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What 2024 has in store for responsible investment and ESG

The ever-evolving – and relatively nascent – responsible investing industry will continue to mature as we progress through 2024.

| 6 min read

Climate change and its associated impact is a growing risk each year. Whilst the science is quite clear regarding climate change, there are still arguments over the appropriate response and approach to addressing this alongside other big environmental, social and governance (ESG) issues.

There is little doubt that key issues that investors should consider are growing in volume, with most no longer simply prioritising a maximisation of shortterm returns. Here are some of the areas that we think will see heightened attention in 2024.

Regulation

We will see the introduction of some key sustainability-linked regulatory changes in the year ahead. Most importantly, the introduction of a new fund labelling regime. Further, investors will also finally be presented with carbon footprint information on their portfolios from all asset managers for the first time, as regulatory requirements from the Task Force on Climate-related Financial Disclosures (TCFD) come into effect from July 2024.

We will also see further consultations throughout 2024 from both the UK and European regulators.The Financial Conduct Authority released their finalised Sustainable Disclosure Requirements (SDR) in late November. The UK regulator is trying to ensure investors have trust and confidence in the products they buy from a sustainability perspective following increasing concerns of ‘greenwashing’ through financial products. Under the SDR, four labels have been established for third-party funds:

  1. Sustainability Focus
    Investment in assets that evidence sustainable characteristics (either Environmental or Social).
  2. Sustainability Improvers
    Assets with demonstratable potential to become more sustainable over a period of time.
  3. Sustainability Impact
    Investment in measurable positive environmental or social outcomes.
  4. Sustainability Mixed Goals
    A classification for a fund investing in a mix of the above

In conjunction with the labels, funds must produce greater information on key sustainability-related metrics, disclose unexpected holdings and funds must also invest 70% of their capital in assets that meet the required criteria. In addition, the release also brings anti-greenwashing
rules into force to prevent ongoing mis-selling and falsely pitched sustainability marketing.

From July 2024 it will be a regulatory requirement that all firms provide carbon emissions data to clients on their investment portfolios. This will be an important moment for investors to understand the environmental aspect of their finances and will certainly instigate some conversations for some. Whilst the real-world impact from financed investment emissions is indirect, it will still be a key moment of thought and education.

Climate engagement

The climate continues to be high on the agenda for most nations, investors and intergovernmental organisations. As we continue to move closer to 2050 and globally agreed ‘net-zero’ pledges, this agenda item will continue to grow in importance. It will not merely be the
public market driving change, but also the private market.

One prime example has been a high profile engagement led by Local Authority Pension Fund Forum, CCLA and Sarasin which has been supported by investors representing a total of £1.8 trillion. This engagement seeks to call for climate transition plans to be submitted for investor approval at the annual general meetings of 35 of the highest emitters in the FTSE 350.

Among those listed are BP, easyJet, SSE, HSBC and Shell. It also seeks to ensure that corporates revisit transition plans through the effective stewardship channels with regularity and suggests a repeat vote every three years at minimum. Some may see this as overly cumbersome, but it is most certainly an effective governance step to ensure investors are happy with the direction and ambition of climate-focused plans.

Biodiversity engagement gets put into practice

Perhaps the hottest topic in the responsible investing realm. The Biological COP15 in December 2022, saw a landmark agreement reached in the Global Biodiversity Framework (GBF) which lends to the acceleration of this theme in 2024.

In summary, the main objective of the GBF is to protect, halt and reverse biodiversity loss through four overarching goals and 23 individual targets. Since the agreement was signed, there has been a focus on how the investment industry can play a role in preserving nature and in meeting these targets.

Much of 2023 saw the establishment of workstreams for responsible investors to sign up, support, collaborate and set frameworks for engaging with corporates on nature. Further, we expect the Taskforce for Nature-related Financial Disclosures (TNFD) to accelerate the investor focus on biodiversity. Although TCFD, the ‘sister’ climate-focused disclosure regime, took 10 years to implement, TNFD is likely to be put into place more quickly.

Nature Action 100 is an engagement initiative that sets expectations and key actions for 100 listed companies across the six key focus areas of Ambition, Assessment, Targets, Implementation, Governance and Engagement.

We have also witnessed the recent launch of Nature Action 100, which like TNFD, has piggybacked on the success of its earlier climate action initiative (Climate Action 100+) which launched in December 2017. Nature Action 100 is an engagement initiative that sets expectations and key actions for 100 listed companies across the six key focus areas of Ambition, Assessment, Targets, Implementation, Governance and Engagement. These initial companies have been selected as they are the largest market cap stocks from sectors that have been identified as crucial for reversing nature loss.

These sectors include:

  • Food, ranging from meat and dairy producers to processed foods
  • Food and beverage retail
  • Biotechnology and pharmaceuticals
  • Chemicals, such as agricultural sprays
  • Household and personal goods
  • Consumer goods retail, including e-commerce and specialty retailers and distributors
  • Forestry and paper, including forest management and pulp and paper products
  • Metals and mining

It is reasonable to expect that these companies will be required to undertake actions that reach the aims of Nature ction 100. Although the nature-focused initiative launched in September 2023, it already has over 200 investors. Participatory members include Aviva Investors, AXA, Fidelity, IMPAX, LGIM and oyal London with $26.6 trillion of total supporting assets under management.

Please note: This article was released prior to SDR and thus the information may not be in line with the Anti-Greenwashing rule but contextually is appropriate for the time it was written.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

What 2024 has in store for responsible investment and ESG

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