While the 2023 it was a year of transition, Responsible Investing has started to grow again and 2024 it will be a year of acceleration, driven by promising structural trends.
Responsible investments, what will 2024 be like?
Amundi’s first “Responsible Investment Views” report highlights that assets held in responsible funds have quadrupled since 2020 and now represent 17% of total assets globally and more than half of European assets.
In a difficult market context for Europe and for cross-border funds, responsible funds as a whole recorded negative flows in line with the trend recorded by traditional strategies. However, the sustainable investment funds that present the highest level of integration have recorded significant positive net inflows: thematic funds, of impact and funds with positive ESG screening they raised almost 33 billion euros between January and November 2023.
The Inflation Reduction Act of the United States and the EU’s Green Deal business plan represent great support for the green technology and clean energy sectors
For the first time, the alignment between energy security, strategic business plans, foreign policy objectives and climate objectives is generating significant opportunities for responsible investment.
Political initiatives in the United States, in the European Union and China are leading to huge investments in green tech. The US Inflation Reduction Act marked a turning point, unlocking 400 billion dollars for incentives for green technologies; the EU response, the industrial plan Green Deal, will strengthen RePowerEU, a plan that aims to mobilize €300 billion by 2030. In China, the combination of the “Made in China 2025” plan and the 14th Five-Year Plan has placed green innovation at the center of industrial policy. Five green technology areas to monitor in 2024: sodium batteries, AI for intelligent emissions management, green steel, carbon capture and storage and alternative marine fuels.
- Climate: the focus on Net Zero remains more relevant than ever
Global CO2 emissions have far exceeded interim targets, while the International Energy Agency has predicted that fossil fuels will peak before 2030 e announced that mature clean energy spending will reach record levels.
Developing a climate change strategy has become essential for long-term investors. However, responsible investors should both evaluate climate risks related to investments and develop a net zero investment process to support the gradual reallocation of capital, while mitigating the impact of high energy market volatility on performance.
During the implementation of climate transition plans, gInvestors should remember that the risks are significant and increasing, Amundi stresses. Indeed, climate transition plans are exposed to both transition risks and physical risks. Transition risks have taken a central role in assessing the impact on portfolios. But when it comes to physical risks, we have already seen an increase in financial losses caused by extreme weather events, which are expected to increase in frequency and intensity.
Fundamental role of “mixed finance”
In a moment dthe debt crises in emerging markets, the gap between the investments needed to reduce greenhouse gases to zero by 2050 and current financing has widened. Given the limited fiscal space in most economies, the private sector will have to cover between 80% and 90% of these investments (source: IMF). Closing the sustainable financing gap through scalable blended finance mechanisms and better collaboration between public and private entities is more important than ever.
- THE sustainability risks are multiple and investor attention towards nature and a just transition should increase
The concept of “planetary boundaries”which outlines the environmental limits within which humanity can operate safely, should emerge as a framework for responsible investors, as it allows biodiversity, climate and other dimensions of nature to be integrated into a single comprehensive framework.
Action by companies and investors on biodiversity has remained limited due to difficulties in data collection and reporting. The OECD reported that funding for biodiversity represents only 7% of funds allocated for environmental measures. This situation is expected to change as biodiversity reporting increases, i research progress and the introduction of specific regulations.
To address the temporary lack of biodiversity data and reporting, Amundi has developed a proprietary investment process to monitor a portfolio’s impact on biodiversity.
For the transition to be successful on a global scale, we need to ensure that it is a just transition. We expect that the private sector will face growing demand for concrete demonstrations of its efforts to promote an inclusive transition.
Amundi has developed a “just transition score”, based on generic and sectoral criteria, for each of the main stakeholders involved in the transition: local communities, customers, workers and society at large.
EU Action Plan for sustainable financeand: important goals have been achieved in terms of transparency which should pave the way for a greater inflow of capital to support sustainable and inclusive growth
The EU Action Plan for Sustainable Finance has brought transformative changes to the European sustainable funds landscape, improving transparency and standards. Its impact goes beyond Europe, as it is influencing regulators around the world and has become a benchmark.
To achieve the objective of financing the transition through individual choices, the Action Plan must guarantee clarity and comparability between sustainable finance offers. These must be adapted to the needs of end investors to allow widespread mobilization of savings towards the transition.
ESG increasingly important for investors
In some regions, responsible investment is generating negative reactions, with debates on its alleged weakness or, on the contrary, with accusations of breach of fiduciary duties. However, more than two-thirds of asset owners (67%) believe that ESG has become even more crucial to investment policy over the last 5 years (source: Morningstar).
This “turn around” it should be seen as a sign of maturation of the sector. First, it shows that real change is taking place. Secondly, it recalls the need for clarity in value propositions and corporate commitments. Investor expectations must be met on these two fronts.
In 2024, “we expect asset managers to continue to improve product-level transparency and clarify how management company-level commitments are linked to product objectives.” Regulators have a key role in preventing polarization of the debate by imposing greater transparency and defining a common framework.