Elodie Laugel
Responsible investing is quickly becoming more mainstream and is gradually converging towards a more standardised and regulated environment. This change of scale has led to heated debates throughout 2023 with a regulatory framework undergoing consolidation, and a significant momentum on energy transition.
In order to keep up with the environmental and social challenges ahead while continuing to put clients’ objectives first, the finance industry needs to bring greater clarity to the sustainable finance value proposition, according to Amundi, Europe’s largest investment manager.
To cut through the noise, Amundi has published its first Responsible Investment Views[1], which presents insights on the main trends to watch in 2024 as well as implications for investors.
Elodie Laugel, Chief Responsible Investment Officer at Amundisays “The coming years will be critical. A slower transition would certainly bring huge environmental, financial, economic costs that need to be carefully identified. On the opposite, we see great opportunities if the world enters into a steady and orderly transition scenario. Investors should stay the course! Consistency and clarity around the investment value proposition will be key component of their success.”
Vincent Mortier Chief Investment Officer at Amundinotes “Despite challenging market conditions, responsible investment flows keep increasing on the long run. Favorable trends should continue to support its future development as 67%[2] of global asset owners are convinced of the materiality of ESG factors. In addition, we expect thematic and impact strategies to dominate the market in 2024 and onwards.”
While 2023 was a year of transition, Responsible Investment resumed its growth:
- Assets held in Responsible Funds have increased fourfold since 2020 and now account for 17% of total assets worldwide[3] and more than half of the European ones.
- In a difficult market for Europe and cross-border funds (- €84bn[3] net flows), Responsible funds as a whole experienced similar negative flows as regular ones but sustainable investment fund presenting the highest level of integration posted significant positive net inflows: thematic funds, impact funds and funds with positive ESG screening, collected close to €33bn between January and November 2023[3].
- In terms of performance, after a difficult 2022 in a context of energy crisis, 2023 showed a return to positive territory for the main ESG indices. Europe, the US and the World indices all experienced significant positive outperformance with only emerging countries continuing to underperform their parent index (over 10 years, the SRI version of MSCI World still outperforms the standard index: +10.1% p.a. versus +9.2% p.a. for the 2014 to 2023 period)[4].
Elodie Laugel says “A number of signals show that the industry is maturing on the ESG topic. Now, the financial industry needs to bring greater clarity in the value proposition made at product level, and commitments made at corporate level.”
On impact investing on Emerging Markets, Vincent Mortier adds, “Impact investing also need to consider EM markets because these are highly critical areas when it comes to climate transition and energy transition at large. There is a conducive environment from macro perspectives when it comes to investing in EM markets.”
Amundi believes 2024 will be a year of acceleration for Responsible Investment, driven by promising structural trends, particularly around 6 important markers:
1. The US Inflation Reduction Act to the EU Green Deal Industrial Plan constitute significant tailwinds for the green tech and clean energy sectors
- 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.
- Policy initiatives in the US, EU, and China are driving substantial investments in green tech.
- The US Inflation Reduction Act marked a breakthrough, unlocking $400bn[5] for green tech incentives.
- The EU’s response, the Green Deal Industrial Plan, will reinforce RePowerEU, a plan aiming to mobilize €300bn[6] by 2030.
- In China, the combination of the “Made in China 2025” plan and the 14th Five-Year Plan has put green innovation at the centre of the industrial policy.
- Five green tech areas to watch in 2024: sodium batteries, AI for smart for emissions management, green steel, carbon capture & storage, and alternative marine fuels.
2. Climate: Net zero compass remain more than ever relevant despite the need for more ambitious climate action from policy makers
- Global CO2 emissions have largely surpassed interim targets, while IEA has predicted fossil fuel to peak before 2030 and announced mature clean energy spending rising to record levels.
- Developing a climate change strategy has become essential for long-term investors. However, responsible investors should assess both the climate related risks of investments and develop net zero investment frameworks to 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. In fact, climate transition plans are exposed to both transition risks and physical risks. Transition risks have taken the limelight in terms of portfolio impact assessment. But on the physical risk side, we have already seen an increase in financial losses caused by acute extreme weather events that are expected to increase in frequency and intensity.
3. ‘Blended finance’ will play a critical role to close the financing gap in emerging countries
- At a time of emerging market debt crunch, the gap between the investment needed to reduce greenhouses gases to net zero by 2050 and the current funding has widened. Given the limited fiscal space in most economies, the private sector will need to cover between 80%-90% of these investments (source: IMF). Closing the sustainable financing gap through scalable blended finance mechanisms with better collaboration between public and private entities is more important now than ever.
4. Sustainability risks are multi-faceted and investors’ focus on Nature and Just Transition should increase
- The “Planetary boundaries” concept, that delineates the environmental limits within which humanity can safely operate, should emerge as a leading framework for responsible investors as it enables the integration of biodiversity, climate and other nature dimensions into a single overarching framework.
- Actions by companies and investors on biodiversity have remained limited due to data collection & reporting challenges. The OECD reported that funding for biodiversity accounted for only 7% of funds[7] allocated towards environmental measures. This is expected to change as biodiversity-related reporting increases, research progresses and regulation comes into place.
- To overcome the temporary lack of data and reporting on biodiversity, Amundi has developed a proprietary investment framework to monitor a portfolio’s impact on biodiversity.
- In order for the transition to succeed at a global scale, we must ensure the transition is just. We expect the private sector to face increasing demands to demonstrate concrete evidence of efforts to deliver an inclusive transition.
- Amundi has developed a dedicated ‘Just Transition score’, based on generic and sector-specific criteria, for each of the main stakeholders involved in the transition: local communities, clients, workers and society at large.
5. EU Sustainable Finance Action Plan: significant milestones have been reached in terms of transparency, that should pave the way to more capital flowing in to support sustainable and inclusive growth
- The EU Sustainable Finance Action Plan has brought transformative changes to the European sustainable funds landscape with enhanced transparency and standards. Its impact goes beyond Europe as it is influencing regulators worldwide, and has become a benchmark.
- To fulfil its goal of financing the transition through individual choices, the Action Plan needs to ensure clarity and comparability across sustainable finance offerings. These must be tailored to end investors’ needs to enable widespread mobilisation of savings towards the transition.
6. Beyond headlines on ESG backlash: ESG is seen as more and more material by investors
- Responsible investing faces localised backlash in some regions, with debates over its perceived timidity or on the contrary on accusations of breach of fiduciary duties.
- Yet, more than two-thirds of asset owners (67%) believe ESG has become more crucial to investment policy in the past 5 years (source: Morningstar).
- This backlash should be seen as a sign that the industry is maturing. Firstly, it shows 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.
- 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.
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