What Could Shape Sustainability and Climate Investing in 2024?

In MSCI’s Sustainability and Climate Trends to Watch 2024 we explore the key themes that could shape the world of ESG investing this year and beyond. Our report brings together the key questions that our global research team is asking and offers thoughtful analyses and useful insights to help navigate the investment landscape that lies ahead.

In this blog post, we touch on three of the eight trends that we have identified. From how changing weather patterns are affecting workers through to how companies are approaching the regulatory and compliance aspects of AI. We also look at the role that the voluntary carbon market will play when it comes to investments in nature.

1. The impact of extreme weather on the workplace

The extraordinary heat waves of recent summers have sparked complaints and threats of industrial action from workers at firms such as UPS and Amazon as they struggled to cope with the global rise in temperatures.^[1] Rising levels of heat and humidity make work more difficult and hold back productivity, even without disruption caused by walkouts. There are questions here for policymakers, companies and workers themselves. For investors, the closest signposts are: Which companies are boosting the climate resilience of their workplaces, and where are the literal hotspots where frayed labor relations pose a threat to operations?

Higher wet-bulb globe temperatures (WBGTs) — a measure that combines both heat and humidity — can severely impact human health and functioning. The danger of higher WBGTs has long been understood for outdoor industries that require physical activity and cannot be temperature-controlled. But as WBGTs rise, the impact and risks are spreading indoors. We assessed different economic activities on their physical-exertion requirements and corresponding prevalence of air conditioning, looking at the potential impact on revenues from lower worker productivity. The results helped explain why logistics firms, in particular, have become vulnerable. Following this logic, manufacturing and mining companies could be next.

By 2050, if CO2 emissions have risen sharply,^[2] the average logistics-warehouse worker in New York City could lose almost 50% more productivity to heat than they did in 2020. And that only counts productivity lost while at work — not the additional losses that could come from labor disputes or increased worker absences due to heat-related illnesses.

This analysis opens a new frontier in our understanding of the risks in managing the workforce of the future. Traditionally, measures such as revenue per employee, workforce size, geographical location or a history of unrest have been used to understand challenges in maximizing productivity. These measures still provide important insight and would have pointed to postal and courier services as the highest-risk area within logistics as a whole. But as we look to a hotter future, new measures of risk — and new ways of managing it — will be critical.

Labor-management risk exposure for the 10 most heat-vulnerable economic activities

2. Managing the effects of AI on data privacy

Generative-AI models and applications are opening up new ways in which consumers’ personal data can be used. Trained on massive datasets, generative-AI applications like search or personal assistance tools may harvest behavior data without clear consent,^[3] for example, and then use it to further train models,^[4] while image-rendering apps may collect users’ biometric data without stating any purposes other than completing the service. Policymakers have begun moving to protect their citizens’ privacy rights in response.

The EU’s General Data Protection Regulation has centered around user rights, consent and secondary purposes, as well as a “privacy-by-design” principle in product development.^[5] But that’s evolving. Cautionary voices from the AI developers’ community have recommended self-governing guidelines covering privacy and the ethical development of AI products.^[6] And the EU’s proposed AI Act includes a comprehensive governance framework for AI systems, from ethical product development to extending best practices for data privacy.^[7]

To get a sense of how ready companies are for the evolving AI regulatory landscape, we looked at three indicators as a proxy for the ability to protect consumer data from misuse or exploitation. Our analysis suggests that technology companies involved in the development of both AI foundation models and applications may need to integrate more-effective guardrails, while those developing AI-driven applications for consumer use may need to expand their privacy provisions to ensure safe deployment.

Companies across the AI value chain may need better guardrails and privacy provisions

3. Investing in nature via the voluntary carbon market

Investments in nature have gained traction in recent years and they are now a central capital flow in the voluntary carbon market. However, projects that generate carbon credits for this market have come under increasing scrutiny. These criticisms are often directed at older projects created under outdated standards or more relaxed approaches to verification. As new pledges mount in 2024 and beyond, investors looking for high-quality carbon credits will face the challenge of differentiating those projects that have integrity from those that do not.

As of June 2023, there were over 850 registered (active) nature-based projects in the voluntary carbon market, focusing on the protection and enhancement of natural carbon stocks in forests, farmlands and coastal ecosystems. Another 2,100 projects were already in development, creating a combined project area the equivalent size of Colombia.^[8]

From 2012 to 2022, a total of USD 16 billion was invested in nature-based projects, and we project a further investment of USD 9 billion by 2025 in projects currently in development. The rate of investments has increased steadily, and by 2022 reached two and a half times the total primary market value of USD 1.5 billion, indicative of an industry planning for significant growth.^[9] New capital raises and announcements cover an additional USD 20 billion up to 2030. Most of these new commitments have come from asset owners or other institutional investors (42%), corporate investors (29%) and fund managers (17%).

But investors looking for high-quality carbon credits need to be able to identify the right projects. Projects with high integrity have a positive impact for climate and nature, support a positive reputation for investors and buyers and produce high-quality carbon credits. We consider four elements of integrity as key for all nature-based projects: additionality, quantification, permanence and “co-benefits” (positive impacts beyond carbon).

A project is considered additional if there is evidence that it would not have been viable without the revenue from carbon credits. This ensures that the project supports the trajectory toward net-zero emissions by 2050. Carbon credits must accurately represent one tonne of CO2e removed or reduced; accurate quantification of a project’s emissions impact is complex but crucial for reducing the risk of over-crediting. The resulting carbon credits should also have low “permanence risk,” by which we mean that the protection and enhancement of the natural carbon stocks will not easily be reversed. Additionally, nature-based projects can often deliver multiple co-benefits to match investor preferences, such as local community support or biodiversity conservation.

In 2024, the importance of investments in nature will only increase. The landscape of opportunities and risks is complex, however, and investors will need to carefully investigate which projects are indeed credible in maximizing climate and nature returns.

Nature is becoming a much more investable prospect

A changing landscape for sustainable investing

MSCI's Sustainability and Climate Trends to Watch 2024 highlights these and other pivotal themes shaping ESG investing. Addressing three of the identified trends, extreme weather's impact on workplaces underscores the urgent need for innovative workforce management strategies in the face of rising temperatures, especially for industries like logistics and manufacturing. Managing the effects of AI on data privacy emphasizes evolving regulatory landscapes, urging companies to enhance privacy provisions. Investing in nature through the voluntary carbon market is a growing industry, but scrutiny is essential to differentiate high-integrity projects. As we enter 2024, navigating these trends will require a nuanced understanding of evolving risks and opportunities in sustainable investing.