The rapidly changing global economy poses several challenges for institutional investors and corporations. From intensifying geopolitics, to the state of environmental ecosystems, to the physical impact of a changing climate, to the shifting regulatory landscape – all of these issues may affect portfolio performance and ultimately impact profits. However, the careful consideration of ESG issues can mitigate these risks and may bring to light real investment opportunities.
This year, the ESG in Conversation podcast examined the sustainability and climate issues that were top of mind for asset owners, asset managers, companies and financial market participants globally. Featuring insights from Morningstar Sustainalytics, listeners heard from subject matter experts on ESG, climate and regulatory issues affecting the market. In this article, we share some key insights from this past season. You can listen to the full episode here and below, or on your favorite podcast app.
Asset owners share their voice
Sustainalytics’ sister company Morningstar Indexes detailed the results from its 2023 Voice of the Asset Owner Survey. The annual report takes the pulse of global asset managers on what matters to them most. Not surprisingly, respondents cited several issues that were top of mind: from the market impacts of global events, to regulatory confusion, to the reliability of ESG data. The results also showed that despite these challenges and concerns, asset owners remain committed to using ESG and sustainability data in building and maintaining their investment portfolios.
The AI revolution comes to ESG
The success of ChatGPT and the like brought artificial intelligence to the public’s attention. Given the proliferation of AI models and their uses, we discussed how the technology is being leveraged in ESG research and sustainable investing. Whether scaling ESG data collection through automation, generating write ups using large language models, or predicting future risk areas, AI has the potential to revolutionize how data is used in investing.
Climate disclosure rules come to the US
With the introduction of the US Securities and Exchange Commission’s climate disclosure rule in early 2024, the US joined other jurisdictions around the globe in requiring companies to report on the material business impacts of climate change. Despite deviating from other global standards – most notably regarding scope 3 emissions and climate transition planning – the rule marked a positive step forward for ESG data availability overall. However, as noted in our episode, there is still room for improvement.
Harmonizing sustainability regulations remains a challenge
How can investors make sense of the often-confusing world of ESG regulations? Sustainalytics’ ESG policy expert discussed what changing political agendas and shifting priorities could mean for ESG and sustainability-focused regulations globally. He also shed light on the discrepancies in reporting requirements for companies, investors and financial institutions, and why harmonization across regulations will likely remain a challenge.
Insights on leveraging ESG ratings in portfolio construction
Delving into Sustainalytics’ research collaboration with Natixis Investment Managers, we examined which elements have an impact on companies’ ESG Risk Ratings and how investors can use the ratings to help identify portfolio risks. Some interesting findings were the existence of an ESG risk premium for stocks domiciled in Europe, but not in North America; the resilience during market downturns of portfolios with low ESG risks score compared to those with high ESG risk; and the impact of style, country and industry factors on companies’ ESG Risk Ratings.
The consideration of ESG issues by financial market participants is now just a part of doing business. This year’s episodes of ESG in Conversation offered a rich digest of insightful and informative ESG and sustainability thought leadership, helping investors and companies navigate this new reality. Check out the full episodes from this look back at 2024 and subscribe to the show on your favorite podcast app to hear what’s on the horizon in the year to come.
