Six key ESG trends, including green technology and disruptive innovation, Climate finance, and policy frameworks will shape credit strength in 2024 and beyond, in sectors most exposed to Carbon transition, said Moody’s in its ESG Outlook 2024.
According to Moody’s, green technology and disruptive innovation will play an increasingly lead role in shaping investment and business decisions within sectors most susceptible to carbon transition. Despite this, the sluggish economic conditions and geopolitical tensions may present obstacles to achieving net-zero ambitions.
The ESG landscape is expected to become more complex for businesses and financial institutions, with mandatory climate and sustainability disclosures taking effect in various jurisdictions. Regulatory scrutiny on greenwashing, combined with a busy election calendar that could lead to shifts in climate policies and heightened social tensions, could add to the complexity.
Moody’s underscores the rising physical climate risks, predicting escalating economic and financial losses for governments and businesses. This, in turn, could result in more expensive or even unavailable insurance in certain markets, underscoring the imperative for investment in adaptation and resilience. Despite efforts to mobilize private finance, the persistent climate finance gap in emerging markets (EMs) is a hindrance. the report said.
A heightened focus on environmental degradation is identified as a source of regulatory, litigation, and market risks for businesses heavily reliant on natural capital, as well as those facing waste and pollution risks. Factors such as carbon transition, population aging, and artificial intelligence (AI) are expected to initiate significant shifts in the future of work, carrying social and economic ramifications. The ESG Outlook 2024 positions these trends as pivotal in shaping the economic landscape in the coming years.
The Key Takeaways from the ESG Outlook
Green Technology and Disruptive Innovation: Green technology and disruptive innovation introduce both credit risks and opportunities for carbon-intensive sectors. Strong policy support, market momentum, and the growing cost competitiveness of mature clean energy technologies are expected to drive green capital spending in 2024, particularly in major markets like the US. Initiatives such as the Inflation Reduction Act (IRA) in the US provide substantial financial incentives for investments in renewables, battery electric vehicles (BEVs), green hydrogen, and carbon capture, utilization, and storage (CCUS).
Navigating a Complex ESG Policy Landscape: Businesses are navigating a complex ESG policy landscape, with an increase in disclosure requirements supporting risk management. In 2024, companies and financial institutions face the challenge of meeting growing climate and sustainability disclosure demands amid a busy election calendar that contributes to polarization on key ESG issues. Regulators globally are increasingly requiring companies to disclose ESG-related data, enhancing businesses’ ability to identify, manage, and monitor risks.
Rising Physical Climate Risks: The escalation of extreme weather events underscores rising physical climate risks, prompting shifts in business strategy. The increased frequency and severity of events like wildfires, heatwaves, and torrential rain result in significant financial and economic losses. Moody’s identifies 16 sectors with over $4 trillion in rated debt that has high exposure to physical climate risks. As climate-related disasters become more concurrent, they risk constraining investment, productivity growth, economic output, and amplifying social strains.
Climate Finance Gap in Emerging Markets: The climate finance gap in emerging markets remains a key obstacle. Investment is crucial for building resilience to climate change and transitioning to a low-carbon economy. However, hurdles in climate finance are greater for emerging markets due to sovereign credit risks and constraints in accessing capital. This poses a significant challenge to decarbonization ambitions, considering that emerging markets account for around two-thirds of global greenhouse gas emissions.
Focus on Environmental Degradation: Investors and policymakers increasingly focus on environmental degradation, including ecosystem vulnerability, biodiversity loss, and waste and pollution. In 2024, there is a growing appreciation of the interplay between climate change and natural capital risks. This translates into greater pressure on companies to disclose and address nature-related dependencies and impacts.
Reshaping the Future of Work: Decarbonization, demographics, and artificial intelligence (AI) are reshaping the future of work. Secular shifts such as AI adoption, decarbonization efforts, and population ageing are influencing work and employment patterns globally. Increased workforce mobility, and persisting remote work post-pandemic, present new opportunities and challenges for workers and employers, impacting commercial real estate and local government. Companies and governments will contend with economic and social ramifications, including chronic labor shortages, business disruptions, and changes in consumer preferences. The ultimate fiscal impact will depend on the policy response.
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