ESG Insights: 2023 Year in Review and 2024 Outlook
It was a challenging year by many measures. In addition to 2023 being the hottest year ever recorded, floods, droughts, and wildfires plagued large parts of the globe, causing devastating consequences. In the financial markets, escalating geopolitical tension, a strained economic backdrop, and resistance to the Environmental Social and Governance (“ESG”) philosophy placed new challenges in the pathway to net zero.
The planet continues to warm at an unprecedented and unsustainable pace, necessitating a new era of global cooperation and a rapid scaling up of climate finance.
Despite the grim backdrop, the year also delivered green shoots of progress and reason for optimism in the year ahead: a historic agreement at COP28 to transition away from fossil fuels, the rapid adoption of electric vehicles and renewable energy technologies, new regulations bolstering transparency, and market participants’ continued commitment to sustainability.
Key ESG Trends to Watch in 2024
We reviewed key trends from 2023 and their implications for the year ahead across the sustainable debt markets, equity capital markets, mergers and acquisitions, and carbon markets.
Sustainable Debt Markets
Sustainable debt markets were resilient in 2023, as investors remained committed to the market and issuers continued to see favorable execution dynamics. Despite growing resistance to ESG around the world, the sustainable bond market outside of the U.S. was largely unaffected. Green bonds remained the cornerstone of the sustainable debt market, while sustainability-linked products saw a marked decrease in part due to increased scrutiny and greenwashing concerns. Looking ahead, we expect sustainable debt issuance to be flat in 2024, as market uncertainty, upcoming elections, and anti-ESG rhetoric continue to create choppy waters, particularly for new participants. However, green shoots will persist as companies and investors alike allocate record amounts of capital toward financing the twin digital and green technology revolutions.
Equity Capital Markets
Public and private equity faced similar headwinds in 2023. In the U.S., political backlash against ESG contributed to greater outflows from sustainable equity funds than conventional funds. Conversely, in Europe, sustainable funds attracted capital at a greater rate than conventional equity funds, reinforced by a supportive regulatory and political environment for ESG. In the funds market, a necessary clean up exercise took place as asset managers took a more disciplined approach to naming funds with "ESG" labels. In light of new fund regulations and reputational concerns, we expect ESG fund labeling to continue steadying in 2024. In the private capital space, 2024 could be a bright spot for impact investing, as funds look to increase allocations toward sustainability themes.
Mergers and Acquisitions
ESG factors have become both an important strategic consideration and an area for enhanced due diligence, as buyers and sellers alike recognize their critical risks and opportunities. For example, in the energy sector, renewable energy M&A volume was up for the fourth consecutive year, supported by favorable government policies and incentives. As global climate change concerns mount, scale, efficiency, and pricing power will be key to energy companies’ resilience and ability to compete. Looking into 2024, mounting stakeholder pressures across all sectors will continue to drive the pursuit of decarbonization strategies and M&A presents an opportunity to achieve those objective.
Carbon Markets
Carbon markets continued to grow in 2023 with voluntary offset retirements reaching a record high. This momentum has continued into 2024 with January retirements increasing 68% year-over-year. Volume and prices also increased across several North American compliance markets in 2023, while industry-led initiatives looked to address quality concerns in the voluntary carbon markets. On top of that, carbon dioxide removal (CDR) technologies had a break-out year as the market embraced them as a potential solution to the growing climate crisis. Overall, CDR has a challenging road to scaling as prices remain high and access to plentiful renewable energy is a concern. A significant amount of capital will be required to help the CDR industry reach a scale where it can be a viable tool for reaching climate targets.
Carbon Dioxide Removal Offset Purchases
Conclusion
ESG faced its fair share of headwinds in 2023 between political attacks, greenwashing concerns, and volatile market conditions. The name itself sparked contention, precipitating debate over what the “ESG” philosophy should be called and how far it should reach.
Whether it's labeled “ESG”, “corporate social responsibility”, “sustainability”, or something else, the underlying principle remains the same; environmental, social, and governance factors can and do have material financial implications. ESG has cemented itself as a critical element within the financial landscape, permeating C-suite and boardroom discussions, influencing corporate strategies, and impacting financial performance.
Despite mixed headlines, companies and capital providers view ESG as a driver of value at a fundamental level. The sustainable financial markets continue to present a myriad of solutions for companies looking to decarbonize as the world undergoes a fundamental transition toward a low-carbon economy.
