Sustainability – Stakes are increasing as sustainability-related risks and opportunities face greater scrutiny
December 2023
Challenges and opportunities: Click here to read GAM's investment managers' Outlooks for 2024
To misquote Mark Twain, ‘Reports of ESG’s death have been greatly exaggerated’. While 2023 saw the term ESG challenged, the environmental, social and governance challenges that this acronym represents will continue to shape the investment and regulatory landscape; in many cases exacerbated by geopolitics and physical impacts of climate change.
The disorderly transition
The stakes are increasing as both climate-related physical and transition risks are becoming more impactful. On the physical side, we are already seeing extreme weather events on a more regular basis, and these are expected to increase in frequency. Coupled with the El Niño, this could extend the already record-high temperatures we have seen towards the end of 2023 into 2024 – impacting agriculture and food supply, manufacturing, and human health – and increasing the focus on resilience and adaptation.
On the policy front, just 12 months on from the introduction of the US Inflation Reduction Act, it has reportedly created more than 170,000 clean energy jobs and led companies to announce over USD 110 billion in clean energy investment. The European Green Deal, with ambitious targets and measures such as the Carbon Border Adjustment Mechanism, regulating carbon-intensive products imported to the EU, such as cement, iron and steel, fertiliser and electricity, could have a significant impact on supply chains, pricing and where companies chose to locate.
The investment opportunities for the transition are evident in the acceleration of clean energy innovation. So too are the challenges, dependencies and potential trade-offs associated with, for example, the growing demand for critical minerals, grid infrastructure and connectivity. And the potential impact of transformative technologies, such as generative artificial intelligence (AI) and automation are all still to be fully understood.
The question is how these complex dynamics will play out – delayed or accelerated action, competition and innovation or friction in global trade? National policies, incentives and responses will need to be much more closely watched and, as we have seen from recent UK policy announcements, liable to change.
Our nature (inter)dependency
With over half the world’s GDP reliant on nature and with the huge potential of nature-based responses to provide cost-effective solutions on both climate mitigation and adaptation, our dependency on nature and the interdependency with addressing the climate challenge is increasingly understood.
Building on the Taskforce on Nature-related Financial Disclosures issued in September 2023, and the publication by the Network for Greening the Financial System, comprising over 100 central banks and supervisors globally, of a framework to assess the interactions between nature, the macroeconomy and the financial system, we expect to see a continued focus on nature from investors and regulators.
Progress in 2024 at COP16 on the Kunming-Montreal Global Biodiversity Framework and National Biodiversity Strategy and Actions Plans will be critical to determine the speed with which policy and finance will mobilise behind the target to halt and reverse nature loss by 2030 and plug the estimated annual USD 700 billion biodiversity finance gap.
Sustainability disclosure no longer optional
Up to 50,000 companies in the EU and non-EU companies with EU subsidiaries or regulated entities will be subject to mandatory sustainability reporting under the EU Corporate Sustainability Reporting Directive (CSRD), being introduced from 2024. This will include a requirement to disclose a climate transition plan. Set to work alongside this disclosure regulation, the proposed EU Corporate Sustainability Due Diligence Directive (CSDDD), once introduced, will also require companies to monitor their supply chains for the risk of violations of human rights and negative environmental impacts. We also expect developments in the US with proposals for the Securities and Exchange Commission (SEC) Climate Disclosures under consideration, and the SEC Human Capital Disclosures that require companies to disclose human capital measures.
This mandatory reporting will be supplemented with industry standards such as the IFRS sustainability and climate standards issued by the International Sustainability Standards Board (ISSB) and the UK Transition Plan Taskforce guidance.
Sustainability disclosure and labelling will also step up in 2024 with proposals from the European Securities and Markets Authority, Financial Conduct Authority and SEC all setting more detailed parameters for sustainability-related funds.
As regulators, supervisory authorities and investors seek greater transparency and accountability, we expect data and disclosures to face greater scrutiny as they are integrated into the investment process.
Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized.
This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized.
This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.