Sustainable Investing Trends
To Watch In 2024
The Impaakt Team
9 min Read Time | November 27th 2023
Sustainable investing is a fast-growing and evolving field that aims to align financial returns with positive social and environmental impact. As the world faces growing challenges such as climate change, biodiversity loss, social inequality, and human rights violations, investors are increasingly looking for ways to support the transition to a more sustainable and resilient economy.
Let’s dive into six major trends that are shaping the future of sustainable investing and what they mean for investors and businesses.
1. The Double-Materiality Approach
One of the key trends in sustainable investing is the adoption of a double-materiality approach, which considers both the financial materiality and the impact materiality of sustainability issues. Financial materiality refers to how sustainability factors affect the financial performance and risk profile of a company or an investment (ESG data). Impact materiality refers to how a company or an investment affects the environment and society through its products, services, operations, and value chain (impact data). A double-materiality approach recognizes that investors have a dual role and that they can create value not only for themselves but also for the wider society and planet. The double-materiality approach is not only gaining traction among institutional investors, asset managers, corporations, and regulatory bodies.
The difference between financial materiality (ESG data) and impact materiality (impact data) is also becoming clear to most players in the financial industry. We can expect to see some budget for ESG data redeployed to impact data in 2024.
2. Stakeholder Engagement
Stakeholder engagement is the process of identifying, communicating, and collaborating with the relevant stakeholders of an organization or an investment, such as customers, employees, suppliers, investors, regulators, communities, and civil society organizations. Stakeholder engagement can help sustainable investors understand the needs, expectations, and preferences of their stakeholders in order to align sustainability objectives and strategies with them. This means co-create solutions and value propositions, and monitoring and reporting on their sustainability performance and impact. Impact research integrating inputs from stakeholders (and beyond, such as civil society) will gain traction in 2024.
3. All Eyes On Greenwashing
As sustainable investing becomes more mainstream and popular, it also faces the risk of greenwashing. Greenwashing is the practice of making false or misleading claims about the environmental or social benefits of a product or service. It can be a way for companies or investors to capitalize on the growing demand for sustainability without making meaningful changes to their practices or portfolios.
An example of how greenwashing is being battled in the financial industry is through the SFDR, which requires financial market participants and advisers to disclose information on how they integrate sustainability factors into their investment decisions and advice. It also establishes a classification system for financial products based on their sustainability objectives and impacts.
Such measures will have significant implications for companies and investors that want to communicate their sustainability efforts. Better guidance and more decisive consequences will mean more clarity for consumers — but also greater risk for companies going public with sustainability efforts.
4. Bespoke Sustainability
The concept of personalization is gaining prominence across industries, and bespoke sustainability is no exception. This shift is fueled in part by the European MiFID2 regulation, which introduces the idea of considering sustainability preferences in financial recommendations, and in part by the growing demand from end-clients for personalized sustainability strategies. Unlike the traditional one-size-fits-all approach, bespoke sustainability recognizes that individuals have diverse concerns, ranging from climate change to social inequalities or biodiversity.
Consequently, there is no universal definition of a “sustainability champion,” as each client’s priorities vary. As we step into 2024, sustainability is becoming increasingly personalized, with data providers, wealth managers, and banks leveraging client profiling to tailor investment portfolios according to each individual’s unique sustainability convictions. This marks a significant stride towards aligning financial strategies with the diverse and personalized sustainability goals of investors.
5. Yet More Regulations
The emergence of new sustainability reporting and disclosure requirements for companies and investors aims to improve the quality, comparability, and reliability of sustainability information. The goal is to enhance transparency and accountability. They also respond to the growing demand from stakeholders, such as regulators, customers, employees, suppliers, communities, and civil society organizations, for more transparent disclosures.
One of the most significant developments in this area is the adoption of the Corporate Sustainability Reporting Directive (CSRD) by the European Union. The CSRD will replace the existing Non-Financial Reporting Directive (NFRD). It will require all large companies (over 500 employees) and all listed companies in the EU to disclose information on their performance, risks, opportunities, and impacts. This will be the first time that a regulation requires companies to conduct a double-materiality assessment while engaging their stakeholders. The CSRD is expected to apply from 2024 onwards.
Another development is the adoption of the Sustainable Finance Disclosure Regulation (SFDR) by the EU. The SFDR is a European regulation introduced to improve transparency in the market for sustainable investment products, to prevent greenwashing, and to increase transparency around sustainability claims made by financial market participants. It imposes comprehensive sustainability disclosure requirements at both entity- and product-level.
6. Sustainability Beyond Public Companies
The expansion of sustainability beyond public companies to include private companies, especially small and medium-sized enterprises shows the acceleration of sustainability amongst businesses in general. SMEs are vital for economic growth, innovation, and job creation, but they also face significant challenges in accessing finance, markets, technology, and skills. Moreover, SMEs have a large environmental and social footprint, as they account for about 90% of businesses worldwide and employ about 70% of the global workforce.
These are some of the trends that are shaping the future of sustainable investing in 2024. Sustainable investing is not only a moral imperative but also a strategic opportunity for investors and businesses. By embracing sustainability as a core value proposition, investors and businesses can create long-term value for themselves and for society.
