With 2023 firmly behind us, holding the title of warmest year on record, sustainability issues show no sign of calming down in 2024 with a busy schedule for those focusing on environmental and social issues. Here's what will likely be grabbing my attention.
Elections, elections, elections
2024 has been dubbed the year of elections, and with what could be seen as unpredictable change on the horizon sustainable investors will be keenly considering the green transition policy. Across both sides of the Atlantic there are green strategies proposed or in use including Rishi Sunak's underutilised Green Finance Strategy against UK Labour's pledge to ‘make UK world's green finance capital', and in the US, there is Biden's subsidy-heavy Insolvency Reduction Act.
Diligence - looking up, down, left and right
Regardless of the politics, the human and natural costs felt in 2023 amplified the calls for rules to bring about real action. So from January 2024 pressure from sustainability regulation will be felt by portfolio companies. EU's regulation on deforestation-free products comes into force requiring companies to prove their supply chains do not contribute to the destruction of forests, with failure to report attracting a fee of up to 4% turnover – a sufficiently strong ‘stick' that the EU food industry has already requested a short exemption from. Similarly, Corporate Sustainability Reporting Directive comes into effect for EU Companies, bringing the double materiality assessment (and getting to grips with dynamic materiality) alongside an additional audit burden to those affected.
Who reports best, wins
Relatedly, third party ratings providers are coming under scrutiny, and we expect tighter rules around their procedures, instructions and products: The International Capital Market (ICMA) published a voluntary code of conduct for ratings agencies in late 2023, while the EU Council agreed the negotiating mandate on the proposed regulation for ESG ratings with talks set to start in January.
With the requirements of sustainability reporting growing and sustainability consultants facing new operating rules, we expect investors and companies to consider alternatives to aid compliance with increasing obligations, such as AI and other SaaS products which have recently shown great efficiency and capability in supply chain modelling and generative reporting across multiple frameworks.
Where the wild things would be
Finally, we expect biodiversity and nature to feature far more heavily in sustainable financings. Compliance with Sustainability Finance Disclosure Regulation's (SFDR) mandatory biodiversity-sensitive reporting was low in 2022, however with greater familiarity, technology and education there's a heightened expectation for better and more complete reporting in this area. Resources to scale the use of such nature focused metrics include the Taskforce on Nature-related Financial Disclosures TFND, who successfully provide guidance to funds and financial institutions on integrating nature-related risks into financial decision making. Financial institutions subject to transition obligations will also be awaiting the specific guidance from TNFD on nature and biodiversity considerations' inclusions into transition plans, alongside the Glasgow Financial Alliance for Net (GFANZ) guidance on the same topics.
Those hoping for a calm, quiet or ‘more of the same' year in sustainability may have to wait until 2025.
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