The Year Ahead In ESG: Assurance, Transition Finance And Natural Capital

Republished By Plato

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Is it officially too late to wish you a Happy New Year? As we return to work, here are three sustainable finance trends that are top of mind for me, along with three themes that sustainable finance and ESG community members say they would like prioritized in 2024.

My hot topics for 2024 build on progress made in 2023: regulations for ESG assurance; international agreements for transition finance; and the development of standards and instruments to monitor investment in nature and biodiversity. Here’s where I see things headed.

Corporations are prepping for ESG assurance mandates

What was once a voluntary exercise for disclosing climate and social goals has evolved into a full-fledged industry of ESG reporting. Up next: the introduction of third-party assurance requirements for certain ESG disclosures.

California and the European Union are leading the way with the Golden State’s Climate Corporate Data Accountability Act, which requires large companies doing business in the state to get third-party assurance for Scope 1 and 2 emissions starting in 2026. (Companies will need to collect 2025 metrics, and file them in 2026).

That means 2024 will be a big prep year: Companies will need systems to collect and manage data to meet those assurance requirements, and that means businesses must establish and test their ESG controllership strategy this year.

How? Some companies are building internal teams to oversee ESG data collection and management for regulatory reporting. That includes hiring for the newly created position of ESG controller. Many large banks have added this role. Expect to see more companies hiring an ESG controller this year to manage regulatory demands.

Transition finance will take the wheel

An estimated $4 trillion in clean energy investment will be needed each year between now and 2030 to reach net-zero emissions by 2050, according to the International Energy Agency.

That’s why climate finance was a key agenda item at COP28. More than $85 billion in new commitments were made, with the host country, the United Arab Emirates, launching a $30 billion global finance solutions fund that will allocate $5 billion to spur additional investment in the Global South.

This year, we can expect the Inflation Reduction Act and Bipartisan Infrastructure Law to continue providing funding opportunities. An example is the $97 billion available through the Department of Energy for clean energy projects. The IRA has also contributed to an increase in cleantech investments, which totaled $176 billion in the first three quarters of 2023, or $50 billion more than the same period in 2022.

Another key IRA provision to watch this year is for transferable clean energy tax credits. Through this facility, developers can monetize credits they receive for clean energy projects by selling them at a slight discount to companies that face large tax bills. This provides a much-needed source of capital for financing clean energy project development.

Finally, better data for navigating natural capital

The EU’s Corporate Sustainability Reporting Directive took effect Jan. 1. It requires large and publicly traded companies to disclose environmental and social risks. The Taskforce on Nature-related Financial Disclosures released its recommendations for doing so in September, guiding how companies should discuss nature-related dependencies, impacts, risks and opportunities.

As companies embrace digital technologies to collect these nature-related metrics, we’ll see the development of the “planet economy,” predicts Lucas Joppa, the former Microsoft chief environmental officer turned private equity investor. Those insights and data pools will give investors more of the tools and infrastructure needed to invest in nature at scale, he said.

What 3 sustainable finance leaders see on the horizon

What ESG accounting or sustainable finance challenge would sustainable finance and ESG experts like to see prioritized in 2024? Why? I put that question to subject matter experts late last year. Here are three of their responses.

Marina Severinovsky — Head of Sustainability, North America, Schroders

“The future of fossil fuels, which was a focus of COP 28, should remain a priority in 2024, as reaching net zero will require a wholesale transformation of energy systems. Energy is an important part of many portfolios, and investors need to assess whether companies can adapt and transition their business models at a pace that can be profitable on their path to lower emissions. Given the demands on the energy system over the next 10-30 years, without significant investment, we will be short energy. Conventional energy companies are an important part of the investment in the energy transition sector and are needed to provide the transition fuels for the global clean energy transition. We expect that they will adapt their business model to capitalize on the growth in new energy transition technologies. Many of the major oil companies are already starting to change where they allocate capital and are already invested in hydrogen, carbon capture, biofuels, and wind and solar. Sustainable finance investment and engagement should focus on encouraging and accelerating this transition.”

Andrew Behar — CEO, As You Sow

“There are 100 million people with $10 trillion in retirement accounts invested in an unlivable planet they can’t retire on. This is the year for every individual to realize that the person who earns the money has the right to invest it aligned with their values and to vote their proxies to shape a company’s trajectory toward justice, sustainability and financial outperformance. Click your heels together, Dorothy, it’s your money — use your power wisely.”

Jeff Mindlin — Chief Investment Officer, ASU Foundation

“At the ASU Foundation, our viewpoint has always been that we are fiduciaries first and want to avoid politicizing the endowment. To that end, in 2024, my hope is that we will have passed the greenwashing and greenhushing phases to make actual progress on the matter at hand. I also would want to see standardization of reporting at the company and fund level become a priority.”