2024 is poised to be an exciting year! From extreme weather events to the burgeoning advancements in AI, and the pivotal role of governments and private capital in driving the climate transition, there’s much to anticipate.
MSCI has released its latest report to illuminate this year’s sustainability and climate trends.
MSCI – 2024 Sustainability and Climate Trends Report
MSCI has unveiled its 2024 Sustainability and Climate Trends Report, [1] which aims to equip investors with insights into ESG trends for navigating the evolving landscape. The report underscores the following core trends:
- Impact of Extreme Weather
Extreme weather events, including tropical cyclones and severe drought, have significantly impacted human life, with this trend expected to continue into 2024. The pressure on home insurance has intensified, leading to a 145% increase in insurance costs over the past 20 years. Consequently, some companies have scaled back their home insurance operations.
In addition to property damage, high temperatures are also affecting the labor force. Productivity losses due to heat are projected to increase by 50% between 2020 and 2050, particularly impacting industries such as agriculture, construction, and transportation.
- Managing AI – The Basics Still Matter
Generative AI is driving technological disruption across various sectors, prompting discussions about harnessing its potential while mitigating risks. As companies rush to adopt AI technologies, investors are considering factors such as risk management, regulatory compliance, privacy, and talent management.
In terms of data privacy, regulators are catching up to the rapid advancements in technology, urging companies to prioritize consumer data protection.
Regarding talent management, the adoption of generative AI technologies is reshaping the workforce landscape, potentially impacting up to 80% of tasks in the U.S. workforce. Companies must invest in upskilling existing employees and acquiring new talent to navigate the AI-driven workplace effectively
- Supply Chain Due Diligence
Supply chains offer professional advantages but also pose environmental and social risks, leading regulators to mandate due diligence. The European Union now prohibits products from being made on recently deforested lands to protect nature. However, traceable supply chains remain insufficient, especially in emerging markets and developing economies where raw materials are sourced. For instance, only 11% of soybeans have traceability as of September 2023. Emerging technologies like satellite monitoring may enhance traceability in the future.
- Regulation Drives More Corporate Climate Disclosures
Regulatory agencies are increasingly mandating corporate climate information disclosure, with many jurisdictions aligning their frameworks with the International Sustainability Standards Board’s (ISSB) IFRS S2 standard. Investors should monitor the implementation of disclosure policies across regions and assess differences in reported information
Another concern is “orphaned emissions,” where companies may alter carbon emission measurements to mitigate rising costs in low-carbon energy transitions. This includes setting up joint ventures or subsidiaries to split emissions data or excluding emissions from assets intended for future sale. While future regulations may address orphaned emissions, investors must remain vigilant when making decisions under current circumstances.
- The SFDR’s unintended consequences for emerging markets
To achieve net-zero ambitions by 2050, global investments of USD 5 trillion annually are required, with 40% earmarked for emerging markets. However, efforts to direct this capital face an unexpected hurdle: the EU’s Sustainable Finance Disclosure Regulation (SFDR). This regulation sets a high bar for sustainable investments, posing a challenge for many emerging-market firms.
The SFDR, part of the EU Taxonomy and European Green Deal, aims to promote sustainability and drive towards net-zero. However, compliance with its “do no significant harm” principle, particularly concerning “principal adverse impact” indicators, presents challenges. Emerging-market issuers often fall short on social and carbon-related indicators, rendering them ineligible for many investors’ portfolios. Legislative revisions to the SFDR are expected in 2024, potentially influencing capital allocation and the balance between sustainable investment objectives and global climate imperatives. [2]
- Private Market Takes A Seat At The Climate-transition Table
Private market participants are playing a significant role in supporting the transition to a net-zero world, yet face structural challenges.
Private-market participants can make more informed decisions due to increasing visibility regarding the carbon intensity of private assets and the availability of better data.
- Investing in Nature & Biodiversity Through The Debt-for-nature Swaps
Investment in nature-related investments is gaining traction, with private investors gaining access through mechanisms such as debt-for-nature swaps and carbon credit.
Debt-for-nature swaps allow countries to refinance their debt in exchange for commitments to conserve ecosystem and biodiversity.
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Reference
[1] Sustainability and Climate Trends to Watch for 2024 Report. Research, insights and analyses.
[2] Based on the forthcoming “European Supervisory Report to the European Commission on the Commission Delegated Regulation (EU) 2022/1288.” European Supervisory Authorities. The EU Commission is expected to legislate changes to the SFDR’s regulatory technical standards, including the PAIs. This is separate from the ongoing consultation on the SFDR primary legislative text, which is expected to take several years before coming into effect.