Look ahead to 2024

Now what?

IN AN AGE OF POPULISM, conflict and AI, forecasting is likely to be a fool’s errand. This time last year, few would have predicted election results in The Netherlands or Argentina, the pace and roll-out to everyday users of AI technologies, and the extent and misery of Middle Eastern conflict.

But if 2023 was unpredictable, so too is 2024. This year, two billion people – the most in human history – will vote in democratic elections, including India, Europe and the US (we’re not including Russia). The US election looks likely to be a re-run of 2020, with Trump as Republican candidate for the third time. To misquote, a year is a long-time in geopolitics.

But in an uncertain world, an investor’s job is to do just that – to forecast. If not for the long-term, then to forecast at least in the medium-term; to determine investment choices that are likely to be better than others.

But rather than forecast – our guess is as good as yours – at Canbury, we’ve set out a few ideas that we think an investor should consider, with, naturally, a focus on sustainability.

First, macro-economics.

We’re beginning to see two geopolitical approaches to addressing climate change: Fiscal intervention in the US and market intervention in the EU.

The US has the luxury of being the world’s currency, borrowing money in a way that’s simply not available to EU policymakers. Much of the Inflation Reduction Act – as we set out in our briefing – is protected from politics, with tax and spend benefits targeted at Republican states.

The Inflation Reduction Act will certainly not be helped by a Trump presidency; but it might not be as affected as the rhetoric would suggest.

To meet their sustainability goals, investors have consistently asked for ‘more data’ – and in Europe, policymakers have delivered. But with CSRDCSDDD and Taxonomy, companies will struggle to meet the extent of their reporting requirements. There is simply not the personnel with the expertise to do so.

With emissions rising, climate change too will rise on the political agenda. There will be increased severity and frequency of weather events, and further loss of life. We think the campaign groups will become more desperate, but also more inventive. Sit ins and slow marches are just the start. It’s difficult to predict how voters will respond.

The COP process is not working as it should and that won’t change in 2024. Dubai may have hosted a good conference, but not – and this is the purpose of COP – a good outcome; that won’t change in Baku.

Perhaps part in spite of this, perhaps part because of this, the pressure will grow on institutional capital.

And so, second, responsible investment.

Importantly, but less excitingly, we believe there will be increased focus on usability of disclosure frameworks (notably in the EU and UK), as well as interoperability (in large part, driven by ISSB and TNFD) and taxonomies (led by the EU). Investors will do well to consolidate their reporting requirements – SFDR, SDR, PAIs, Taxonomy, TCFD / ISSB, TNFD – into one report, with carve outs for different users.

AI technologies will ease the reporting burden, but in our experience, investors have been slow to harness their potential, perhaps held back by wary compliance teams.

Regulators will take further steps to address greenwashing. We think we’re only at the start of regulatory penalties for unfounded ESG claims (the next is ‘net-zero washing’). We can also expect more litigation, increasingly through civil action (savers filing complaints against their investors) both for (in the US) and against (Europe, Australia, UK and, again, US) action on climate change.

We’ll start to see attempts to align responsible investment with the real-economy – what PRI calls, whole-of-economy transition – bringing together disclosure frameworks with real-economy policymaking. If the responsible investment regulatory intervention is to achieve a sustainability outcome then this alignment should be front and foremost of policymakers’ agendas. But in the EU at least, there will be little that’s new, a welcome regulatory hiatus, ahead of elections in June 2024.

We think we can expect further attention to nature and just transition, but social issues will continue to lag – by some way. Social taxonomies will – we think – take many more months, if not years, to develop. In some ways, this is a microcosm of responsible investment itself; as an industry, we are far more comfortable with climate, nature, water, and land use, than with human rights and inequality, which tend to be personal, political and difficult to price.

The debate around fiduciary duties will continue, but, we believe, cover no new ground. Whether or not responsible investment is financially material is specific to the strategy and the skill of the investor. EU and UK investors will be more comfortable prioritising sustainability outcomes to mitigate systemic risk. Regulatory change that ‘allows’ concessionary investing is unlikely, nor, we think, necessary.

We’ll see moves away from the use of third-party ESG ratings in responsible investment. A singular ESG score has never made much sense. New technologies, regulatory disclosures and NGO analysis will replace black-box scores and spurious accuracy.

Stewardship – still considerably under-resourced – will get more attention, but as it is currently practised its potential remains limited. Attention will turn to stewardship resourcing and collaborative engagement. Proxy season will largely be a repeat of last year, with around 20 – 30% support for high conviction resolutions on climate issues, but without the vocal support of US investors, reluctant to take action in the months leading up to the Presidential election.

On nature, we’ll see the benefits of traceability for commodities, again, helped by new technologies. It’s much easier for companies to know where they’re buying from or, to put another way, it’s much harder for companies to ignore where they’re buying from. This will include critical materials, necessary for the transition, but often sourced from areas of conflict and human rights abuse.

So let’s end where we started, forecasting in today’s environment is challenging, if not, unwise. Rather, we recommend thinking through a few ideas, and understanding how those ideas might play out. A series of “what ifs”. In the weeks and months ahead, our insights pages and newsletters will cover a range of sustainability issues relevant to companies, investors and NGOs.

And for Canbury itself? Since our launch in September, we have developed a range of reporting solutions, including TCFD and stewardship code reporting, a use-of-proceeds bond tool, which we’re trialing with a client, an AGM and vote tracker tool, company tear sheets with a focus on sustainability intangibles (which we believe to be more financially material than priced in tangibles), a bespoke nature health-check programme (which we’re rolling out to clients and includes TNFD reporting), an assessment tool for companies activities in conflict areas, bespoke training materials and more – and a fast-growing, expert staff-base to deliver.

If your new year’s resolution is to, not just get on top of your sustainability demands, but get out in front – then get in touch

This article was written by Ben Wilmot and Will Martindale.

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