KEY TAKEOUTS

• In light of commitments made at COP28 and the stimulus policies being implemented, funding of the energy transition will top the agendas of investment managers this year.
• Artificial Intelligence (AI) will also continue to dominate debate this year as it emerges as a game changing tool for sustainability practices and responsible investment.
• Key elections around the world this year could all have significant implications for sustainability policies and could specifically influence the transition to a low carbon economy.
• There is a reckoning coming with regard to local stewardship in 2024, where investors will increasingly be expected to show what they have achieved through all the ‘engagement’ they report as doing.

As the sun started to set on 2023, the closing days of COP28 – controversially hosted by major fossil fuel producer Dubai – saw an agreement reached by delegates for the first time on the pathway to transition away from fossil fuels in order to slow down climate change. While the detail surrounding this pathway is still not entirely fleshed out, it has been described much more clearly than at previous climate conferences.

Importantly, a global commitment was made to triple the use of renewable energies by 2030, given that massive expansion of renewable energies has been identified as the main source of energy of the future if the world is to reach its collective net zero targets. 

The South African delegation at the event stressed the country’s commitment to contributing to the reduction of greenhouse gas emissions. The country's nationally determined contribution – or commitment to limit carbon emissions to a particular range – is between 350 and 420 megatonnes annually by 2030. The lower target of 350 megatonnes of carbon equivalent is consistent with keeping global temperature below 1.5⁰C, and the upper end of the range of 420 megatonnes is consistent with keeping global temperature below 2⁰C, as outlined in the Paris Agreement.

However, equally important for SA is that the principles of social justice must be embedded in efforts to address climate change, which makes South Africa’s just transition to net zero that much more complex.

COP28 represented a culmination of issues surrounding climate risk over the past few years and during 2023. But will any headway be made around this issue in the year ahead and, overall, which other key sustainable investment themes will 2024 shine a spotlight on? We unpack some of the likely key emerging themes in the year ahead below.

Energy transition funding

While climate change will continue to dominate headlines this year as the world warms close to 1.5C and the negative effects are felt across the globe, in light of commitments made at COP28 and the stimulus policies being implemented, funding of the energy transition will top the agendas of investment managers in 2024.

To provide a sense of the numbers required to fund the transition to mitigate most of the material impacts of climate change, the below infographic from HSBC shows the sheer scale of investment required – most of which will be funded by the private sector as public balance sheets are already stretched post-Covid etcetera. Availability and cost of finance will be a key consideration depending on the interest rate and economic environment:

There are therefore huge opportunities for investment managers to deploy capital into companies that derive revenue from clean energy and carbon neutral transportation, among others.

Revolutionary AI

Artificial Intelligence (AI) will also continue to dominate debate this year as it emerges as a game changing tool for sustainability practices and responsible investment. For example, AI will revolutionise the mitigation of climate risk and the tracking of biodiversity loss, on the one hand, but will also have significant impact on governance risk as boards grapple with the ethical considerations from its deployment, as well as the introduction of new risks such as “deep fake” news flow or commentary on their products or services.

This environment raises critical questions for our investee companies – are they ready to respond to these developments?

Elections fever

2024 will hold some key elections across the globe, with SA, the US, Russian, Ukraine, Taiwan and India all expected to go to the polls this year. These elections all have significant policy implications and the commitment to favourable sustainability policies by some of the world’s largest economies will be tested in the event of a regime change in key countries which will impact the status quo in these jurisdictions. Specifically, the outcomes of many of these elections will determine whether or not the transition to a low carbon economy will accelerate or be stymied by ineffective or disjointed policy implementation. We are watching the electoral outcomes closely.

A stewardship reckoning

Globally, the practice of stewardship or active ownership of investee companies, has made great strides in the role of responsible investors driving change in the assets that they invest in. Locally, we still have some way to go, however, there is a reckoning coming with regard to local stewardship in 2024, where investors will increasingly be expected to show what they have achieved through all the ‘engagement’ they report as doing.

2024 will also see this pressure on accountability coming from not only industry bodies and standard setters (such as PRI), as has previously been the case to a certain degree, but also from policymakers and regulators (including local ones). As a result, investors will increasingly be looking for ways to prove that they are serious about stewarding assets, so there are likely to be greater numbers of instances of escalation – such as voting pre-declarations, voting out of directors, divestment and potentially even litigation. This will also start to impact the way that responsible investment is reported on, as will increasingly stringent regulation on reporting.

In addition, the New Year is also expected to herald in multi-asset class stewardship, in particular collaboration between different types of capital providers to achieve a common goal or outcome with the company that they are funding. We see the frameworks and guidelines being created for stewardship in private equity, fixed income and others. The question remains, however: how do we align multi-asset class stewardship with the same entity when different providers of capital have different rights or investment goals or timelines?

The journey towards net zero continues to be littered with significant challenges, and 2024 will see some of these challenges come to the fore. However, it is now, more than ever, that we need to recognise that responsible investing presents a fundamental and unavoidable shift in the investment landscape if we are to drive the meaningful change that is needed to support the United Nations Sustainable Development Goals (SDGs). As investors increasingly recognise the interconnectedness of financial success, climate risk mitigation and positive societal outcomes, the trajectory of sustainable investing will continue to shape a more responsible and impactful future for generations to come.