Pragmatism is the watchword as we look forward to the topics that may shape sustainable investing in the new year. Here are the five themes to watch.
As attention turns to 2024, we welcome a pragmatic, risk-based approach to addressing critical sustainability-related challenges.
Against a backdrop of global instability, the frequency of damaging weather-related events will continue to remind the world that climate is a topic with near-term impact.
High-quality, innovative data capture increasingly allows for a robust quantification of risks that underpins ESG 2.0.
The topic of transition will be an increasing focus, including from regulators.
Although the world heads into 2024 facing a number of sustainability-related challenges, we are encouraged by an increasingly pragmatic, risk-based approach to addressing them. This is despite some clear political divisions. As 2023 concludes, slowing economic growth, stubbornly high inflation, fragile politics and tangible evidence of climate change amount to a polycrisis – a cluster of related global risks with compounding effects as foreseen by the World Economic Forum. But as attention turns to 2024, we think we can look forward to an important change of emphasis in key areas, even as the political context remains challenging.
1. The political agenda could pack a “delayed” punch
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
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.
3. ESG is dead, long live ESG 2.0
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.
4. From the transition of regulation to the regulation of transition
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
5. Finding a solution with impact
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.
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Disinflation trends vs depletion of excess savings
Despite a rollercoaster few years in terms of global macroeconomic performance – and ongoing geopolitical uncertainty – one area which has proved particularly resilient is consumer spending.
Until the macroeconomic outlook becomes clearer, the favourable supply-demand dynamic in fixed income is enabling investors to diversify portfolios and prepare for all eventualities in the next rate-cutting cycle – be it fast or slow.