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Lindsey Hall: Hi. I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1. 

Esther Whieldon: And I'm Esther Whieldon, a senior writer on the Sustainable1 Thought Leadership Team.

Lindsey Hall: Welcome to ESG Insider, an S&P Global podcast where Esther and I take you inside the environmental, social and governance issues that are shaping the rapidly evolving sustainability landscape.

Every year, we like to kick off the podcast with a look ahead. What are the big trends driving the sustainability space? And this is the perfect time to have this conversation for 2024. We're fresh into the new year and next week, the annual World Economic Forum gathering at Davos in Switzerland kickoff. This event brings together governments and business leaders in the Swiss Alps to talk about the big issues facing the world. I'll be attending this year and bringing you conversations from on the ground. We'll be hearing in the podcast a lot about the big trends from those interviews. 

Esther Whieldon: To help us set the stage for Davos and the year ahead, in today's episode, we're talking to 2 sustainability leaders about what issues they'll be paying close attention to in 2024, that's across the environmental, social and governance space. From the investor perspective, we'll talk with Marina Severinovsky, Head of Sustainability North America at U.K.-based asset management firm, Schroders. And we'll also hear from Aniket Shah. He is Managing Director and Global Head of the Sustainability and Transition Strategy team at Financial Services Company, Jefferies Group.

Lindsey Hall: First, let's turn to Marina. Now you'll hear her mention COP28, which is the recent UN Climate Change Conference that took place in Dubai in the United Arab Emirates. At Cup 28, nations agreed to the first ever global stocktake, and that's a process for countries and stakeholders to assess progress toward meeting the goals of the Paris Agreement on Climate Change. Nations agreed to language in the stocktake that calls for transitioning away from fossil fuels and working toward the phasedown of unabated coal. So Esther, what did you hear from Marina?

Esther Whieldon: Marina said she'll be watching how sustainability issues play out across a few broad market trends this year. But to understand the context for 2024, she said we have to look at how things have evolved over the past couple of years, starting with Russia's invasion of Ukraine in 2022. Here she is. 

Marina Severinovsky: In 2022, obviously, the industry had a more challenging moment where we had sort of the war between Russia and Ukraine, we had energy markets ascendant, and we had a bit of a backlash around performance for ESG, but also just sort of sentiment, right, political sentiment, media sentiment and kind of investor sentiment. 

And so when we were talking to our investors in 2022, I would say that there was -- I don't want to say fear, but just discomfort on a variety of levels. Is this stuff performing? What is the purpose? How do I think about this? What is going to be the political risk? Those kinds of things.

The focus was really on integration and risk management and just making sure you understand all the risks that are inherent and that made a lot of sense, I think, given where people were in their minds around kind of fiduciary duty and making sure that everything is really focused on risk and performance, which it always should be. 

But I think what's sort of happened over the course of 2023 is what we call the 3D reset, which is the 3 Ds are these broad trends that are happening in the market, they are decarbonization, deglobalization, and demographic shift. And these things are quite durable. And I think what's happened is, over time, investors have come to sort of see and certainly decarbonization, and we have some additional evidence of support from kind of coming out of COP28 right now, that this is just -- it's a real trend. This is really happening. -- governments, companies are committing, civil society has these expectations. So that's how we're going to move going forward. 

And so now I think we move a little bit from the kind of fear to the other side, which is to say, "How do I harness these trends for the benefit of my portfolio long term, especially if I'm an investor?" And so we did the survey again, and we saw really different kind of response around sort of how would you like to invest sustainably. 

The answer being, I would like to invest in ways that are thematic, which I think means explain to me how we can harness sustainable principles to go into investments in companies that are going to succeed given these long-term trends, these sort of new patterns and let's say, decarbonization being one of those. So whether that's climate leadership or kind of energy transition. Or if we think about demographics, we can think about companies that will succeed in an environment where you have tighter labor markets. So in other words, companies that are successful reducing turnover and can retain their employees can attract great talent to companies that do a good job on human capital management, which, of course, is one of the kind of key pillars of the S in ESG or kind of the kind of focus on sustainability. 

So I think that this extends into 2024, this kind of better comfort level with what sustainability is intended for, and especially thinking about it more in terms of what is the trend to which I'm anchoring. What is the theme along which I'm investing? Why does this make sense in the long run end markets? 

So look I said, we have that evidence from the surveys that we're doing, but also just anecdotally kind of going out and speaking to our clients, speaking to peers and really seeing, again, this kind of level of comfort now 18 months post the sort of beginning of 2022, where we've seen a lot of things shake out politically across the country. And then also from a performance standpoint in the markets, I think moving forward in a more constructive way in terms of sustainability as something that can support the durability of long-term portfolios because it sort of anchors you to real changes that are happening in the world and how a portfolio, or companies in a portfolio, can be resilient to those changes or even take advantage of those changes and benefit from them. 

Esther Whieldon: Marina said investors view sustainability as a way to support the durability of long-term portfolios. So I ask her whether investors are focusing more on solutions as a result. Marina mentions COP15, which was held in Montreal back in December 2022. Now COP15 is the UN's big Biodiversity Conference, which is separate from its annual climate COP. At COP15 countries agreed to a new global biodiversity framework. Among other things, the agreement pledged to protect 30% of Earth's land and water that's considered important for biodiversity by 2030. The next UN Biodiversity conference takes place at the end of this year in Colombia. Okay. Here's Marina answering my question about whether investors are focusing more on solutions now. 

Marina Severinovsky: Absolutely. And I mean the solutions has become a pivotal word here, right? I think in the first instance, solutions around climate, around energy transition, you're getting to a place, and we've already had this in Europe, but now you're seeing it in the U.S. as well, where it's at the next stage of making the commitment. You've made the commitment, but now the kind of hard work begins, and it's really the people who are responsible for the portfolios that have to think about how you put decarbonization into practice across multiple asset classes, by the way and do so in a way that doesn't impose on the integrity of the portfolio.

Esther Whieldon: Thank you. So what are some topics or themes that you think are going to get more attention this coming year?

Marina Severinovsky: I do think the fact that we have language specifically around fossil fuels is important. And I think the kind of ongoing discussion of how we engage with and integrate into the conversation of the fossil fuel producers. 

We talk about sort of hybrid approaches to transitioning in the energy markets, again, some combination of sort of traditional and then renewable and how you kind of move over time right between those, supporting those companies who clearly understand that that's where the future is headed, but they have to evolve their businesses. 

But I think going forward, it's just much more clear, right, that the kind of higher emitting sectors clearly need a lot of support, and that's -- there's no way to get to where we need to go without them. And so the kind of the depth of that engagement is really important. 

I think that overall, the kind of concept of active ownership and real stewardship real engagement with investee companies. We at Schroders have done a number of pieces this year around deep active ownership, the efficacy of it, the right way of structure. We've interviewed our investee companies across different industries and sectors to understand kind of what works for them in terms of our engagement with them as their investors. So I think that will continue to be kind of top of mind. 

And then I do think -- I mean, we've talked about it before, but in nature and biodiversity. W re now 1 year past COP15. Schroders has made a commitment around deforestation that we're delivering by 2025 and then increasingly looking for ways to invest to make nature investable. Again, it just comes out of the sort of COP28 discussions and the abatement of fossil fuels, and there's obviously technological approaches, but there's also nature-based approaches, which could be very effective. And obviously, a lot more investment is needed. 

I would say again that we -- it's a bit self-serving because we've done the work around this year, Human Capital Management. We published a fairly big piece around human capital, ROI, return on investment. And again, how you identify companies that will be able to succeed better in a world where there is labor scarcity. So I do think that, again, continues to be a significant trend.

And then on the deglobalization side of things, there's just a lot of cross sections effectively on global supply chains. There's human capital implications, human rights implications, the implications around sort of climate transition and the sourcing of minerals and rare earths. And so I think there's many different ways that you can kind of take a look at what the trends might be going forward around, again, that sort of 3D framework.

Esther Whieldon: Marina said the public and private sectors are increasingly paying attention to the importance of ensuring a just and equitable path forward on climate change. For example, she noted that at COP28, parties reached an agreement on a new loss and damage fund to assist countries that are especially vulnerable to the effects of climate change.

Marina Severinovsky: And I think increasingly in these public circles, there is discussion around climate adaptation. We've obviously got the loss and damage fund, which was agreed to now sort of being funded. And again, when you see the language that is coming out of COP28 or other global gatherings, it is now in a way that it wasn't even a couple of years ago, really talking about that just an equitable path forward. So I think there's definitely folks who are unnoticed, right, that really to deliver these things, we have to think about the impact on people. We have to support those that are most vulnerable.

Esther Whieldon: Marina also mentioned that this year, she is watching for some rule-making activity from the U.S. Securities and Exchange Commission, or the SEC, including on climate change and on human capital management disclosures. You'll also hear her mention several other terms, including the TCFD. That's the Taskforce on Climate-related Financial Disclosures, which starting this year will be managed by the International Sustainability Standards Board, or ISSB, that's a voluntary standard setting organization and issued its first 2 sustainability disclosure standards in June 2023. 

Marina also mentions the TNFD, which is the test course on nature-related financial disclosures. The TNFD late last year finalized a voluntary framework that companies can use to assess their nature-related risks and opportunities. Lastly, you'll hear her mention EPS. That stands for earnings per share.

 Marina Severinovsky: There is an expectation that Q1 we see some movement from the perspective of the SEC around climate. There's also hope around human capital disclosure. As well in the U.S., and that's obviously leading into the second half of the year, we're really getting to the election cycle kind of wanting to do those things beforehand, the finalization of the climate rule and also the human capital draft rule.

So I think again, in addition to what we see in other parts of the world, I do think we're going to have a bit of a ramp-up in the U.S. A lot of it is already quite anticipated, I would say, which is helpful. We've got TNFD-following TCFD. We got the ISSB. Y u're starting to really come together in terms of some of the standards that are out there and then obviously the kind of policymaking and regulatory approach as well, and we do expect to see that in the beginning of 2024 from the U.S.

Esther Whieldon: So is there anything we didn't get to that you wanted to mention that you're going to be watching this year?

Marina Severinovsky: I do. There's one thing that I wanted to mention as investors, it's really critical that at some stage, we sort of see the market really rewarding or punishing companies as they distinguish themselves as either being leaders or laggards from kind of a climate transition perspective. 

And we have started to see some data if we kind of look at companies' carbon intensity, whether it's increasing or decreasing for their business and then the performance of those companies, EPS and so on. 

And then the one that I really love, which I think will be talking about all of us, I think, in the coming years is the issue of network effect, or almost sort of positive peer pressure in the sense that if we see increasingly these climate commitments, these net zero commitments and science-based targets being initiated. And a lot of it is being done by the largest companies in the world, and they have a supply chain. And so to deliver those commitments, ultimately, their entire supply chain also needs to play ball. 

I think at some point, if you're a company that's reticent or sort of dragging its feet, I think you just will be pressured that if you want to continue to be part of these supply chains, these networks, you have to get on board. And so I think that's one way that we're kind of thinking about really the investment case for looking for companies that are open to being leaders moving forward. And again, it's very different from just a few years ago when the kind of, I guess, the way we identified or defined an ESG company, which now we don't say ESG as much as we are sustainable, right? The way we define that was much narrower, right? It's kind of where they are at present versus where they can go in the future. So I think that's really important. 

We're seeing basically kind of a hollowing out of a middle ground of maybe a few years ago, you would have a sustainable strategy, quote on quote "sustainable". And how do you define what that means? I think the definitions are definitely becoming more specific and that's necessary. 

But I think we're moving the 2 sides or you're kind of like following up the center and you move to sort of the 2 sides. On one side, you have the integration -- the active ownership, I mean, all of the kind of considerations of financially material risks and opportunities, all the things that as a fiduciary, you're required to do. And I think that, that just becomes the kind of table stakes or the expectation that every investment should have those things and there shouldn't be a need to kind of label it special. 

But on the other side, I think having a higher bar for proof that something is sustainable or it is transition focused or what have you. So really being able to go beyond just saying, this is a sustainable strategy to say what exactly? Again, are you focused on energy transition? Are you focused on climate leadership, are you maybe looking at circular economy or sustainable infrastructure? Or what is it that you're trying to invest in? And how do we know that there is durability to this and that it can be something that's profitable for investors? Maybe it's on the social side, what are the considerations there again? Is it a human capital? Is it something that -- or is it social impact? 

So I just think there's going to be a higher bar of proof for anything beyond just kind of financially material integration. -- which is also good. It is good that there is a higher bar that we are able to kind of measure and evidence the things that we do. And I think that that's all just been a learning experience from what we've all collectively experienced over the last 18 months, which is a less supportive market environment, which has just sort of forced a higher standard, more regulation, more focus from investors and policymakers, which again has sort of forced, or is continuing to force a higher standard.

I think those of us to industry practitioners should welcome that kind of higher standard across the board as expected by all of our stakeholders. And again, I expect that to continue in 2024, and it's to the good of the industry, I would say.

Esther Whieldon: Lindsey, two things that Marina said stood out to me. If you recall, we heard at Climate Week NYC in the full of 2023, how investors are looking for companies to show credible transition plans, and that sounded very similar to what Marina said is now being expected of investors. That is, investors will need to clearly define what their sustainability strategies are focused on. 

The second thing that stood out to me is this idea of positive peer pressure in which bigger companies are setting sustainability targets and how that, in turn, is putting pressure on supply chain networks to "get on board." Let's turn now to Aniket Shah of Jefferies to hear what trends he's watching. He starts off by describing his role at Jefferies.

Aniket Shah: I'm a Managing Director and Global Head of the Sustainability and Transition strategy team at Jefferies. We advise institutional investors and corporates on all matters related to sustainability, ESG, and energy transition. We're focused on 4 main topics. The first is climate and nature. The second is human capital and corporate culture. The third is policy and regulation. And the fourth is business strategy and corporate governance. And we work on these topics all around the world and help investors and corporates make better investment decisions based off of our work.

Esther Whieldon: Great. Thank you. So we're now in 2024. What are some of the topics or things you're going to be watching this year closely?

Aniket Shah: 2024 is the year when ESG and energy transition goes on the ballot and goes on the ballot globally. There are going to be over 75 elections around the world in 2024, the most number of elections in any year in recent history. Eight of the 10 most populous countries in the world are going to have elections this year, the United States, of course, the European Parliament, the U.K., India and several other strategically important countries are going to go to the ballot box. 

And our view is that, for the first time in a while, voters will get to vote on whether they like the direction of travel on government policy with regards to energy transition, government policy with regards to ESG investing. And the outcomes of these elections could have significant impact in the work that we all do. So first and foremost, our focus is going to be on these elections and helping our clients understand different outcomes and different scenarios of what may come out of these various elections. 

The second big topic on our minds for 2024 is Climate Tech. There is now more money than ever before going into all parts of the climate transition space. The number globally is around $2 trillion in 2023. 

We are particularly interested in the early-stage innovation that is happening in some of the most difficult problems when it comes to the energy transition. And we want to better study and help our clients understand what is happening in early-stage investments and early-stage technology development when it comes to solar and wind and nuclear fusion and direct air capture and long-duration battery storage and other essential technologies for the energy transition. So that's number two. 

And then the third thing that we're going to be spending a lot of time thinking about in 2024 is what is happening on the energy transition outside the U.S. and Europe. The U.S. and Europe gets most of the attention, I would argue, when it comes to this topic, particularly for investors, but U.S. plus Europe is less than 20% of global emissions. And certainly, both U.S. and Europe have seen, most likely I've seen peak emissions many, many years ago. So we're going to be spending more time studying what's happening in China, more time studying what's happening in India, in the Middle East and Latin America. So the energy transition outside the West, and we look forward to providing some perspectives on that to our clients as well.

Esther Whieldon: Are there any particular regulatory developments anywhere in the world that you're particularly interested to see the results of?

Aniket Shah: Sure. In terms of both public policy and regulation, there are a few that I think go under the radar but are going to be quite interesting for investors and corporates to follow. 

The first is what's happening in Japan with their green transformation or their GX plan. In 2023, the Japanese government announced a 10-year JPY 150 trillion investment ambition around green transformation. And if you do the math, JPY 150 trillion over 10 years is around $1 trillion over 10 years, so $100 billion a year, which as a percentage of the Japanese economy would make it much larger than the Inflation Reduction Act even in the most ambitious of scenarios would be in the U.S. context. 

So this is a pretty important piece of policy. And what we find very interesting about the GX plan is its focus on carbon pricing, its focus on this whole notion of transition finance. So the Japanese sovereign is going to be issuing transition bonds, most likely in February of 2024 to raise capital to invest in some of these hard-to-abate sectors and to invest in technologies, Esther, that are generally not considered the normal technologies for the green investment crowd. 

So we're hearing focus on things like carbon capture and sequestration, on green ammonia, on nuclear and other such transitional sectors for the Japanese and global economy on energy transition. So we are going to follow what's happening in Japan on the GX plan in 2024 because we think that, that's a new development. It's a new approach to the energy transition, and it's something that investors should be spending more and more time on. 

Esther Whieldon: What are some nature-related or that intersection of climate in nature that you think are going to be valuable to watch this year?

Aniket Shah: We have been writing about nature and the growing focus of the investment community and of the corporate community on nature over the past couple of years. And most investors look at the nature topic from a risk perspective. And they say, "Hey, look, we need to ensure that our investments are not contributing to deforestation, that all of these major natural disasters are not going to impact our investments in any significant way. 

My view though is to spend more time looking on the opportunity side around nature and look at disruptive companies and disruptive market mechanisms that can help improve the health and the quality of the natural world around the world. 

And the 2 things that I'm most interested in, in 2024 will be, number one, the carbon markets and whether the carbon markets get any reprieve from what's been a couple of very difficult years in terms of public perception. Particularly the voluntary carbon credit world, which is really one important way to get capital into forest and into nature and into all of these nature-based solutions for carbon storage. And so that's one area that we're going to be spending some time and focus on. 

And the second is the future of food and, in particular, the future of alternative meat and alternative protein. It's becoming quite clear for most scientists and most analysts that the most significant activity or behavioral shift that one can do in one's day-to-day life that would positively impact nature is eating less meat. And that's been known for a long, long time. 

As we all know, there have been many attempts already to try to have alternative proteins introduced into the diet. And so far, none of them have been able to scale. I'm really interested in following the cultivated meat industry, lab-grown meat, because in some ways it can perhaps assuage the concerns around taste and potentially do so in a way that alternative proteins that we've seen so far haven't been able to. And so we're going to be following that space as well.

Esther Whieldon: Aniket also talked about how he expects company approaches to ESG and sustainability will evolve.

Aniket Shah: ESG as a stand-alone part of the financial and business community may go away, Esther, and it may go away in the next year or two. And that's going to happen at the very same time as the underlying environmental, social and governance issues have never been as important as they are today for investors and for corporates. 

And both things are true at the same time. And I think that's just something that we should all appreciate. It's a dynamic in the market that we all need to accept and to understand. We see this in the fund flow data that flows into ESG labeled funds, especially here in the United States continue to decrease. And again, at the same time, there has never been more investment in solar, in wind, in electric vehicles, in battery storage, in climate resilience and climate adaptation. 

I think that's okay. It's okay that the ESG -- that ESG has a stand-alone part of the financial community may just not have the kind of profile that it's had in the past if we, as an industry, still remain focused on those issues. And I think we're going to see a test of that in 2024, and it will be very interesting to see how that plays out. 

And I think that's a good outcome actually for this space because it means that there's a mainstreaming of these topics and these issues into the core engines of business and of allocators of capital. 

We certainly see this in the energy space right now. The folks who are doing work on energy transition are now, by and large, just energy teams that are, in addition to looking at natural gas and oil, they're looking at solar and wind and hydrogen and so on and so forth. And that's, I think, a good outcome. And I think we're going to see that trend happening more and more. We already see that with how some of our clients are structuring their teams, and we think that's only going to continue in the years to come.

Esther Whieldon: I found it interesting that Aniket is focusing more and more on helping his clients understand the implications of specific technologies as well as investment strategies and solutions. For example, I was surprised to hear him mention that he's thinking about how things like alternative meat can help individual consumers make the kind of behavioral shifts that are needed to lower global emissions.

Lindsey Hall: I think this is a trend we'll continue to see play out this year, how there will be a real effort across the public and private sector to drill down from high-level concepts to how we can actually solve some of the bigger challenges ahead. 

This is something we'll be watching for next week at Davos and throughout 2024. So please stay tuned. 

Thanks so much for listening to this episode of ESG Insider. If you like what you heard today, please subscribe, share and leave us or review wherever you get your podcast. 

Esther Whieldon: And a special thanks to our agency partner, The 199. See you next time.

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