Climate change has been a core sustainability investment theme for a few years. According to Morningstar, some US$415 billion ($550 billion) of assets were held in climate funds as of the end of 2022, up from around US$220 billion only two years earlier.
We have also seen a major increase in carbon net-zero commitments. According to Net Zero Tracker, 92% of global economic activity linked to 88% of global emissions is now covered by a net-zero goal.
More than half of 2,000 of the world’s largest companies have a net-zero goal, representing 66% of their total annual revenues. Moreover, corporate net-zero commitments grew by more than 40% in only 16 months — from 702 in June 2022 to 1,016 in November 2023.
Moving beyond climate change
Looking ahead to 2024, we expect to see more measures to help convert these good intentions into reality.
Still, focusing only on decarbonisation won’t be enough. Climate transition plans must also deliver a just, nature-positive, and resilient transition.
These paths to net-zero aren’t detrimental to the natural world and society. They also recognise the importance of adapting to the physical risks — storms, floods and droughts — caused by climate change.
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This is a central focus of the United Nations’ annual climate conference, COP28, held in Dubai in November. Investor efforts are focused on being able to assess the interconnected effects of these transition goals, as well as to meet the demands of growing regulatory disclosure. However, getting data that helps decision-making will be a big challenge.
Socially ‘just transition
We expect to see a much stronger focus on social factors in 2024. The energy transition can’t be successful without the consideration of key stakeholders — it needs workers with the right skills, supportive local communities and consumers who can afford to use these new low-carbon technologies.
In addition, we expect growing requirements to measure and disclose social metrics across investment portfolios. For example, in the UK, the Taskforce on Social Factors was launched earlier this year with a proposal to embed social metrics into pension investments.
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Next year will also see the launch of the Taskforce on Inequality and Social-related Financial Disclosures (TISFD), which follows in the footsteps of the Task Force on Climate Related Financial Disclosures and Taskforce on Nature-related Financial Disclosures (TNFD).
This initiative will help drive a growing focus on demonstrating how social issues — human rights, labour standards, diversity, equity and inclusion — are assessed for their financial impact on investments and integrated into the investment process.
Another social issue we expect to become more prominent is the impact of technology, and in particular AI, on people.
Nature positive transition
There’s no net-zero without preserving natural capital — the stocks of plants, animals, air, water, soil and minerals collectively benefit people. For example, land use is a major carbon source that can be turned into a store of carbon with the right actions, such as tackling deforestation.
There will be a growing focus on food production, which contributes to around one-third of global emissions but, so far, has not received the same level of attention as energy. The UN’s Food and Agriculture Organization is expected to publish a net-zero roadmap for food and agriculture at COP28, which will guide businesses and investors.
We’ve seen more investor interest in nature and biodiversity following the launch of the Global Biodiversity Framework in 2022 and the publication of the TNFD’s final report on nature-related disclosure requirements.
The attention will shift to securing data to meet those requirements and, importantly, identifying nature-related investment opportunities. However, getting meaningful data is a major challenge. Our review of data providers shows they are competing to develop methodologies, as very little is disclosed by the companies themselves.
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Regulation is also expected to be a key driver. For example, the ‘biodiversity net gain’ policy will come into force in the UK next year. This will require land developments to show a positive impact on biodiversity.
Resilient transition
The world has already reached 1.25°C warming versus pre-industrial era levels, and this year is expected to be the hottest on record.
Climate change devastates communities everywhere, yet emissions continue to rise — with another 1.2% increase in 2022, a new record.
It’s now too late to focus on reducing greenhouse gas emissions alone. We also need to invest in adaptation measures to build resilience to the physical impact of climate change.
For example, investment is needed in new infrastructure to deal with rising sea levels and innovative technologies to make crops more heat resistant.
Most climate strategies focus on transition solutions, but we expect to see a shift next year with capital increasingly flowing into these adaptation solutions.
Final thoughts
In 2024, investors must be prepared to demonstrate how they consider these complex, interconnected requirements within their investment processes and transition plans.
Investors must focus on measuring and assessing data to understand transition-related risks and opportunities and meet the more demanding sustainability-related disclosure environment coming next year.
Emerging technologies like AI and satellite data analysis could transform how we measure and disclose sustainability-related data.
To deliver a just, nature-positive and resilient transition, we need continued technological innovation, political will and a strong policy landscape to mobilise private capital.
Investors can play their part by engaging with policymakers and companies to encourage credible and comprehensive transition plans and seek more transparency.
Eva Cairns is head of sustainability insights & climate strategy at abrdn
