Developments to Watch in ESG Investing

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Welcome to Advisor ToGo, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject matter experts themselves. 

Aaron White, vice president, sustainable investments, CIBC Asset Management. 

The ESG landscape continued to mature throughout 2023 and into early 2024. We’re seeing the evolution of ESG from a novel and separate concept within investing to becoming a fully integrated approach within a strong investment process. Firms have invested over the last several years to build internal capabilities and capacity. That includes specialists in all areas of ESG investing, including active ownership. 

We will look to the back half of 2024 and into 2025 as a continuation of this approach, and watch for firms to make advances in their policies and processes as they leverage these resources.  

We’re fast approaching a time where we will no longer have to differentiate between investment strategies that are ESG-integrated from those that are not. The market has undergone self-selection to prioritize investors that can effectively account for non-financial factors in their analysis of investment opportunities. 

2024 looks to be a dynamic year for ESG and sustainability. I would like to focus on six key areas that investors should watch for this year: disclosure, climate resilience, plastics, ethical AI, polarization and opportunistic investing. 

Developments in both investment and corporate disclosure are expected this year. The International Sustainability Standards Board has made its recommendations to establish a global standard for corporate disclosure on sustainability issues. 

On the back of this, the Canadian Sustainability Standards Board is working to adopt these standards for the Canadian market with modifications that serve the Canadian public. They’re undertaking a consultation and will be releasing a work plan later this year.  

These standards will work to create uniformity and disclosure across companies, sectors and industries, and will foster the transparency and cross-comparability of data on sustainability-related risks. This will effectively democratize access to critical ESG data and continue to mainstream its incorporation in a thorough investment analysis. 

We are also seeing a focus from global regulators and industry associations to align around common 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 for their investors. 

A recognition for the need to invest in climate resilience and adaptation will also continue to develop in 2024. Global governments have recognized the need to invest in critical infrastructure to protect against the social and economic impacts of extreme weather. This is evidenced in Canada with the release last year of Canada’s climate adaptation strategy. And while this is mostly a government policy exercise, companies are not immune to this challenge, as they will face disruptions in operations and in supply chains as a result of increasing climate risk. This will fuel pressure from investors to ensure company disclosures and risk management practices are adequate to both understand and to mitigate these potential disruptions on operations. 

Also, plastics will emerge as a significant topic this year. There is intersectionality with the biodiversity trend that we have seen developing over the last several years, and investors should monitor the progress of UN’s global treaty to end plastic pollution, which is set to be finalized this year. This will have meaningful implications for the use of plastics and include potential regulation on its production, design and disposal. 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 this new regulation as a result of the treaty. 

In 2023 we saw pressure to eliminate single-use plastics in many jurisdictions across the world, and we anticipate that this debate will continue throughout 2024 and have implications for companies in certain sectors and industries that rely on them heavily within their distribution practices. 

AI was certainly front and centre in 2023. The emergence of the ChatGPT craze through to the dynamic run that semiconductor earnings had over the year, it’s clear that the market is anticipating AI to cause both significant societal and economic disruption. And on the back of this trend, governments and companies will face increased scrutiny on their governance practices around AI. Investors will seek increased disclosure on how companies are integrating AI into their operations and what risks this presents for the company. We anticipate calls for the ethical implementation of AI and a focus on data privacy and security in 2024, and we’re already seeing some of these cases emerge in this year’s proxy season as investors call towards action of companies towards the implementation of AI within their business. 

We expect to continue to see the polarization in ESG trend in certain jurisdictions. Policymakers remain focused on the emerging dynamic of active ownership and how institutional investors exert their influence on investing companies, particularly related to the climate transition. In early 2024, we’ve seen many departures from Climate Action 100+, which is a collaborative organization focused on engagement with companies to focus on their implementation of strong governance and disclosure related to climate risk, and also to take action on reducing company emissions. 

The timing of these departures is really not surprising, given the organization has moved on to phase two of the initiative. In phase one, investors were calling for significant improvements in disclosure. And now, in phase two, the focus has shifted more to company transition plans and calling for action related to those. We do not really view this as a setback for climate-related active ownership, but rather a maturation of the industry. And we expect that investors will focus on more independent engagement where they can be much more targeted in terms of their expectations for investing companies. This will certainly be an ongoing trend to continue to monitor in 2024, and we’ll look to see how investors will build internal capacity to execute on their strategy over the coming years as it relates to this type of climate engagement with portfolio companies. 

And lastly, we’ve seen a major pivot from investors in terms of the demand for solutions that seek to participate in the opportunities that are presented by sustainability themes. To date, the bulk of solutions offered to investors have focused on addressing the investible universe. In other words, to reward issuers with better ESG profiles or to exclude companies that don’t align with investor values. In 2023 we saw continued momentum in both public and private markets 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 as both institutional and retail investors recognize the need, and with it, the potential for investment return. We expect this momentum to continue in 2024 with the emergence of new investment firms and new investment solutions offered to investors in both the climate space but also the space surrounding other sustainability trends. 

As we move forward in 2024, we expect to see continued advancement in how advisors engage directly with their clients on ESG and sustainability matters. Advisors play a critical role in terms of both educating investors on this emerging landscape and also helping facilitate them to invest in both association with their values, but also in addressing asset allocation decisions related to getting exposure to many of these themes that we anticipate will grow at greater rates than the broader market.