Following a difficult 2022 amid a global energy crisis, 2023 surged into positive territory for the main ESG indices.
With Europe, the US, and world indices all experiencing significant positive outperformance last year – with only emerging countries continuing to underperform – Amundi asset management has observed responsible investing gradually converge towards a more standardised and regulated environment.
“A slower transition would certainly bring huge environmental, financial, economic costs that need to be carefully identified,” chief responsible investment officer Elodie Laugel said.
“On the opposite, we see great opportunities if the world enters into a steady and orderly transition scenario. Investors should stay the course,” she added.
However, the firm has called upon the financial industry to bring greater clarity in the value proposition made at product level and commitments made at corporate level and highlighted several markers for investors to keep an eye on in 2024.
Foreign policy bolsters green tech and clean energy sectors
According to the asset manager, policy initiatives in the US, Europe, and China are driving substantial investments in green tech.
Namely, the US Inflation Reduction Act (2022) unlocked US$400 billion in federal funding to clean energy, while the EU’s Green Deal Industrial Plan is directing part of its efforts to mobilise €300 billion by 2030.
China similarly has put green innovation at the centre of industrial policy, through a combination of the “Made in China 2025” plan – which seeks to reduce China’s reliance on foreign technology imports – and its 2021 to 2025 plan, emphasising high-tech innovation.
“For the first time ever, the alignment between energy security, strategic industrial plans, foreign policies goals, and climate objectives is creating significant tailwinds for responsible Investing,” Amundi said.
Five green tech areas to watch for in 2024, according to Amundi, are sodium batteries, AI for smart emissions management, green steel, carbon capture and storage, and alternative marine fuels.
Net zero efforts remain more relevant than ever
The firm has further emphasised the importance of both assessing the climate-related risks of investments and developing net zero investment frameworks.
This, Amundi explained, will support gradual capital reallocation while mitigating the impact of high energy market volatility on performance.
“While implementing climate transition plans, investors should remember that risks are significant and rising,” it said.
Namely, climate transition plans are susceptible to both transition risks and physical risks, with the former taking the limelight in terms of portfolio impact assessment.
On the other side of the coin, the asset manager expects to see an increase of frequency and intensity of financial losses caused by acute extreme weather events.
‘Blended finance’ critical to lifting up emerging countries
According to the IMF, the private sector will need to cover between 80 and 90 per cent of investments going into net zero efforts, particularly as the gap between funding and the investments needed to reduce greenhouse gasses has widened amid an emerging debt market crunch.
Collaboration between public and private entities, particularly through blended finance mechanisms, is now “more important than ever” in the pursuit of closing the sustainable financing gap, according to Amundi.
‘Planetary boundaries’ to lead responsible investment frameworks
The “planetary boundaries” concept, which outlines the environmental limits that humans can safely operate, should be front of mind for responsible investors seeking to integrate multiple dimensions such as biodiversity and climate into a single overarching framework, the asset manager highlighted.
Namely, limited actions by companies and investors on biodiversity up to this point, with data from the Organisation for Economic Co-operation and Development showing that funding for biodiversity accounted for only 7 per cent of funds allocated towards environmental measures, is expected to change as biodiversity-related reporting increases and more regulation is implemented.
Beyond ESG headlines
While Morningstar data has shown that more than two-thirds of asset owners still believe ESG has become more crucial to investment policy in the past five years, Amundi has observed an increase in backlash for responsible investing in some regions.
Specifically, debates have centred around its perceived timidity, or rather, its perceived aptitude for breaching fiduciary duties.
The asset manager said that this backlash should be seen as a sign that “the industry is maturing”, first, signifying that “real change is at work”.
“Secondly, it calls for a need for clarity in value propositions and corporate commitments. Investors’ expectations must be met on these two fronts,” it noted.
“In 2024, we expect asset managers to continue enhancing transparency at product level and to clarify how commitments at an asset management company level relate to product level objectives. Regulators have a key role to play in preventing polarisation of the debate by enforcing greater transparency and providing a common framework.”
