2022 brought historic agreements from the COP summits, the passage of a climate bill in the U.S., and a global spike in emissions. We break down the year that was. Plus, tighter regulations, stricter standards, the transition to renewables, adaptation and relentless climate disasters are just some of the main themes facing countries, companies and investors in 2003. Meggin Thwing Eastman of MSCI rejoins the show to share her team’s ESG and Climate Trends to Watch for 2024 report.
Investing for good
After gaining mainstream attention in recent years, the environmental, social and governance (ESG) investing trend is expected to become more popular in 2024 — and beyond.
Sustainability has become a major focus of ESG investing as investors seek to align their investments with their values and prioritise companies working to address environmental and social issues.
“The US Senate’s passing of a sweeping $430 billion bill to help fight climate change underscores why every investor needs exposure to ESG investments to build wealth over the long term,” says Nigel Green, chief executive and founder of deVere Group.
Global ESG assets are on track to exceed $53 trillion by 2025, according to Bloomberg Intelligence, representing more than a third of all assets under management.
The trend is driven by investors who want to not only generate financial returns, but also make a positive impact on the world. Increasingly, they are demanding greater transparency from companies around ESG credentials of businesses.
This includes the disclosure of information about a company’s environmental and social impact, as well as its governance practices.
The passage of the 2022 Inflation Reduction Act by U.S. lawmakers was more of a climate bill in disguise. Over $350 billion was dedicated to green energy programs, tax rebates, and infrastructure development. That put a temporary charge into solar and wind stocks as well as companies around the electric vehicle ecosystem. The COP27 summit, held in Egypt last fall, saw the last-minute adoption of an agreement by richer nations to create a loss and damage fund that is designed to send aid to vulnerable countries devastated by the irreversible harms of global warming. Details still need to be worked out, and the agreement did not go so far as to increase ambitions on lowering emissions or take any new steps to preserve the 1.5 degrees Celsius limit for warming temperatures, but still some rare progress out of a COP meeting.
At the COP15 gathering in Montreal in December, an agreement was reached to protect a third of the Earth’s land and water by the end of this decade and may have the potential to shake up the regulatory landscape for the green investment industry. The landmark deal, which is called the Kunming-Montreal Global Biodiversity Framework, drew wide praise from governments that wrote and signed it as well as by the private sector, environmental organizations, and even activists. We’re going to look for more details on that agreement this year.1
The planet got a lot hotter in 2022. Emissions from the burning of fossil fuels and cement production rose an estimated 1% last year over 2021 to 36.6 gigatons of carbon dioxide. That’s even higher than 2019 levels, the year before the pandemic, according to the Global Carbon Project. Oil use led the 2022 increase, specifically for aviation as international travel rebounded towards pre-pandemic rates. Both oil and coal finished the year in higher demand than in 2021, and Russia’s invasion of Ukraine set off an energy crisis in Europe that led to the increased burning of coal by countries impacted by skyrocketing prices and shortages.
The state of California made historic investments in climate measures in 2022, as Governor Gavin Newsom signed more than 40 bills to fight climate change in September. The California Climate Commitment, as it’s called, adds bolder climate pledges, including reducing oil use by 94% from 2022 levels by the year 2045. The plan also sets more aggressive goals of cutting carbon emissions by 48% below 1990 levels by the year 2030, up from the 40% by 2030 required under state law. Net zero emissions would be achieved in 2045 if these commitments are honored according to the plan. California also phased out sales of new gas-powered cars by the year 2035 and set a more stringent low-carbon fuel standard and streamlined citing and permitting of renewable energy projects. In all, the Golden State plans to spend more than $45 billion towards its climate commitments through the year 2045.2
The European Union started to make good on its pledge to cut emissions by 55% in 2030 from 1990 levels. The bloc’s 27 members reached a historic deal to set up the carbon border adjustment mechanism, an emissions levy on some imports. That’s meant to protect Europe’s carbon intensive industries that are forced to comply with the region’s increasingly tougher rules. Once it takes effect, there will be additional costs imposed on imported goods from countries without the EU’s restrictions on planet warming pollution.3
Investments in renewables is expected to keep growing. BloombergNEF projects that 2024 will bring an 8% growth in carbon-free energy investments. That should add up to more than 500 gigawatts of wind, solar, electricity, storage, nuclear, and geothermal power in 2024. According to the U.N. Intergovernmental Panel on Climate Change, at least 18 countries lowered emissions for more than a decade, according to its most recent review.
There’s hope in health care
The global pandemic galvanised the healthcare sector and sparked both medical and technological innovation.
However, medical science has taken major strides in other critical illnesses such as cancer, diabetes and cardiovascular diseases.
Drug makers have been working on providing therapies and treatments, launching a steady supply of blockbuster drugs. Healthy annual revenue generated from these drugs helps pharmaceutical companies to keep the pipeline for new treatments humming.
Digital health technology, such as electronic health records, telehealth platforms and mobile health apps, have the potential to attract greater investor interest.
The part investors may find particularly reassuring is that few sectors are as immune from global political or economic uncertainty as health care.
Predictable cash flow and revenue make healthcare companies a sensible choice for investors.
Prolonged Economic Adjustment
The U.S. has experienced its highest inflation in 40 years and the fastest pace of interest rate hikes since Paul Volcker’s crusade against rising prices in the 1970s. The percentage of economic forecasters expecting negative growth in 2024 is the highest it has been in the last 50 years at 44%, as the impact of the lagged monetary tightening is felt across the economy.2 Wall Street’s view is shared by Main Street as CEO sentiment hovers near historical lows. The same consensus believes the recession will lead to a fall in inflation, followed by a Fed pivot and a cut in rates that will propel a growth pickup and market rally in the second half of the year—the quintessential tale of two halves of a dip followed by a rip. We believe the economic adjustment will be more drawn out rather than a V-shaped recovery.
Structural pressures in the labor market, such as a declining workforce, falling immigration and employer incentives to retain workers could limit job market declines. It may take a long time for the unemployment rate to climb from 50-year lows.3 Wage growth at 4-5% suggests no sharp adjustment in consumption and may take sometime to fall to levels consistent with the Fed’s 2% inflation objective.4
The housing sector will also be slow in adjusting given there are few sellers, and the buyers are stepping back. Sixty percent of the housing stock is owned by the 55+ age group that is less likely to relocate or downsize.5 Since many homeowners obtained low interest rate mortgages, there is little incentive for them to sell and buy at a higher mortgage rate. At the same time, higher interest rates have led to a collapse in demand. It will take some time for the housing market price discovery and adjustment to occur.
Although inflation should ease from its recent highs, it could stay higher for longer. The Fed wants to avoid the monetary policy reversals of the 1970s when they tightened on three separate occasions to break the back of inflation, which could be more durable this time given tight labor markets, resource intensive energy decarbonization and less competition due to deglobalization.
