Sustainable investing: five themes for 2024

The coming year will see elections in 40 countries that together account for 41% of the global population and 42% of global GDP.¹ The political resonance of the climate topic could peak in 2024 as nations grapple with economic and cost of living challenges. This political agenda risks delaying the financing and implementation of transition plans, and could result in a higher probability of a “delayed transition scenario” as described by the Network for Greening the Financial System.² Such a scenario has significant implications for economic growth and risk modelling; it also increases the finance needed to achieve the transition at a later date.³ Already, we are quantifying the potential impact on client portfolios in terms of the drag on returns.

Network for Greening the Financial System (NGFS) scenario analysis

Source: NGFS Scenarios Portal, https://www.ngfs.net/ngfs-scenarios-portal/explore/, November 2023
See portal for more explanation of the different scenarios.

Amid these divisions, climate is likely to shift from a distant 2050 concept to a nearer-term priority. While academic studies have modelled temperature and emission increases, they have been less effective at determining the impacts of these increases. The frequency, severity and locations of damaging weather-related events exhibit significant volatility, and the return of El Niño will likely test records in the coming year. Rising financial risk materiality could prompt a rethink, particularly given the costs of the very sizeable and rising fossil fuel subsidies.⁴ Meanwhile, hotter temperatures are placing additional burdens on already stretched healthcare services⁵ and biodiversity risks are rising within the global supply chain.⁶ These topics could influence future sovereign strategies and disclosures as they approach the next wave of nationally determined contributions (NDCs) – the national commitments on climate that countries make as part of the Paris Agreement.

We anticipate that this greater appreciation of risk materiality will trigger a revived – and significantly refined – return of ESG. When the term “ESG” was introduced in 2004, it sought to broadly classify the key factors contributing to an entity’s long-term operating and financial resilience.⁷ This was often simply summarised into a blunt, overly simplified ESG score. Since then, ESG has suffered mission creep. It is increasingly associated with “doing good” or imposing values or responsible investing outcomes. In addition, it was assessed using opaque, qualitative assessments with low correlation among the main providers.⁸ Now, however, we see a trend in high-quality, innovative data capture that will allow for a robust quantification of both impact and dependency risks at company, sector and regional levels. You can expect a thematic paper from us in 2024 on how we will evolve our risk materiality data capture in our Sustainability Insights Engine (SusIE) to include new innovative specialist provider offerings, alongside reviewing new artificial intelligence (AI) data capture techniques.

The past year has seen sustainability regulation move from fatigue to functioning. With the UK’s proposed Sustainability Disclosure Requirements (SDR), the ASEAN Taxonomy⁹ and subsequent adjustments to the European Union’s Sustainable Finance Disclosure Regulation (SFDR), we appear to be entering a more pragmatic “norming” phase. As a result, we expect a greater regulatory focus on the concept of “transition”¹⁰ to be steadily embedded into climate, impact and sustainability investment frameworks. In September 2023, this was underscored by the Glasgow Financial Alliance for Net Zero, which launched a consultation on transition finance strategies.¹¹ We expect “just transition” to be a focus again at the COP 28 meeting¹² amid greater clarity around just energy transition partnerships, which direct money from wealthier economies to support developing nations as they shift away from fossil fuels.¹³

During 2023, the World Economic Forum issued several publications around the need to invest in solutions, ranging from existing technologies that need to be scaled up to those that do not currently exist. At a time when the market focus is on lowering footprints (ie, the impact that an entity itself has), we need to focus on the handprint opportunities to facilitate this mitigation – in other words, the solutions that will support widescale improvements. The public markets can learn from the private markets and impact investing worlds in how they articulate and measure positive impact, and the governance around targeting and achieving this impact through the life cycle of a project. In July 2023, we published a whitepaper on how we at Allianz Global Investors approach the topic,¹⁴ as we roll out new client offerings, and we expect some of the notions we discussed to be increasingly influential in public markets next year.