What will be the main catalysts for responsible investment this year and the main challenges in 2024?

The first thing that is in the spotlight this year is the “PRI in person” event, where the world’s main decision makers gather every year. 2023 will be no exception, and the inauguration of the Japanese Prime Minister is clear proof of his reputation.

The Principles of Responsible Investment (PRI) continue to be a key catalyst for sustainable investment and are gaining increasing attention. The organization currently represents more than 500 signatories worldwide, with funds under management of more than US$1.3 trillion, and we believe this trend will play out. continue to increase.

The inevitable political response

The political response will likely accelerate, as governments will be forced to act more decisively than before to ensure the success of the transition. The consequences of this transition are far-reaching, affecting the foundations of our economy: how we power cities, grow food, and utilize our land. The health of the earth is closely linked to economic stability and growth. It’s not just about the environment; This is about ensuring the wheels of our economies – both big and small – keep turning in a world forced to confront the accelerating impacts of climate change.

Although the Paris Agreement is non-binding, many countries have incorporated their climate commitments into their national laws, where they are legally binding. This shows that, despite political backlash against it, there is a commitment that remains strong and is integrated into a country’s legal framework, thereby driving the collective action necessary for a sustainable future.

Political backlash and concerns about ‘greenwashing’

This increasing political pressure around climate policy partly explains the backlash in the United States, where some of the key decision makers and most influential politicians have stated that they are unwilling to take the next net zero step.

While Europe has encouraged and regulated sustainable investments, in the United States concrete measures and specific proposals against sustainability have made their way into the legislature. However, despite this reaction, international markets tell a different story: money continues to flow into ESG-focused investments, providing a more nuanced view of the situation. However, the results of the upcoming election will be crucial to the future of ASG in the United States.

But even among ESG advocates, it is important to distinguish between simple greenwashers and truly committed actors. There is still high demand for strong and stringent ESG practices and regulations, especially in Europe, where investors are looking for a reliable and conservative approach without over-promising.

AI’s double-edged sword

Among these advances, we must also consider the role of Generative Artificial Intelligence (AI) – which is the biggest disruptor in 2023. The risks associated with this technology require our attention. First, AI poses important ethical challenges because, while its long-term impacts will certainly lead to exponential increases in productivity in many sectors, its short-term prospects appear much more worrying. A Google search for “is my job in danger?” doubled in the first months of this year. Appropriate education and training will be critical to preventing these disparities from worsening in all societies.

AI also exacerbates problems related to unauthorized use of personal data, unauthorized reproduction of content and protection of anonymity. In terms of cybersecurity, AI enables the creation of “deepfakes”, which makes deception more convincing and therefore riskier. Luckily, AI is also helping us find advanced methods to detect this manipulated media.

The impact of AI on the environment is another pressing concern. The main players in the sector are reluctant to provide data, but it is known that the energy and water consumption required for AI hardware production, model building, training, updating and actual use is quite large.

However, despite the many risks, we should not forget that AI also offers important opportunities. The EU’s “Artificial Intelligence Law” is an example of the need for a regulatory framework that balances these risks and opportunities, including the impact of AI on the environment. Although the US, UK, China, Canada and India are also busy updating their regulatory frameworks, the rapid development and adoption of generative AI is so rapid that even the most proactive regulators are lagging behind.

ESG evolution: building a bridge between human rights and renewable energy policy

The current geopolitical landscape further complicates this scenario, as recent events impact supply chains and trade restrictions have a major impact on equities in a multipolar world.

Human rights are also becoming increasingly important, especially in Asia, where due diligence is one of the priorities of ESG programs. These countries aim to maintain their trade relationships, but also promote a viable ESG agenda. This is increasingly important as new “scope 3” considerations become more relevant for outsourcing services. In short, this means that companies must take responsibility for their entire supply chain, including outsourcing services, to ensure that they do not ignore human rights issues.

In response to these steps, some investors began to divest from companies involved in social issues, such as the Uyghur Forced Labor Prevention Act and CS3D.

If we want to summarize our perspective on sustainability, we can quote the conclusion of this year’s “PRI live: from commitment to action” event: Our journey towards achieving sustainability is far from over.

These milestones, developed by scientists rather than investors, may be difficult to integrate into financial strategies, but they are important benchmarks for governments and societies to strengthen their economic strategies in the face of climate threats.

*Director of Sustainable Investment DPAM