Energy transition funding

Climate change will continue to dominate headlines in 2024, as the world continues to warm close to 1.5°C and the consequent negative effects are felt across the globe. Considering commitments at COP28 and the stimulus policies being implemented, funding the energy transition will top the agendas of investment managers.

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

From this data, we see huge opportunities for investment managers to deploy capital into companies that derive revenue from clean energy and carbon neutral transportation, among other areas.

Revolutionary Artificial Intelligence (AI)

AI will also continue to dominate debate in the years ahead – emerging as a game-changing tool for sustainability practices and responsible investment. For instance, it will revolutionise the mitigation of climate risk and the tracking of biodiversity loss. AI will also have a significant impact on governance risk as boards grapple with the ethical considerations from its deployment and face 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 holds some key elections across the globe, all of which will have significant policy implications. Additionally, 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, many of the election outcomes will determine whether the transition to a low-carbon economy will accelerate or be hindered 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 in which they invest. Locally, we still have some way to go but this year we are seeing that investors are increasingly expected to show what they have achieved through all the engagement they report on.

Going forward, we will also see this pressure on accountability coming not only from 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. As such, there are likely to be greater numbers of instances of escalation – such as voting predeclarations, voting out of directors, divestment and potentially litigation. This will also begin to impact the way responsible investment is reported on, as will increasingly stringent regulation on reporting.

In addition, we also expect to see more 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. However, the question remains: How do we align multi-asset class stewardship with the same entity when different providers of capital have different rights or investment goals and timelines?

The journey towards net zero continues to be littered with significant challenges, and going forward, we expect to see some of these challenges come to the fore. However, now more than ever, 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.