ESG Trends We’re Tracking in 2024
The landscape of Environmental, Social, and Governance (ESG) considerations continues to experience significant transformation. Environmental issues dominate media headlines while social issues remain a key focus of investor calls. Staying atop of ESG topics and trends is crucial to an investor like AIMCo.
Understanding the current and future state of trends in sustainability is an important aspect of corporate strategy, risk mitigation, and investing. In this article, we delve into three prominent ESG trends that will shape sustainable investing this year.
Supply Chain Risks
This year, the spotlight on ESG will shine brighter on risks associated with supply chains. Transparency continues to be a cornerstone of ESG practices, reflecting a shift towards accountability of asset owners and businesses. While it’s true that consumers demand greater accountability about their investments and the products they purchase, its governments and government agencies who are also forcing companies to be more transparent about the risks associated with their supply chains.
Last year, the Canadian Federal Government passed the "Forced Labour Act" (also known as Bill S-211, An Act to enact the Fighting Against Forced Labour and Child Labour in Supply Chains Act), representing a significant human rights regulatory development that impacts investors and pension plan fiduciaries in considering forced and child labour as a more material social — the “S” in “ESG” — factor in investments.
Numerous nations, including the U.K., Australia, France, and Germany, already have instituted legislation to combat modern slavery, encompassing forced and child labour, within the operations and supply chains of businesses and other institutions. In Canada, the newly instituted act mandates entities such as AIMCo to annually report on the steps taken to identify and mitigate the risk of forced labour or child labour in their supply chains or those of entities under their control.
There may be new climate disclosure rules that seek to improve transparency in supply chains in the U.S., too. At the end of last year, California enacted two climate-related reporting statutes. The first requires some public and private entities doing business in California to make disclosures of their scope 1, 2 and 3 greenhouse gas emissions public. The second, will mandate certain public and private entities doing business in the state to publicly report their “climate-related risks” and efforts to address them. The statutes define “climate-related financial risk” to mean material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including, but not limited to, risks to corporate operations, provision of goods and services, supply chains, employee health and safety, and more.
For years, public companies have been readying themselves for new climate-related disclosure rules from the Security Exchange Commission (SEC). This spring, new rules from the SEC could be finalized and many see the recent California statutes as preview of what SEC might bring forward to improve transparency for investors about value chain risks as they relate to emissions.
AI's ESG Frontier
Generative AI has emerged as a transformative force that allows computers to create content, mimic human behaviour and even create original pieces of art in sheer seconds. Its application across industries has freed up time and begun to make work more productive and efficient. Even though generative AI has the ability to transform industries, some of the risks of adopting and integrating this technology cannot be overlooked, especially from ESG perspective.
Starting with the environment, significant computational power is required to train, run, and store generative AI data. As demand for and usage of AI grows, the energy used to power computers and warehouse the exabytes (millions of terabytes) of data will also rise. Ultimately, this may contribute to growing environmental concerns and may have a negative effect on companies’ carbon footprints.
Of course, we cannot think about generative AI without thinking about the ethical and social implications of the technology. As AI gets more sophisticated and embedded into society’s processes, job displacement and the impacts on the workforce will undoubtedly mount. It’s true that automation has improved productivity and efficiency. However, through generative AI’s increased adoption and implementation, the technology may lead to job losses in certain sectors, potentially exacerbating social inequities across sectors, and jurisdictions.
One of the biggest issues facing generative AI has to do with privacy. Foundational to the technology are datasets that AI models can learn and iterate off of which raises privacy concerns about the types of data being fed into models. The output, also known as synthetic data, developed by the programming can also be cause for concern. Ultimately, these issues relate back to accountability and governance concerns. Companies who weave the technology into their business will have to establish clear responsibility and governance mechanisms. This emphasizes the importance of governance structures that ensure accountability for the use of the technology, transparency as well as stakeholder engagement.
Generative AI has changed the way many of us work, but the effects that it will have on the environment, social equity and governance will be questioned more deeply this year.
Biodiversity
While a lot of attention has been paid to emissions and the energy transition in recent years, biodiversity has more recently emerged as a specific focus within the broad set of ESG concerns. The growing awareness of biodiversity, and nature in general, has led investors to recognize the relevance in assessing the financial risks and opportunities associated with biodiversity loss.
After facing pressure for more disclosure about how companies’ activities impact nature, the Taskforce on Nature-related Financial Disclosures (TNFD) launched its final framework in September 2023. The framework was designed to address risks connected to the natural world. TNFD disclosure recommendations mirror the now widely accepted Task Force on Climate-related Financial Disclosures (TCFD). The new nature framework is also consistent with the recently launched International Sustainability Standards Board (ISSB) standards and the approach used by the Global Reporting Initiative (GRI).
This year, investors and investee companies alike will continue to opine on the TNFD’s recommendations. To start the year, over 320 financial sector actors representing $4 trillion in assets under management (AUM) have already announced their commitment to start making nature-related disclosures. Many investors are still interpreting the framework and determining how best to collect nature data to enhance and build out climate strategies. Indeed, observers will also be awaiting the recommendations from the ISSB.
While the integration of biodiversity into investment strategies is still in its infancy, this year, there will be an even greater push to think about it more holistically. Investors like AIMCo will need to deepen their understanding about their portfolios impact biodiversity and the financial industry at large will need to determine how to integrate nature as when assessing long-term financial risks and opportunities.
In the ever-changing landscape of sustainable investing, supply chain transparency, generative AI, and biodiversity will be at the root of ESG news stories throughout the year. AIMCo will continue to navigate both the risks and opportunities with respect to these trends (and others). We will also continue to align our sustainable investing philosophy with our fiduciary mandate, managing ESG risk factors that help our clients secure a better financial future for the Albertans they serve.