Five ESG Trends That Investors Need To Be Aware Of In 2024

Five ESG Trends That Investors Need To Be Aware Of In 2024

This year marks the twentieth year since the term ‘ESG’ was first coined by UN Secretary General, Kofi Annan, in a landmark study entitled ‘Who Cares Wins’. As we enter 2024, the ESG investment landscape will largely be shaped by the economic outlook, ESG disclosure regulation, product innovation and policy uncertainty due to elections – which will see an estimated 2 billion voters in 50 countries head to the polls. According to Verdantix research, there are five ESG trends that investors need to be aware of:

• Reforms to the Sustainable Finance Disclosure Regulation (SFDR).
  The EU’s Corporate Sustainability Reporting Directive (CSRD) will impact an estimated 11,700 firms in 2024. Disclosures made under the CSRD will be used by asset managers to fulfil their reporting obligations to investors and regulators under the SFDR. Efforts to align the SFDR more closely with the CSRD were the subject of a public consultation launched by the European Commission in the final quarter of 2023. This is likely to have an impact on sustainable finance reporting requirements, however no new rules are expected until the end of 2024.
  
  
• Growing emphasis on data transparency driven by greenwashing accusations.
  Increased public scrutiny and litigation of ESG claims is highlighting the importance of data transparency and accuracy. In response to this, ESG software vendors across the board are baking in functionality for users to estimate missing data and provide indications of data quality to enhance accuracy and reliability. For example, sustainability platform Apiday enables users to carry out consistency checks on reported data based on market values.
  
  
• Regulation of the ESG scores and ratings market in the EU and beyond.
  In December 2023, the European Council reached an agreement on a proposal to regulate ESG ratings providers, bringing them under the authorization of European markets regulator ESMA. This proposal is a landmark for investors, regulators and governments who have long raised concerns about the transparency of ESG scores and ratings agencies, their methodologies, and their data sources. Other regulators are expected to follow suit, with the UK government drawing up plans to bring ESG rating providers within the remit of the Financial Conduct Authority (FCA).
  
  
• Mounting stakeholder pressure to manage nature-related risks in investment portfolios.
  Financial institutions are facing growing pressure from stakeholders to manage portfolio nature-related risks. In September 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) released its final framework for the management and disclosure of nature-related risks, which is expected to be transposed into national law. In preparation, data, software and services providers are launching nature-related offerings for financial institutions. In May 2023, Clarity AI announced a partnership with GIST Impact to develop a biodiversity impact assessment product for investors. Similarly, in August 2023 S&P Global launched a Nature and Biodiversity Risk portfolio assessment service that covers 17,000 firms and over 1.6 million assets.
  
  
• Private debt fundraising for sustainability driving demand for private asset solutions.
  In 2024, we expect to see increased private debt fundraising for sustainability initiatives driven by the need to meet ambitious net zero targets, as well as concerns over higher risk, equity-based alternatives. This will drive increased demand for data and software solutions specifically designed for collecting ESG performance data on private assets. Examples of solutions providers include MSCI, which acquired private assets data firm Burgiss in August 2023 and now offers a carbon footprint modelling tool for private equity and debt funds. Another example is AtomInvest, which allows credit managers to track ESG performance across a portfolio.

For a detailed benchmark of investor-focused ESG reporting and data management software, see Verdantix Smart Innovators: ESG Reporting And Data Management Software For Investors.