Navigating the Future: Key Trends of ESG in 2024 and aligning with measuring and achieving Sustainable Development Goals (SDGs)
Environmental, Social, and Governance (ESG) factors have become increasingly important in the business world as companies strive to create sustainable, ethical, and responsible practices. The year 2024 holds significant importance as it marks the deadline for achieving the United Nations' Sustainable Development Goals (SDGs), a set of 17 global goals aimed at addressing the world's most pressing social, economic, and environmental challenges. In this article, we will explore the key trends of ESG in 2024 and discuss how organizations can align their efforts with the achievement of the SDGs.
SDGs are the most commonly used framework for the sustainability reporting.? The SDGs are a globally agreed and accepted framework of practices with clearly defined indicators and goal-oriented recommendations that enable criteria-unbiased sustainability assessment.??ESG (environmental, social, and corporate governance) is ineffective for measuring development sustainability, with so many subjective interpretations of what constitutes sustainability and the difficulty in quantifying certain actions.? There is no global definition of ESG or standardized metrics, with assessments based on proprietary models.? Nor is it target-oriented or process focused, thereby fostering corporate greenwashing.
Last year, the Chairman and CEO of the world's largest asset manager, BlackRock (BLK: N), who is at the forefront of the business world's adoption of ESG standards said he has stopped using the term, claiming it has become too politicized, despite not changing its stance on ESG -related issues. The firm would continue to talk to companies it has stakes in about decarbonization, corporate governance and social issues to be addressed, he added. Blackrock has projected that by 2030, at least three quarters of its investments will be with issuers of securities that have scientific targets to cut greenhouse gas emissions on a net basis.
Fink had said in January that BlackRock had lost about $4 billion in managed assets as a result of the backlash against ESG, a tiny sliver of its $9 trillion under management. He reiterated at the Aspen conference that there had been no material impact on BlackRock's business.
The politicization of ESG in the world's largest recipient of Foreign Direct Investment between the far right and the far left- Democrats in favour and Republicans who claim it is a political liberal agenda, has resulted in Fink declaring he is "ashamed of being part of the conversation".
For example, the UN - backed Net Zero Insurance Alliance (NZIA) climate change alliance of insurers were threatened with legal action for anti-competitive behaviour pushing up prices of oil and gas by the State attorney generals of 23 Republican-run states in 2023, resulting in 12 of the 28 members leaving the alliance.
ESG, a catch-all term that encompasses a range of ethically responsible business practices, from curbing carbon emissions to cracking down on discrimination in the workplace, has become politically polarizing in parts of the Western world, especially in the United States,
"I don't use the word ESG any more, because it's been entirely weaponised ... by the far left and weaponised by the far right," Fink said.
Strong calls for market leaders such a Vanguard and BlackRock to focus on their primary objective to drive the profitable performance of their client's portfolios and risk-based investment strategies, rather than incorporating complex factors such as ESG which may increase volatility and lower investment returns, resulting in both money managers reporting a 2% approval of shareholder's social and environmental concerns in comparison in 2023 to 12% the year before and BlackRock reporting similar rejections.
ESG Metrics
Investment firms may set their own factors for assessing ESG which may exclude the following:
Investment factors may include:
Environment
Social
Governance
Diversification versus competition
In a Harvard Business Review article on anti-trust legislation and a new form of monopoly - horizontal shareholdings’: investors that own significant shares in several competing firms which evidence and theory suggest harms competition, consumers and the economy.
The increase in common ownership between competing firms reflects a more general shift towards passive investment strategies such as index funds that rely on portfolio diversification. One of either Blackrock, Vanguard, or State Street is the largest shareholder in 88%?of S&P 500 companies. They are the three largest owners of most DOW 30 companies. Overall, institutional investors (which may offer both active and passive funds) own 80%?of all stock in the S&P 500. Their representation among the top 10 shareholders of U.S. corporations has skyrocketed since the 1990s.
This is not all bad. Institutional investors have grown so much because they offer small-scale savers the opportunity to invest in diversified funds with economies of scale. Indeed, horizontal shareholdings initially grew with the rise of institutional investors following legislative and tax rule changes?in the late 1970s and early 1980s that created retirement savings accounts. BlackRock and Vanguard are “only the most recent incarnation” of a longer-term rise in diversified investment strategies. But it is impossible?to have complete portfolio diversification, shareholder representation, and competition.
The necessary flip side to portfolio diversity is increased common ownership. Although theory predicting negative effects of horizontal shareholdings dates to at least 1984, only recently has a substantial amount of research emerged that articulates how common ownership leads to anti-competitive actions, provides corroborating empirical evidence, and proposes policy responses.
Environmental, Social, and Governance (ESG) factors have become increasingly important in the business world as companies strive to create sustainable, ethical, and responsible practices. The year 2024 holds significant importance as it marks the deadline for achieving the United Nations' Sustainable Development Goals (SDGs), a set of 17 global goals aimed at addressing the world's most pressing social, economic, and environmental challenges. We will explore the key trends of ESG in 2024 and discuss how organizations can align their efforts with the achievement of the SDGs.
1. Growth of Passive ESG Funds: Passive ESG funds have seen significant inflows, with $21.3 billion brought in last quarter in Europe alone.
2. Higher Rates and Greater Volatility: BlackRock expects higher interest rates and increased market volatility to define the new investment regime, marking a significant change from the previous decade.
3. Requirement for Accurate and Reliable ESG Data: There is a growing need for more accurate and reliable ESG data solutions to support ESG investing and decision-making.
4. Transformational Trends: BlackRock identifies various transformational trends, including technology, demographics, climate, and urbanization, that are shaping the world and influencing ESG investing.
5. Significant Growth in ESG-related Assets: BlackRock's ESG-related assets under management have increased by 53% from the beginning of 2022 to the end of the previous year.
6. Challenges in Sustainable and Transition Investing: Investors face challenges in distilling large volumes of data and information and navigating the complexities of sustainable and transition investing.
7. Low Carbon Transition as a Driver of Investment Opportunities: BlackRock predicts that the low-carbon transition will create major investment opportunities in 2024.
8. Impact of Regulations and Requirements: Regulations and requirements, such as Germany's Supply Chain Due Diligence Act, are expected to have a significant impact on ESG investing in 2024 and beyond.
9. Strong Belief in ESG's Benefits: A high percentage of investors and executives believe that ESG investing leads to better returns, resilient portfolios, enhanced fundamental analysis, and positive impact.
10. Research and Innovation: BlackRock emphasizes the importance of research in informing investment decisions and product innovation, focusing on major structural trends shaping the economy, markets, and asset prices.
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Trends in ESG and impact investing inn 2024 and achieving the SDGs
Here are some of the biggest trends in ESG and impact investing in 2024 that are expected to drive the achievement of the Sustainable Development Goals (SDGs) in 2030:
1. Alignment with SDGs
There is a growing focus on aligning ESG and impact investing strategies with the specific goals outlined in the SDGs. Investors are increasingly seeking investments that contribute to the achievement of these goals.
2. Impact Measurement and Reporting
There is an increased emphasis on measuring and reporting the impact of investments on the SDGs. Investors are looking for transparent and standardized metrics to assess the social and environmental outcomes of their investments.
3. Social and Affordable Housing
Investments in social and affordable housing are expected to increase in order to address the housing crisis and promote inclusive and sustainable communities (SDG 11).
4. Renewable Energy and Clean Technology
Investments in renewable energy and clean technology are expected to continue to grow, contributing to the transition to a low-carbon economy (SDG 7).
5. Sustainable Agriculture and Food Systems
There is a growing focus on investments in sustainable agriculture and food systems to address food security, promote sustainable land use, and reduce the environmental impact of agriculture (SDG 2).
6. Gender Equality and Diversity
Investments that promote gender equality and diversity in leadership positions are expected to gain traction, contributing to SDG 5.
7. Circular Economy and Waste Management
Investments in the circular economy and waste management are expected to increase, aiming to reduce waste generation, promote recycling, and minimize resource consumption (SDG 12).
8. Access to Healthcare and Affordable Medicines
Investments in healthcare infrastructure, access to healthcare services, and affordable medicines are expected to play a crucial role in achieving SDG 3.
9. Education and Skills Development
Investments in education and skills development are expected to increase, focusing on improving access to quality education and promoting lifelong learning opportunities (SDG 4).
10. Financial Inclusion
Investments in financial inclusion, such as microfinance and fintech solutions, are expected to expand, aiming to provide access to financial services for underserved populations (SDG 1).
Some have argued that, in addition to their social value, ESG criteria can help investors avoid the blowups that occur when companies operating in a risky or unethical manner are ultimately held accountable for its consequences. Examples include BP's (BP) 2010 Gulf of Mexico oil spill and Volkswagen's emissions scandal, which rocked the companies' stock prices and cost them billions of dollars.
MSCI ESG Metrics
Morgan Stanley Capital International (MSCI) ESG Metrics is a tool designed to give institutional investors a broad set of standardized ESG data and simple flagged metrics that are comparable across a broad universe of 8,500 companies in the MSCI ACWI Investable Market Index (IMI) coverage universe. Developed based on 40 years of experience collecting, standardizing and modeling ESG metrics, the data can be used as inputs for in-house analytical models or to develop proprietary investment strategies.
The metrics include 56 metrics across the following four (4) ESG metrics datasets:
1) Risk exposure;
2) Practices;
3) Management Performance;
4) Controversies.
Market consultation revealed there is "prevailing market uncertainty over how to assess if a company is a sustainable investment," according to the world's largest asset manager, BlackRock, the ESG index provider MSCI in 2023 made several changes to the index range from 1 March following a consultation with the market as it looks to strengthen the suite’s ESG credentials in order to reflect regulatory developments in Europe.?
The changes include a carbon intensity reduction of 30% compared to the parent index. The indices will also exclude companies that generate 5% of their revenue from the production or distribution of palm oil or extraction of arctic oil and gas.
Furthermore, companies that have an MSCI ESG controversy score of one for two pillars of its methodology, land use and biodiversity and supply chain management will also be excluded from six ETFs.
Following the consultation, MSCI said: "Market participants generally recognised the need for the MSCI ESG Screened indices to evolve in order to reflect regulatory developments, such as the Sustainable Finance Disclosure Regulation (SFDR), the Markets in Financial Instruments Directive II (MiFID II) sustainability preferences, and different regulations related to the naming / labelling of indexes and financial products.
Conclusion
These trends reflect the growing recognition of the role that ESG and impact investing can play in driving progress towards the SDGs which may evolve over time.
The ultimate value of ESG investing will depend on whether they encourage companies to drive real change for the common good, or merely check boxes and publish reports.
That, in turn, will depend on whether the investment flows follow ESG tenets that are realistic, measurable, and actionable.