Developments to watch in ESG investing

ESG investing is going mainstream, as this area of the market matures and investment firms build skill in the space.

“We’re fast approaching a time when we will no longer have to differentiate between investment strategies that are ESG-integrated from those that are not,” said Aaron White, vice-president of sustainable investments with CIBC Asset Management, in a recent interview. 

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White says 2024 looks to be a “dynamic” year for ESG and sustainability, and he cited six areas that investors should watch: disclosure, climate resilience, plastics, ethical artificial intelligence (AI), polarization and opportunistic investing.

On disclosure, “The International Sustainability Standards Board has made its recommendations to establish a global standard for corporate disclosure on sustainability issues,” White said. “On the back of this, the Canadian Sustainability Standards Board is working to adopt these standards for the Canadian market.”

Such standards, which will foster transparency about sustainability-related risks, “will effectively democratize access to critical ESG data” to incorporate in investment analysis, White said.

Further, regulators and industry associations worldwide are focusing on common ESG-related definitions and product categorizations. “It is vital for the industry that we move forward in removing the confusion for investors from this space and provide clarity around what investment strategies specifically target,” he said. 

White also expects recognition of climate resilience to increase.

“Global governments have recognized the need to invest in critical infrastructure to protect against the social and economic impacts of extreme weather,” he said. “This is evidenced in Canada with the release last year of Canada’s climate adaptation strategy.”

Beyond government policy, companies face disruptions in operations and supply chains as a result of climate risk, White noted, which will drive investors to ensure company disclosures and risk management practices are adequate.

Plastics will be on the agenda this year too, he said, following pressure last year to eliminate single-use plastics in many jurisdictions across the world. White suggested that investors monitor the progress of the UN’s global treaty to end plastic pollution, to be finalized in 2024.

“We have long heard of the focus on recycling and a circular economy, and we believe that the move to this more circular economy will be front and centre as we watch how countries adopt new regulation as a result of the treaty,” he said.

On ethical AI, he expects increased investor demand for disclosure on how companies integrate AI into operations, as well as a focus on data privacy and security.

Polarization related to the ESG trend is also expected to continue, White said, as investors attempt to exert influence over the companies they invest in. “We’ll look to see how investors … execute on their strategy over the coming years as it relates to this type of climate engagement with portfolio companies,” he said.

Lastly, White expects continued momentum for investment strategies that take advantage of long-term sustainability trends.

“Strategies that focus on gaining exposure to the significant capital required to facilitate a climate transition have been particularly successful at raising capital,” he said.

Looking ahead, White foresees advisors increasingly engaging with clients on ESG and sustainability matters.

“Advisors play a critical role in terms of educating investors on this emerging landscape,” he said, as well as helping them invest in alignment with their values and gain exposure to this growing area of the market.

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