In its annual Global Risk Report, the World Economic Forum named three key climate issues as critical challenges facing humanity: Extreme weather events, critical change to Earth systems – which is a new entrant this year – and biodiversity loss and ecosystem collapse.
We believe that the strong long-term structural growth drivers underlying our sustainable investment philosophy will once again come to the fore.
The rise of green tech
Technological innovations are leading to more cost-efficient ways of solving social and environmental issues. Despite higher interest rates increasing cost of capital for climate and sustainable infrastructure over the last year, the climate transition remains cost competitive even now.
For example, solar roll-out has beaten expectations for 2023, with over 413 GW new installed capacity, up 60% compared to 2022. Another example is in transport, where the technological innovation and thus drop in battery prices enables electric vehicles to edge closer to combustion engine price parity. Some reports state Europe has reached this point already for total cost of ownership over the car’s lifetime and use, with US and China closely behind.
We predict 2024 to bring further advances in technological applications to sustainability challenges; this includes climate adaptation (given the increasing weather extremes hitting populations across the world) and using AI (Artificial Intelligence) technology for sustainability improvements (such as energy management or digital learning).
Government regulation driving real change
Supportive regulation is a game changer for innovation and the roll-out of existing sustainable solutions, creating powerful tailwinds for sustainable investors. In 2024 we will see several regulatory developments helping those who invest sustainably, and we expect more to be soon announced.
The first example is new regulations on AI ethics in China and the EU, targeting businesses that integrate AI without sufficient responsible governance structures aimed at minimising unforeseen negative impacts. This is set to help those businesses that have already developed an ethical approach to AI, favoured by sustainable investors.
A second example is regulation on human rights and nature-impacts of supply chains. The EU’s new Deforestation Act prevents any business selling deforestation-sensitive commodities (cattle, coffee, soya, furniture etc.) into the EU, if it cannot prove a deforestation-free supply chain. Further, financial fines will hit EU businesses which have not conducted modern slavery due diligence in supply chains. All these further favours businesses treating their stakeholders responsibly, which aligns to our investment approach.
Financing the transition
COP28 reaffirmed the global direction of travel on climate action. Government support continues to be a major catalyst for climate solution businesses: this includes the US’s Inflation Reduction Act (IRA) and EU Green Deal, as well as a new global commitment to treble renewable energy capacity and efficiencies by 2030. We expect the first grants and tax incentives to be claimed through the IRA in 2024, translating into the order books for renewables, clean transport and energy efficiency technologies. We would not be surprised to see further announcements for large capital spending plans to keep economies on track to meet their net zero targets.
Lastly, sustainability data will become more standardised and transparent in 2024, through the launch of the International Sustainability Standards Board (ISSB) initiative, as well as mandatory company reporting through EU’s Corporate Sustainability Reporting Directive (CSRD). More data will uncover ESG (Environmental, Social, and Governance) risks, allowing financial markets to price this in more accurately, reflecting in increased flows to sustainable leaders.
Despite the continued macroeconomic and geopolitical uncertainty, we are optimistic that the structural tailwinds outlined will above support the EQ Positive Impact, Climate Action and Future Leaders portfolios in the months and quarters to come.