Higher cost of living: an additional challenge for responsible investing? 

The climate crisis and loss of biodiversity remain the top-of-mind challenges in responsible investing. Longevity will be added in 2023. Because in the long run, the problems and hence their solutions are interrelated. 

KBC Asset Management is convinced that even in exceptional times, corporate responsibility is one of the keys to overcoming this and subsequent crises.

With the focus on sustainability in European regulations such as SFDR, EU Taxonomy and MIFID II (more on this in Stricter regulation speeds up transition - KBC Banking & Insurance), the European Union has already pushed the climate transition higher up many corporate agendas in 2022, and consequently put it on investors' radar. Stricter regulations are not only increasing the importance of sustainability in the way companies conduct their business; they are also becoming an important factor in investing.

Both accelerate the path to a more sustainable world. Companies that fail to adapt run the risk of paying the price when the bill eventually comes due, and this price could be so high as to undermine the financial stability of the company entirely. 

KBC therefore also raised the bar in 2022 and took advantage of the new regulations to sharpen up its responsible investing methodology. As in the past, the methodology is based on assigning equal importance to E (environment), S (social themes) and G (good governance), but adds a new element in the form of the sustainability transition, among other things by adding a climate target and by investing in companies that support the UN Sustainable Development Goals (SDGs). Specifically, KBC favours countries and companies with better ESG scores and lower carbon intensity. ‘Given the importance of decarbonisation, our ambition is to reduce the carbon intensity of companies in which our responsible funds invest by at least 50% by 2030 compared to 2019’, says Kenneth De Bruycker, Responsible Investing Expert at KBC Asset Management.

This accelerated transition across all domains and sectors should ensure that dependence on fossil fuels is reduced so that we can gain more control over our energy supply and prices.

Whereas in 2022 consumers were still cushioning the initial shocks of the energy crisis with savings and temporary concessions from the government, in 2023 they will seek solutions to the higher cost of living through higher incomes. The resultant wage pressure, together with the drive for income equality, will put corporate social policies in the spotlight. The economic climate could bring the ‘S’ of ESG more to the fore. Will the social element be a common thread throughout 2023? ‘A greater emphasis on the social element has been on the cards for some time, especially since the EU announced the development of a social taxonomy in the coming years’, says Kenneth De Bruycker.

This social taxonomy is the planned classification of economic activities that contribute to the EU's social objectives and provides investors, companies and regulators with guidance on what is or is not regarded as sustainable from a social perspective. Will this put an end to poor working conditions or excessively low wages? 

KBC Asset Management's responsible investment fund methodology already places a firm focus on the ‘S’ by screening companies on aspects such as working conditions, employee diversity and the right to association. In addition, KBC Asset Management continues to use the investor vote to the full to challenge companies on social issues such as decent pay and inclusion. ‘KBC has voted on more than 8 889 resolutions at 768 shareholder meetings since the beginning of 2022’, says De Bruycker. In addition to this Proxy Voting, KBC also promotes sustainable business practices through 'Engagement'. Among other things, this involves KBC engaging in dialogue with companies, for example to encourage them to put in place policies to combat bribery and corruption.

Governments are often held accountable for actions related to create a more responsible society. Consequently, the European Commission is adopting a stricter stance on the quality of information and transparency on environmental and social impacts. 

From 2024, it will be mandatory for many large and listed companies to report on sustainability policy and performance. They must also have in place a risk management system and a system to collect data for reporting. 

This will make more and better data available, which in turn will form the basis for screening companies and countries within responsible investing. KBC Asset Management relies on the objective data analysis of no less than three external research companies specialising in assessing the sustainability of listed companies.

This is also becoming important for investors. Increasing digitalisation has ushered in an era of total transparency. Investors choose brands that espouse their own values. This will be no different in 2023, given that investors are wary of greenwashing. KBC Asset Management therefore makes every effort to inform investors about how their investment solution fits in with corporate responsibility. 

KBC pioneered the first responsible investment fund on the Belgian market 30 years ago. Today, KBC allows its clients to build their overall portfolio in a fully responsible way, thanks to an even wider range of investment solutions and a methodology that is constantly evolving to keep pace with the needs and values of society. Customers appreciate KBC's clear choice for zero tolerance on fossil fuels, even in exceptional times like today. Over the past five years, KBC has seen a twelve-fold increase in deposits in funds that invest responsibly. These funds have grown from a niche instrument into the normal investment choice.