What ‘good’ might look like for sustainable investment and ESG in 2024 ...

Regulatory requirement, client demand, political noise (ESG backlash or just hot air?), biodiversity and climate change all loomed large across sustainable investment and ESG in 2023 – arguably crowding out – from the public narrative at least - the fundamental purpose of sustainable investment: to generate investment value by allocating capital to companies that are preparing for and facilitating sustainable industrial transitions and away from those that don’t.

What’s ahead for 2024?

It seems unlikely that any of the macro factors identified above will subside in 2024:

  • Regulators are going to keep regulating (sigh!)
  • Clients will keep demanding (quite rightly!)
  • With elections across the world, it seems unlikely that the political noise will subside (more sigh!)
  • … and individual sustainability issues remain pressing.

So, against this inevitable backdrop, we ask: Will investors be able to support effectively sustainable industrial transitions in 2024?

Yes, we can … if …

… we – as an industry / value chain:

  • Focus on the fundamentals (that drive companies and investments … even if that means discarding data and metrics which are easy to collect, superficially and tangentially-relevant but ultimately meaningless in an investment context)
  • Focus on human intelligence as much as we focus on artificial intelligence – until we get the former right, the latter isn’t going to help us much
  • Follow the money (in investment decision-making and in our own value chain)
  • Model – wherever possible – sustainable investment practice on ‘mainstream’ investment practice
  • Prioritise pre-trade ANALYSIS (to make better investment decisions) over ANALYTICS (to hide or explain away mistakes by dumping so much data on people that they lose themselves in complexity and ultimately lose the will to care)
  • Use transparency to clarify rather than obfuscate

In pursuit of these objectives, I’m hoping to kick off a debate by defining what – in my humble opinion – would constitute ‘good’ for sustainable investment in 2024.

I feel confident that others will have very different (even contradictory) ideas … and am optimistic that some will wade into discussion in the thread below.

Progress made recently

There are encouraging signs in a few of the areas:

Focus on the fundamentals
  • This WBCSD guide on How investors integrate sustainability factors into intrinsic valuation provides the first (that I am aware of) end-to-end guide on the different ways that sustainability can be used to improve FUNDAMENTAL BOTTOM-UP investment decision-making.
  • It provides a line of sight from the theory of valuation through case studies on practice to recommendations for investors and companies
  • (Disclosure of interest, SRI-Connect was involved in the writing of this guide)
  • Also, training is available to asset managers (via www.sita-training.com) to investors and research providers looking to develop their capabilities in this regard

For those investors who want to integrate fundamentally, models and training are available as are case studies of how leading firms are applying the practice.

Focus on human intelligence (before systematising this via artificial intelligence)
  • One thing that the WBCSD guide highlights (to me at least) is that sustainable investment analysts need to pay more attention to what makes individual companies different from each other and – arguably – less attention to what makes them similar and comparable.
  • As we – as an industry - explore AI (which we must do), we must pay as much attention to the ways that it can be used to identify and understand unexpected information as it can be used to deliver efficiency in expected information.
  • Insofar as it is used for investment analysis, AI must be used – as much to find – counter-consensus ideas as to organise consensus.
Model sustainable investment practice on ‘mainstream’ investment practice
  • In this respect, some companies are taking the lead and developing sustainable investor communications that are aligned with (even embedded within) their mainstream investor communications practice.  This is to be fully welcomed and investors and research providers should encourage further development of this where possible.
  • In a similar vein, we modelled (in 2022), what the investment format of a ‘morning meeting’ would look like if it focused on specific sustainability issues.  We learned a lot from the exercise of producing these ‘morning meetings’ and would love to hear about other experience of practices like this that align (or embed) sustainable investment practice with ‘mainstream’ investment practice.

This is a big one.  So, I’ll devote a whole post to it.  See: ‘What ‘good’ might look like for (sustainable) investment research providers in 2024 (Part III).

Transparency & reporting
  • 2022-23 were bumpy for transparency and reporting as asset managers first jumped onto an ‘ESG’ bandwagon by classified lots of funds as ‘ESG’.
  • Then – as US politicians demonised the concept and regulators worldwide made it clear (through tightened regulation and fines for malpractice) that ESG claims needed to be justified – they jumped off the bandwagon equally quickly.
  • … leaving the industry in a good position: High-quality reporting and transparency is expected …

So, now it’s up to us to make good on this expectation … and just like companies and CSR reporting before us … travel the journey backwards through our organisations from what we want to SAY back into what we have to DOP to make this credible and real.

Next up…

In upcoming posts, I will extend this discussion to:

For discussion

For now, however, I reframe the hopes and expectations as questions and would be interested in any thoughts on:

  • Focus on fundamentals: Beyond models, training and case studies of practice, what else needs to be done to enable investors to apply sustainability factors to intrinsic valuation … thereby supporting sustainable industrial transitions by creating a cost of capital gradient between unsustainable and sustainable practice?
  • How should sustainable investment approach the use of AI?  How is it currently being used?  What opportunities does it present?  What traps should be avoided?
  • What are the best examples you have seen of investors ‘keeping it real’ with their sustainability reporting?  What practices should be demonised?