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‘System-wide stewardship’, where investors engage with a broad spectrum of stakeholders on sustainability issues, will be a driver of the ESG agenda in 2024. The aim is to help create a favourable policy and regulatory environment that enables and incentivises companies to operate more sustainably. We have identified four themes that underpin our thinking around system-level stewardship: climate change, nature loss, strong and effective governance, and social disparities. 

Transition finance needed

Climate financing remains a significant challenge for corporates and financial institutions alike. Gradually, frameworks are emerging to help companies put in place robust strategies to meet their net zero targets. As more businesses publish credible transition plans, we expect further developments in transition finance, including innovation in sustainable debt instruments. 

Governments are seeking to close policy gaps to make green technologies cheaper while regulators are working to channel transition financing to the right places. System-wide initiatives such as the United States’ Inflation Reduction Act provide support to develop technologies like green hydrogen and sustainable aviation fuels. Political will such as this should help to develop decarbonisation pathways for sectors where the transition is either technologically difficult or too expensive. In the EU, the introduction of the Carbon Border Adjustment Mechanism is designed to create a level playing field between companies manufacturing within the bloc and exporters to it, by ensuring that the carbon price of incoming goods is equivalent to the carbon price of production within the EU. 

But the social ramifications of the transition are also front of mind. We continue to engage with firms not only on the infrastructure costs of decarbonisation but also retraining workers as requirements change. At government level, policymakers are looking for ways to protect those least able to bear the costs from up-front transition commitments as new technologies are built out. The prize is a clean energy revolution with lower operating costs and increased energy security.

Nature in focus

COP15 in 2022 proved to be a turning point in recognising the impact of nature loss as part of the climate crisis. Healthy carbon sinks and ecosystems play a significant role in achieving net zero, while climate change is a direct driver of declining biodiversity. 

The economic implications are clear: it’s estimated that more than half of global GDP is moderately or highly dependent on nature.[1] The ties between climate and nature are also becoming more evident in certain industries. Some, like mining, will need to play leading roles in a successful transition.  

Companies are already considering how to implement the recently published Taskforce on Nature-Related Financial Disclosures (TNFD). Like the Taskforce on Climate-Related Financial Disclosures, the framework is designed to deliver a standardised language to report on nature. This is no mean feat. Nature loss is notoriously difficult to gauge given the absence of a universal metric. Innovative technologies, like the nascent field of bioacoustics, are trying to remedy this by developing alternative measurement systems. 

Bioacoustic technology is putting a number on nature loss

Elements of the TNFD have already been included in the EU’s Corporate Sustainability Reporting Directive (CSRD), a form of data collection that begins in 2024 for some firms. This is the most comprehensive reporting standard to date. The CSRD requires companies to report on their own environmental and social impact as well as sustainability-related risks to their business. 

And there is more: the International Sustainability Standards Board has published its own version of sustainability disclosure standards designed to be adopted globally and focused initially on climate. Due diligence of supply chains is also gaining attention following the EU Deforestation Act and other forthcoming rules aimed at mitigating impacts on human rights. 

Regulation on this scale sounds daunting, but sustainability reporting and how it links to financial reporting is an important part of mitigating the risks of climate change, nature loss, and social issues.  It should also enable companies to scale up activities that not only align with the transition but drive change across the global economy.

Outlook materials:

[1] World Economic Forum (2020) Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy, WEF_New_Nature_Economy_Report_2020.pdf (weforum.org)

Jenn-Hui Tan

Jenn-Hui Tan

Global Head of Stewardship and Sustainable Investing