ESG Investing 2024: Opportunities through Clarity
Many companies worldwide are approaching their sustainability goals in the areas of environmental, social and corporate governance (ESG). 2024 is increasingly about showing concrete measurable results. Both at company level and for ESG investors. Find out why “greenwashing” is likely to become significantly more difficult soon.
2024 will be a politically moving and moving year. Because elections are pending for the next US President, the British Prime Minister, the Indian Government and the members of the European Parliament. The outcome of the elections, combined with regulatory initiatives and global climate goals, could include developments in ESG investing positively influence. Because a successful transition to a sustainable economy also offers opportunities for investors.
So far, however, one problem with ESG investments has been that the criteria for what is “green” or “social” vary. Both from the companies themselves and from sustainability rating agencies and financial product providers.
That's because sustainability is complex. Experts all over the world are therefore trying to find criteria that are relevant, measurable and comparable at the same time. These should help companies, investment companies, rating agencies and investors to provide or receive valid information in order to be able to make decisions based on it. If this tightrope is achieved, ESG investments could gain reputation and, as a result, record capital inflows.
Really eco: The end of greenwashing?
But there is still a lot to do until then. Both at corporate and political levels. Regulators and market participants are well aware that companies and financial institutions have made numerous daring “green” promises in recent years that have not always been true. As in the case of DWS, this greenwashing has sometimes led to scandals with millions of dollars in fines. Statements on the most important ESG topics must therefore be valid and verifiable. This is because greenwashing destroys trust in the market for sustainable investments and harms investors.
Companies and financial firms that are truly pioneering when it comes to ESG, could increasingly set themselves apart from the competition, as the successful and verifiable management of ESG aspects is becoming a key criterion for financial decision makers. If regulators and legislators also scrutinize investment strategies, greenwashing could in fact soon become a marginal phenomenon.
Policy sets clearer ESG goals
From a regulatory perspective, however, the ESG world is divided: In the United States, anti-ESG laws and the upcoming 2024 presidential elections could pose hurdles, while in the EU, for example, a new era is dawning, which requires companies, investors and lenders to increase disclosure, transparency and accountability regarding ESG issues.
In the USA, several groups have questioned the financial benefits of ESG or complain that a preferential focus on ESG factors is contrary to the fiduciary principle of profit maximization for shareholders. As a result, at least 40 anti-ESG laws had been passed in 18 states by December 2023. The reigning President Biden, however, has tended to underline his “pro ESG” position, when he exercised his veto right for the first time during his term of office in March 2023: He stopped a law presented by opposition Republicans that would have prevented pension funds from taking environmental, social and responsible corporate governance into account as criteria when making investment decisions. Many Republicans, on the other hand, reject so-called ESG criteria for investments as motivated by left-wing politics.
The EU wants to become climate-neutral by 2050. To achieve this goal, the European Green Deal was presented by the European Commission at the end of 2019. It comprises various components, such as the EU taxonomy and CSRD (Corporate Sustainability Reporting Directive). This Directive, which came into force in Europe on January 1, 2024, requires companies to report comprehensively on their ESG impact. Large corporations in the European Union must now prove how their activities impact the environment and society. Annual reporting based on the information provided should then begin in 2025.
Global reporting standards developed by the International Sustainability Standards Board also came into force internationally in 2024. These so-called ISSB standards However, in contrast to the EU CSRD, they are not mandatory to apply. The aim is rather to create globally accepted standards, with the EU striving to orient and align them with ISSB standards so that they could also become relevant for European companies.
For many companies, this means a lot of work. One Evaluation of Fidelity Across all regions, for example, shows that only around half of the companies they examined are prepared to meet their sustainability reporting requirements. For European companies, this percentage rises to around 60 percent.
How investors benefit from clear ESG standards
The improved regulations and initiatives on the corporate side are likely to be “profitable” both for the environment and society as well as for ESG investors. One recent study by Morgan Stanley shows that private investors' interest in sustainability is increasing. More than three quarters (77%) of private investors worldwide say they are interested in investing in companies or funds that aim to generate standard financial returns while taking into account positive social and/or environmental impacts. More than half (57%) say their interest has increased in the last two years, while 54% say they want to increase their allocations to sustainable investments in the next year. At least when the transparency and validity of ESG data are guaranteed.
