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Sustainable investing outlook 2024: Key issues and developments

Until recently, sustainable investing was viewed as a nobrainer – but over the last 12 months it’s lost popularity.1 Returns from sustainable investments have been under increasing pressure, while differing approaches to standards and definitions of sustainability have caused confusion and increased concern about ‘greenwashing’.

The world has accepted that the climate has changed and will continue to change. We are slowly – but surely – shifting from a focus on preventing climate change (mitigation) to how we adapt to a new reality (adaptation) to protect ourselves, our environment and our communities. But how far do adaptation measures go? The danger lurking is that they will not go far enough. War in Ukraine has heightened concerns around energy security and affordability, resulting in a focus on alternative energy sources but also new investments in oil and gas fields.

In our view, investment in fossil fuels and the impact on climate change will remain a major discussion in 2024 but in our mind there are four other key issues and developments that we are likely to see:

1. New approaches to managing and measuring biodiversity

In 2024, we will see increasing focus on the consequences of biodiversity loss for investors. To date, measuring the impacts of biodiversity loss has been strangled by a lack of quality data, but we expect a leap forward in ecological data development. Cardano is already using the latest data tools, such as determining physical risks using ‘geospatial data’. We’re also developing measurement methodologies using new techniques such as bioacoustics – an affordable, speedy, and non-invasive tool for measuring biodiversity richness and abundance in a certain area.

We also expect that more biodiversity-related market standards will become mandatory, such as the Taskforce for Nature-related Financial Disclosures (TNFD). New EU regulations on deforestation-free products are likely to be translated into local practice. In the Netherlands, for example, the Dutch Central Bank has highlighted the importance of recognising biodiversity loss as a financial material risk.

2. More focus on the social impact of sustainability

There can be no doubt we also need to make social themes more transparent and measurable. While the potential impact of ecological aspects on company profitability is greater than social aspects, the interaction between different themes are increasingly clear. For example, in the case of climate refugees.

Can the transition to a sustainable society be done in a fair way, with attention to human and labour rights, and in such a way that everyone receives a living wage?

3. Getting to grips with defining sustainability

The debate about what sustainability really is rumbles on: what is the definition and how do I apply it? Looking ahead to 2024, we believe ‘sustainability’ will be redefined for investors as this area becomes more transparent and data-driven, and will address the level of integration in investment portfolios.

In the absence of an unambiguous definition, investors have embraced the Sustainable Finance Disclosure Regulations (SFDR) as a stamp of approval. In September 2023, a new consultation on the future interpretation of SFDR was launched and so we expect there will be significant adjustments in this area in the year ahead. Meanwhile, investors and regulators are seeking alternatives to ensure as much objectivity as possible.

We welcome this discussion wholeheartedly and encourage ‘real world impact’ to play a central role. Implementing all this objectivity in just one year is probably too short a timeframe, but its good news that discussions have begun.

4. Investors increasingly favour engagement over exclusion

Geopolitical tensions and rapidly alternating environmental disasters directly affect the discussion on ethics, the transition to a sustainable world, fossil exposure and more. We believe that institutional investors are going beyond complying with sustainability-related legislation, and beyond simply having an opinion on climate. They are embracing the overall transition to a sustainable society – not just looking at single themes such as climate, but more broadly to include water, biodiversity and circularity, for example – and this is reflected in investment choices.

From simply excluding certain investments on the grounds of sustainability or ethics, we believe 2024 will see more investors take up an engagement approach, because real change is not taking place on paper in investment portfolios, but in the real world.