5 ESG Investing Trends and Developments to Watch in 2024

ESG investing: it’s a market trend that’s gained traction with ethical investors, multi-billion dollar companies, mammoth private equity firms, and recently, the Securities and Exchange Commission (SEC) and International Sustainability Standards Board (ISSB). 

ESG—environmental, social, and governance—centers on a more stakeholder-centric approach to doing business by establishing ethical and eco-conscious corporate policies that provide transparency to investing parties. 

More importantly, ESG goes beyond analyzing the environmental toll of corporate operations. While shareholders are still concerned with a company’s greenhouse gas emissions and resiliency against physical climate risks, the three pillars of ESG also focus on how ethical an organization is (i.e., human right issues and fair wages for workers, safe working conditions, etc.) and how it is being led (i.e., operational transparency, leadership accountability). 

ESG investing soared to new heights during the COVID-19 pandemic, with many believing it would be a fleeting trend the following fiscal year. But today, ESG has emerged as a business-as-usual topic, even amid uncertain global economic conditions.  Bloomberg Terminal forecasts that ESG assets will generate $53 trillion in valuation by 2025, representing a third of AUM. For 2023 and beyond, ESG is part of the normal course of business discourse.

There’s plenty of interest in ESG, but investor faith in companies claiming to be ESG is fast fading. Without institutional means of measuring and reporting their commitments, there’s no system or process to validate the thousands of companies who’ve rebranded as ESG-oriented. 

Recent investigations into Goldman Sachs Assets Management (GSAM) and Deutsche Bank for their claims have led to speculations of fund managers relabeling their products to cash in on the trend without doing any of the heavy lifting. It’s led to what many are calling the ESG backlash.

In response, investors are finding new tactics to check the authenticity of stocks labeled “ESG.” Using the AlphaSense platform, we dug deeper into how the ESG trends have shifted with investors and companies to meet this growing need for transparency.

Related Reading: 5 Steps to Building an Effective ESG Strategy

The Drivers Behind Change in ESG Investing

The intentions behind ESG investing are altruistic: to influence the mainstream finance industry into funneling private capital to address global challenges. However, leading private equity firms have recently been accused of manipulating investors through various misleading schemes to cash in on the trend. Potentially the ignitor of the ESG backlash era, the SEC’s formal charge of GSAM revealed how brokers we’re exactly accomplishing this: 

“The order finds that GSAM’s policies and procedures required its personnel to complete a questionnaire for every company it planned to include in each product’s investment portfolio before the selection; however, personnel completed many of the ESG questionnaires after securities were already selected for inclusion and relied on previous ESG research, which was often conducted in a different manner than what was required in its policies and procedures. GSAM shared information about its policies and procedures, which it failed to follow consistently, with third parties, including intermediaries and the fund’s board of trustees.”

–Press Release | SEC Charges Goldman Sachs Asset Management for Failing to Follow its Policies and Procedures Involving ESG Investments

Without admitting or denying the SEC’s findings, GSAM agreed to a cease-and-desist order, a censure, and a $4 million penalty.

Greenwashing is a key phrase widely used to describe incidents of organizations presenting misleading or inconsistent information that makes them appear more environmentally responsible than they are. 

In May, German law enforcement raided Deutsche Bank’s offices after a consumer group waged a lawsuit on suspicion of the bank fraudulently advertising sustainable investment funds at its DWS unit, and more specifically, misrepresenting a fund’s green credentials in marketing materials–a.ka. greenwashing. Prosecutors gathered “sufficient factual evidence, ” leading to CEO Asoka Woehrmann’s departure. 

These investigations into major financial institutions have led to a growing demand for vetting processes for companies ascribing ESG to their policies. And while the SEC and ISSB‘s involvement has brought more authoritative figures into this issue, investors are still primarily responsible for determining whether a company or ESG fund is honest in its intentions.  

Without an official system to check an organization’s commitment to its ESG policies, many shareholders and investors are doing their due diligence through fact-checking. From reviewing how a company is publicly rated as “ESG-friendly” to the supply chains they use and even the processes regulators utilize, there’s a myriad of aspects investors are analyzing to improve their responsible investing criteria. 

Using the AlphaSense platform, we dug into the nitty gritty of what stakeholders and investors are specifically looking for in a company’s ESG claim or, more importantly, what might be missing from it. 

Related Reading: How Green Building is Transforming the Real Estate Industry

Key ESG Trends & Developments

Reducing and Reporting Supply Chain Emissions 

There’s no underplaying the importance of supply chains in ESG, as they can account for more than 90% of a company’s greenhouse gas emissions. Most of these emissions stem from sourcing, which is why spend management should be a top concern for organizations prioritizing supply chain sustainability. Strategically sourcing partners and products that contain lower-emission footprints aligns with ESG—but potentially more important is that reporting and publishing these metrics is crucial in establishing transparency with stakeholders. And to accomplish this, more and more businesses are embracing digital transformation by adopting intelligent spending and business network technologies. 

When leveraging the right technology, companies can gain greater visibility across their supply chains and partner collaboration, which allows them to evaluate and assess progress toward their ESG goals. For example, network-enabled insights monitor carbon-tracking data that can influence trading partners and improve business operations and strategic decision-making. Additionally, leadership can leverage this intelligence to assess the circularity opportunities in product lifecycle design.

As ESG investing becomes increasingly important to a company’s vitality in our volatile market, future compliance and audit requirements will likely follow, making digitization essential to scale resources and outcomes organization-wide. Further, companies that have integrated digital transformation into their operations have already shown to financially benefit. Based on research produced by IDC, 680 manufacturing organizations that were considered “digitally mature” and emphasized sustainability outperformed their non-digital and non-sustainability-focused counterparts.

Sustainability and Operational Longevity in Biodiversity

Fighting and reducing corporate greenhouse gas emissions (GHG) is an objective relevant to all three pillars of ESG. It’s well documented that GHGs accelerate climate change in various biodiversities—the variety of life in the world or in a particular habitat or ecosystem. 

The direct consequences of climate change include intensified and frequent fires, storms, and periods of drought. But there’s also a range of cascading effects that can cause both social issues and governance crises. From youth disillusionment to involuntary migration, livelihood crises, and geopolitical risks such as resource contestation and geoeconomic confrontations, the toll of climate change on biodiversity is often widespread. That’s why more and more companies are going beyond tracking, reducing, and reporting their emission stats. 

In addition to taking action on stakeholders‘ social concerns linked to corporate GHGs, companies also have a self-serving interest in preserving biodiversity and limiting their emissions. 

In fact, biodiversity attrition can also severely hinder a company’s bottom line. A majority of businesses rely so heavily on ecosystem goods (i.e., timber, natural pharmaceuticals) and services (i.e., pollination, air quality regulation) that more than half the world’s GDP ($44 trillion) can be traced back to natural resources. It’s a staggering fraction that relays the potential economic mayhem of continuous biodiversity loss. Moreso, without any effort to reduce or reverse the human impact on biodiversity, the natural resources most of the world’s companies rely on will become scarce and, consequently, more expensive, harder to access, and eventually disappear.

Investing in a Net Zero Business Model

Last year, the world saw a record number of global governments and large companies set goals to reach net zero emissions by 2050—a promising future where corporate fossil fuel and GHG metrics would be near or close to 0% and rely on renewable energy. But with a deadline nearly a quarter of a century in the future, corporate commitments often lack interim emission reduction targets or plans to curb indirect supply chain emissions. 

Stakeholders and investors are taking notice of this discrepancy and demanding organizations develop concrete, near-term plans as a way to measure the progress of corporate ESG commitments and goals. Long-term stakeholders will require more than just long-term commitments, but credible, achievable near-term signposts on their path to decarbonization from governments and companies—virtually eliminating any opportunities for companies to pledge unrealistic ESG initiatives with no intention of follow-through. 

Stakeholder pressure to take action sooner rather than later stems from climate change‘s impending, fast-approaching consequences. According to a report from the UN’s Intergovernmental Panel on Climate Change, scientists found that achieving net zero emissions globally by 2050 is critical to avoiding some of the worst effects of climate change—effects that the UN Secretary-General dubbed as “a code red for humanity.” 

A future with more climate-related natural disasters has centered shareholder attention on risk management and how well-prepared corporations are in the wake of physical climate occurrences. Companies should do their part in reducing GHGs but also protect themselves from the climatic consequences associated with GHG emissions. 

In the grand scheme, these demands reiterate the widespread investing expectations of stakeholders to hold companies accountable for their commitments and fight against market greenwashing. 

And companies across industries are responding to these demands, as the total sustainable debt issuance reached a record high of about $960 billion last year—a 61% increase from 2020, according to the Environmental Finance Bond Database. This substantial figure encapsulates green bonds, social, and sustainability-linked bonds that represents the growth, if not acceleration, of companies and governments financing a transition to net zero business models and economies to further their ESG agenda. 

Transforming Workforces

As 2024 begins to unfold, industries are experiencing major transitions in regards to the labor and skills required to meet net-zero economic standards. For example, within E&I, and more specifically the mining sector, workforce disruptions were witnessed during the COVID-19 era, and coupled with advancements of digitized work processes, professionals need to quickly adapt and grow their expertise to fill these new, essential jobs. 

Training will play a pivotal role in preparing workforces for these emerging roles, especially considering that an estimated 59% of job opportunities in the energy transition between 2025 and 2050 are expected to be in higher-skilled positions such as technicians, trade workers, professionals, and managers. Further, ESG regulations will expect business owners to showcase their commitment to valuing personnel, ensuring fair treatment and conditions not only for direct employees but also throughout their supply chains.

With a tight labor market and restricted skilled migration, there will be high demand for workers in the competitive ‘war for talent,’ with individuals choosing job offers that align with their preferences. For organizations prioritizing transformation with ESG at its core, apart from structural adjustments, attention to employee upskilling, sustainability programs, and fostering a supportive organizational culture will be imperative. This necessitates a profound understanding of cultural realities through clear aspirations that support sustainability and drive behavioral change.

The accelerating shift towards clean energy will create a demand for new skills across various sectors of the economy. Consequently, companies will face increasing recruitment pressures, particularly in securing qualified candidates for skilled roles within the expanding green economy. Many renewable energy firms are already grappling with a shortage of candidates possessing the necessary experience or qualifications for the available opportunities. The bottom line: from this year and beyond, expect business leaders to prioritize securing a premium workforce to take a lead in the race for net-zero.

Embracing ESG Investing Regulations

As new jurisdictions on ESG stock labeling, trading, and selling emerge, C-Suite leadership is taking measures to ensure their company operations accurately represent their commitments. Honing in on the “G” pillar, boards and committees are being devised to better understand and oversee how well their organizations are positioned for the goals they’ve set, define governance structure and policies, as well as provide a framework for overseeing accountability and strategic focus. 

Respectively, executives are ensuring these efforts are made public to stakeholders. According to Deloitte, there was a 14% increase in “the percentage of S&P 500 companies disclosing in their proxies the primary committee(s) overseeing ESG relative to last year. 

This trend likely is the result of companies progressing along an ESG maturity model that is more integrated into their core business strategy and risk program and defining how the board oversees such ESG efforts. Notably, the 35 companies newly added to the S&P 500 this past year were more than twice as likely not to have disclosed the committee overseeing ESG, suggesting that company size and market expectations may impact the formalization of an ESG governance framework.”

With this increase of committees and boards being established to focus on ESG, there are common trends corporate leadership is implementing in their initiatives. For one, a slew of companies are disclosing that an entire board and committee or multiple committees have a role in overseeing ESG efforts, with most utilizing their nominating and governance committee for primary oversight. 

As programs and policies evolve and companies define how they’ll tackle the pillars of ESG, certain boards or committees are also delegated a specific ESG issue to ensure diverse accountability. Doing so effectively enables boards and committees to execute their fiduciary responsibility. 

Several organizations have also named or renamed their nominating and governance committee’s names to be more transparent with stakeholders about the broader committee’s purpose. 

Collaboration in ESG Reporting 

Last year, the first initiative to incorporate sustainability into the core of the investment process and stamp out greenwashing came with the European Commission’s Sustainable Finance Disclosure Regulation (SFDR). But delays in the implementation of SFDR’s requirements have muddied the waters for asset managers who are already having to comply with adverse ESG disclosures in 2022, opening the door for potentially misleading trading tactics. 

With the current lack of reporting standards for ESG metrics, companies are feeling the impact most with investors who compare data on ESG progress, risks, and opportunities. 

As regulations on reporting requirements and disclosure slowly develop to define how corporations can and can’t address ESG, and comparable data becoming popularized, a singular system of evaluating a company’s pledge will help investors understand the various ESG factors and metrics shared with asset managers. 

As regulations continue to change, the ESG data that companies need to track, report, and leverage to peak investor interest will also shift. This then requires businesses to ensure that all personnel involved in developing ESG reports not only participate in the collaborative, centralized reporting model that is established internally but also learn their role in it. 

By instilling education initiatives across teams, companies are sharing how ESG committee board members will need access to the right reporting tools and, importantly, clear and consistent lines of communication. To maximize the benefits of being a transparent company, everyone around the boardroom table—whether an ESG leader or not—has a part to play. 

More importantly, top leadership (i. e. C-Suite Executives) especially need to ensure that all necessary teams become part of the reporting process. Groups like the UN Global Compact CFO Task Force serve to this end, guiding companies who are looking to align their sustainability commitments with credible corporate finance ESG strategies. As an added benefit, groups of this nature provide forums for advice and idea-sharing in a peer-to-peer environment. 

The Second Coming of ESG Backlash

Inauthentic corporate claims of ESG transparency are making headlines once again. According to a recent Skadden article, shareholders are still filing derivative and securities lawsuits that claim companies have not lived up to their stated commitments to fulfill ESG goals. The initial U.S. lawsuits challenging the accuracy of disclosures about corporate commitments to diversity have generally been dismissed; however, shareholders remain undeterred and have resorted to requesting access to corporate books and records, including board materials in an attempt to bolster claims in amended complaints.

Along with the scrutiny companies face from shareholders, the U.S. Securities and Exchange Commission (SEC) has proposed regulations that would require detailed ESG disclosures. While those proposals are pending, the agency has brought a number of enforcement actions challenging companies’ ESG-related disclosures and initiatives.

As these pressures for more robust ESG policies and disclosures build up and put U.S. companies under a spotlight, some industry leaders are fighting these allegations of inaunthenticity. After all, ESG litigation is not without risk for the plaintiff. 

For example, French oil company TotalEnergies is challenging assertions by an environmental NGO that its greenhouse gas emissions have been underestimated. The company is seeking withdrawal of the published assertions and asking that a penalty be imposed on the NGO and its supporting consultants. Where companies believe that allegations are misleading or exaggerated, they may go beyond a robust defense and actively seek vindication.

Staying Ahead of the Curve with AlphaSense

With new regulations constantly emerging to fight greenwashing, misleading schemes, and other ESG risks wielded by private equity funds, staying on top of new investment trends and disclosure standards is crucial for the business longevity of public and private companies. It’s a need that requires a tool that continuously aggregates leading industry information yet cuts through the noise that distracts you from the answers you need. AlphaSense is that and more. 

Using our innovative market intelligence platform, our clients can access broker research, company documents, and more from over 10,000 plus content sources–ensuring that our users have all the information they need.

If you want to stay at the forefront of new developments in ESG investing, start your free trial with AlphaSense today to learn how we can help keep you abreast of emerging sector trends and ahead of your competition.