. In the year ahead, we expect further clarity of 2035 Government targets, sector pathways and a continued focus on developing tools to support sustainable finance.
The European Union has been ahead on ESG policy and is likely to streamline sustainability regulation, aiming to deliver sustainable outcomes in a way not overly burdensome for corporates. This involves streamlining corporate sustainability reporting requirements, due diligence requirements and the European Taxonomy. The EU continues to push forward with ambitious climate targets within this competitive landscape, reinforcing its commitment to carbon neutrality by 2050.
In contrast, the United States has federally exhibited a degree of regulatory pushback against ESG. Certain state governments and regulatory bodies have scrutinised ESG investing, questioning its alignment with fiduciary duties and economic priorities while others are continuing to pursue the sustainability agenda, including California, which mandated corporate climate disclosures. We now observe a fragmented landscape where ESG adoption varies significantly across regions and sectors.
ASIC's role and mandatory climate disclosures
In 2024, Australian Securities and Investments Commission (ASIC) intensified its scrutiny of corporate ESG claims, ensuring that companies provide accurate and comprehensive information to investors.
Australia introduced mandatory climate disclosures, requiring companies to report on their climate-related risks and strategies. This aligns with international best practice and aims to provide investors with the necessary information to make informed decisions. The mandatory disclosures are expected to drive greater corporate accountability and enhance Australia's reputation as a leader in sustainable finance.
Outlook
Looking ahead, we expect the ESG industry in Australia to refocus their approach to sustainability and we are already seeing a shift to pragmatism and a focus on aligning ESG engagement with fundamentals and corporate strategy. The policy certainty and country's commitment to reducing carbon emissions and fostering renewable energy, as well as the Future Made in Australia initiative will help keep the country focused on these priorities. We believe this backdrop is essential for companies to have the confidence to deliver on their decarbonisation commitments and find opportunities in emerging technologies and abatement options.
Globally, the outlook is opaquer and more fragmented, with global priorities shifting regularly and we remain attentive to any developments.
