2024 has been a challenging year for institutional investors who have been working to make the world cleaner and fairer.
For a start, it was the hottest year since temperatures were first recorded in 1880. Then there were floods in Spain, which killed more than 200 people, while the extreme heat in Portugal ignited more than 1,000 wildfires.
Some UK rivers recorded fresh pollution scandals, an oil spill in the Mediterranean harmed marine life within a 25-square kilometer radius and wars continued to rage. To top it off, fewer electric vehicles are now expected to be made as some production lines in the UK and Germany are set to be switched off.
Unfortunately, these were not isolated incidents. So it is not “goodbye, 2024”, but “good riddance”.
You could be forgiven for understanding why the sound of those questioning the effectiveness of ESG-led strategies is growing louder.
And those voices are set to gain influential support in the year ahead. The outcome of more than 50 national elections in 2024 has seen some people take power who are known climate-change sceptics.
Indeed, America’s new CEO takes over in January and once labelled climate change a “scam”.
Geopolitics is the elephant in the room given that 2024 was a huge year for elections, says Alex Bernhardt, global head of sustainability research at BNP Paribas Asset Management.
“There are a lot of political shifts globally, and there will be a lot of scrutiny on what policy changes might be implemented in the coming 12 months that could cause shifts in sustainable investment strategies,” he adds. “That is definitely going to be an area of focus.”
But for Bernhardt, sustainable investing is much more of a global and secular trend. “There are factors at play that supersede the latest election cycle, and which have a material effect on how people choose to invest,” he says.
One of those factors is equality.
BNP Paribas AM believes that it is one of the biggest macro issues impacting sustainable investing, alongside energy and ecosystems. It carries systemic and idiosyncratic risk, so its influence is felt not just by the overall market, but at the individual company level, too.
For Bernhardt, equality is a huge driver helping investors to achieve their environmental goals. As an example, he pointed to Cop 29, which wrapped up days before we spoke.
An agreement was signed and the deliberations hinged on issues of equity related to climate damage, climate mitigation and adaptation responsibility. “It is all about channeling capital from developed countries to developing countries. That is an issue of equality on a global scale,” he says.
“In sustainable finance, there has been a lot of focus over the last 20 years on climate change, which is justified,” Bernhardt adds. “But we are not going to resolve issues like that without greater focus on justice or the aspects of climate that implicate social ramifications.”
Time to adapt
Another big theme for 2025 is adaptation. Forecasts point to 2024 being the first year on record to hit 1.5-degrees above the pre-industrial average. “It is becoming clear that we are not transitioning fast enough to meet the temperature rise target, certainly not without a significant overshoot,” Bernhardt says.
So more investment needs to be channeled into climate adaptation with “some degree of urgency”.
But this is challenging, as monetising such investments can be di cult. For example, an investment in a wind farm produces cashflow from the sale of electricity, but a sea wall just protects people from storms. It does not generate an income.
“There are other challenges, but this is the core one,” he adds. “We need to figure out more creative ways of addressing this adaptation finance gap, which is growing and becoming more urgent.”
This is an issue Bernhardt is discussing with his clients. “There is a ton of energy around it,” he says. “There’s more smoke than heat at this point, but I believe 2025 will be a landmark year in terms of how much progress is made towards scaling adaptation finance,” he adds.
The natural touch
Bernhardt’s final ESG theme for the year ahead is natural capital, which sits at the nexus of the transition and adaptation topics. If the world is not transitioning fast enough, then we are going to need net-negative carbon solutions to mitigate the resulting temperature rise.
“Natural capital investments are the primary way in which to achieve those net-negative emissions,” Bernhardt says. For example, planting or repairing coastal forests creates carbon sinks and/or provides a buffer against hurricanes.
“The nexus of these issues is going to be what we talk a lot more about in 2025 and hopefully there will be more action underpinning them,” Bernhardt says.
Also seeing nature emerge as a big ESG trend in the coming 12 months is Rebecca White, global ESG integration lead at New- ton Investment Management. She is seeing a focus on this issue in the UK, Europe and Japan and feels that it will continue to rise up the agenda.
Therese Niklasson, who is Newton’s global head of sustainable investment, says that nature is coming along steadily, but has more momentum behind it than climate.
Nature loss is a theme portfolio institutional has been briefed on many times in the past few years, so what will be different in 2025.
For White, the evolution and emergence of standards in the space, such as ISSB, SBTN and TNFD, will start to put some structure around the topic, which has traditionally been separated into components, such as deforestation and water.
“Investors have been focused on risks with companies and have engaged around this for quite a few years,” she says. “It is not necessarily new, but that standards piece is crucial.
“The complexity is much greater than with climate, because you don’t have that one metric you can refer to. Nature impacts aren’t fungible in the way that emissions are.
“So understanding how to get started and having the standards in place to set what good practice looks like will be important,” White says.
Indeed, Niklasson thinks there will be greater focus on regulation related to sustainable investments. “In the UK, 2025 will probably be the year of implementing the Sustainability Disclosure Requirements, when we will see what the market looks like and how impactful it is,” she says.
Niklasson believes that a big challenge for the industry next year will be to make nature a mainstream investment. “These are topics that need to be translated into investment themes,” she says. “There is no good in these complex ideas sitting in a fund that only scientists and responsible investment experts can understand. For nature to become mainstream, it needs to be kept as simple as possible.”
Different outcomes
How investors consider nature in their portfolios is evolving, a trend Amelia Tan has witnessed. The head of responsible investment strategy at Legal & General Investment Management (LGIM) says that investors have been aware of nature as an investment issue for years, but now they want to understand how the firm identifies, assesses and manages nature-related opportunities, risks and impacts.
And next year LGIM could make an innovative move into a growing part of this market.
Interest in debt-for-nature swaps is gaining momentum, says Tan’s colleague Laura Brown, who is head of client and sustainability solutions. “We are looking at launching strategies in this space where not only is there a nature outcome associated with a bond, but there is also a social outcome incorporated,” Brown says.
Real estate is an example of how social and nature outcomes are interconnected. It is about the people who live or work in a property and how it impacts their wellbeing.
“This is something we are seeing a lot of demand for from a range of investors, including – and this is perhaps an interesting trend – the defined contribution space,” Brown says.
Tan adds that these bonds typically target developing markets with the conservation of nature being a condition of the financing.
But there is a need to produce social outcomes, too. Indeed, within emerging countries, nature is a big source of people’s livelihood. The impact of nature loss on fishing is an example.
“The efforts being made to restore nature and biodiversity are also helpful for the local livelihoods of the communities that are directly impacted by such loss,” Tan says.
“It is interesting that there has been a lot of talk about the nexus between climate and nature, but ultimately nature and people are also extremely connected,” she adds. “Achieving all of this through our investments is something we are focused on.”
A different view
When discussing trends in ESG in the coming year, the one topic that will not go away is geopolitics. The result of the US election, in particular, has left some investors wondering what it could mean for sustainability.
“In the short term, there is probably going to be more volatility in terms of the interest in ESG across the Atlantic,” Tan says.
“It may have a knock-on impact at a national level, but ultimately, we believe that the long-term case for the energy transition is still intact on the basis of it being economically more viable to use renewable energy.
“Solar is more affordable than oil and gas over time. It contributes to energy security as well with less reliance across national divides,” Tan says.
Political risk
For Niklasson, the geopolitical agenda and how it connects with sustainability will become more important in the coming year. “We are in a world facing a broad conflicting geopolitical backdrop than has been seen for many years,” she says. “We have also gone through a record-breaking set of democratic elections, so relationships from a geopolitical perspective are changing, which matters for sustainability.”
It is not just about trade, but economic policy and international treaties, such as those ratified at Cop, could be influenced by a change in government.
Being analytical about policy and politics might be a more interesting compass to how you invest sustainably.
“That is quite a broadbrush way to talk about it, but if your responsible investment team hasn’t traditionally had an analytical focus on that then you are going to have to develop it quickly,” Niklasson says.
“I would expect that to be identified by quite a few clients this year, because we are going through such a unique point in time,” she adds.
There is a difference between thinking about this through the lens of ESG, so risk-adjusted returns from making good investment decisions, versus what it means for a sustainable investment fund trying to achieve a positive outcome for the environment in a space that is becoming more di cult to play in.
“It is more resource-intensive than ever, affected and influenced by regulatory regimes in a different way than it ever has before,” Niklasson says.
“So that is going to continue being a focus for us,” Niklasson says.
Happy anniversary
Moving on to other issues, next year will be 10 years since the Modern Slavery Act was introduced in the UK and White wonders if the market will focus on what has been achieved since 2015.
“There have been calls from some pockets that this hasn’t been enforced in a way that will have the desired effect,” she says. There could be a renewed interest in this, potentially with influence on more industries than just construction and agriculture.
“There’s definitely a question on my mind as to whether the market focuses on this to some extent, particularly with it being a milestone year,” White says.
Artificial interest
Another main topic of conversation next year could be artificial intelligence (AI). “It could be the solution to so many issues from a sustainability perspective,” Niklasson says. “I see a lot of impact funds leaning into it from that angle, but at the same time, there is this an unknown about it.”
There has been a focus on the social implications of AI, but White is seeing an increasing move towards approaching it from an environmental perspective. Data centres are an area of particular interest here.
Giving them the capacity they need is hugely energy and water intensive, so can AI offer an alternative. “We are having a lot more conversations now around how this can be powered in a clean, green and speedy way,” she adds.
According to White, Newton’s clients have taken some interest in AI, how firms can approach it and what impacts it could have. “Similar to nature in many regards, we are still in that understanding phase of AI, rather than necessarily setting out specific expectations, because it continues to evolve so rapidly,” White says.
Making an impact
Regulation has been mentioned many times while researching this article, and it could be the catalyst that entices more ESG-led investors into the impact space next year.
Even geopolitical conflicts and political change in Europe and the US are unlikely to deter interest, believes Anna Väänänen, head of listed impact equity at AXA Investment Managers.
“Despite the uncertainty, the increasing number of investors seeking to do good with their capital, as well as generate a financial return, means impact investing will continue to grow in importance,” she adds.
Väänänen puts this down to the UK taking the “bold step” of starting to regulate funds that claim to make a positive impact in the listed-equity space.
“Together with GIIN’s framework for impact in listed equities, this has led to increased transparency on how listed- equity funds can achieve real-world measurable positive impact,” Väänänen says. “We expect this journey to continue in 2025.”
And the journey could take a different turn when it comes to making a real-world impact in biotechnology.
“We expect the Taskforce on Nature-related Financial Disclosures to continue its work helping companies understand their nature-related dependencies, opportunities and risks. We expect the work to move to sector specific recommendations during 2025. This will be an important catalyst for more companies adopting nature-related accounting,” Väänänen says.
What we want
In a change of tone, instead of looking at what trends could emerge in ESG next year, we wanted to know what those promoting such strategies would like to see during 2025.
And two regulatory issues sit at the top of responsible investment campaigner Share Action’s wish-list.
The first is fiduciary duty reform. Current guidance emphases financial return over the impact an investment may have on people’s lives. “That does a disservice to pension savers,” says Louise Marfany, Share Action’s director of financial sector standards.
“To be truly acting in the best interests of their beneficiaries, pension funds need to take account of whether the investments they make are enabling people to retire with a reasonable degree of security and health on a livable planet. We are calling for the law to be clarified to make it clear that people’s best interest goes beyond narrow financial return over the short term,” she adds.
This is an issue Share Action intends to campaign on “pretty hard” in the year ahead alongside its opposition to the proposed changes to the Stewardship Code.
The Financial Reporting Council (FRC) wants to remove references within the definition of stewardship that cover social and environmental outcomes. But the code exists to protect the interests of savers and pensioners by making sure that those managing their money are stewarding the companies they invest in.
“The social and environmental impacts are important,” Marfany says. “Therefore, the FRC needs to keep them at the heart of what it means to do effective stewardship.”
Still climate change
Climate change remains front and centre for the campaigner next year. This is due to 2024 looking set to be a record-breaking year for all the wrong reasons. “We are running out of time and so the critical ask we have of investors is to raise their ambition and urgency on climate,” Marfany says.
“Despite all of the talk, we are still seeing them pouring money into damaging, high-carbon companies. We are not seeing asset managers do enough, frankly, to steward companies to transition at pace,” Marfany says. “In fact, we are seeing a faltering of ambition, greenwashing and finger pointing. So we are pressing investors to raise their game. That is our number one ask.”
But it’s not all bad news. Share Action is encouraged by the momentum on some social issues. One of which is obesity, which it estimates could cost the global economy more than £3.3trn a year by 2035.
“We are seeing increasing investor awareness of the role the food industry is playing in that,” Marfany says. “It is driving diabetes, heart disease and certain forms of cancer. That is not just affecting people’s lives, it is having a huge economic impact.”
Investors in Nestlé, for example, led a resolution to encourage management to make their products healthier, while a group of investors in global food companies like PepsiCo, Coca-Cola and Mondelez called on the sector to be more transparent about how harmful their products are. “That is a positive trend,” Marfany says.
Another social issue where Share Action does not want investors to lose momentum is low pay. Marfany claims that some retailers are not paying a living wage to millions of workers.
“It leaves people unable to keep the lights on, heat their homes, pay the rent and struggle to feed themselves,” she adds, pointing to research that shows two in five low paid workers regularly skip meals.
Marfany is pleased that investors are taking “a responsible attitude” to the issue and recognise the systemic implications for their portfolios. “It hinders productivity, drives inequality and places additional resource burdens on the state, which is highly constrained as things stand.”
Share Action wants investors to drive higher standards in the UK’s retail sector to pay a real living wage, whether that’s delivery drivers, cleaners, people on the shop floor or in the warehouse.
These are the issues the campaigner would like regulators and investors to work on next year with Marfany starting to see a “growing body of evidence” about their long-term financial impacts.
A fresh start
Those working to build a more sustainable future suffered a series of setbacks in 2024 as the world appeared to be full of ecological disasters and corporate scandals.
The outcome of certain elections only adds to the pressure on sustainable-led investors and those working to create fairer societies where people can be treated with dignity and respect.
Yet have the events of last year only served to harden investors’ belief in what they are working to achieve while paying pensions?
Environment, social and governance-led strategies may be maturing and no longer considered niche, but they still have a fight on their hands.
Nature, climate and regulation appear to be the main battlefields in making sure that the coming year is not a repeat of 2024.
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