What the drive for cleaner capitalism will look like in 2024

Happy new year to all our readers. Still stuffed with festive chocolate, we’re gearing up for what looks set to be a hugely busy year for anyone tracking environmental and social issues in business and finance.

For much of the past few years, the agenda on this front has been driven by voluntary action from companies. Now, regulation and government policy are starting to kick into gear, moving this story into a pivotal new chapter.

Here are five key themes that we think you need to be on the lookout for in 2024. Are there other stories that you think deserve close attention? Let us know at moralmoneyreply@ft.com, or just reply to this email. — Simon Mundy

1. A scramble for supply chain disclosures

This will be the year when companies get serious about assessing environmental and social risks in their supply chains.

A number of looming regulations over scope 3 emissions — those linked to a company’s suppliers or the use of its products — have sent companies scrambling to respond.

From 2025, larger companies operating in the EU will be required to disclose their scope 3 emissions. California recently announced that large companies operating in the biggest US state economy will need to do the same from 2027. The International Sustainability Standards Board, whose standards are set to be used or referenced by regulators around the world, includes a clear requirement for scope 3 disclosures. Authorities in the US and UK are also considering introducing national scope 3 reporting rules.

It’s not just carbon emissions that companies will need to track more closely. Last month, EU officials reached an agreement on the bloc’s new Corporate Sustainability Due Diligence Directive, which requires companies to report on global supply chain risks related to human rights and the environment. The full details of the CSDDD are to be agreed this year.

Financial companies have been excluded — for now — from the full scope of the CSDDD’s requirements, after an intense lobbying campaign. Various companies have also been pushing to dilute or kill off scope 3 requirements in California and elsewhere. But the trend towards much more rigorous supply chain disclosure requirements seems clear. (Simon Mundy)

2. Carbon pricing set to gather momentum

Economists have been saying for decades that an international carbon pricing regime is vital to tackle climate change — and it was eight years ago that Nobel laureate William Nordhaus offered the “climate club” model, in which countries would agree to apply a minimum carbon price and tax imports from nations that didn’t do so.

This year, we’ll see whether a global climate club is finally taking shape. The EU has been the first mover here. Since 2005, it has been selling carbon permits to companies in high-emitting sectors such as steelmaking and cement production. In October, it began the first stage of introducing a “carbon border adjustment mechanism”, under which the EU will charge a corresponding levy on imports of those products from countries without an equivalent carbon price.

Nordhaus hypothesised that once the climate club was up and running, countries would be incentivised to join by introducing their own carbon pricing systems. That dynamic is starting to play out. Last year, Turkey announced plans to create an emissions trading scheme for heavy industry, similar to the one operating in the EU. The UK, which already has a trading scheme, last month announced plans for a CBAM of its own.

The EU’s move has also sparked discussions among US politicians on how to respond. While some have urged retaliatory trade measures against imports from the EU, others — such as former Republican congressman Francis Rooney — argue that a new national carbon fee and CBAM would help both US industry and the federal budget. The bipartisan “Prove It” bill, which will be discussed by legislators this year, would lay the groundwork for such a policy.

But the EU’s policy has sparked strong pushback in developing nations such as India, which have relatively carbon-intensive energy systems. Critics say the policy’s impact on these countries will run counter to principles of climate justice.

If rich nations’ carbon pricing policies are not accompanied by more ambitious measures on international climate finance, this could become an increasingly serious source of tension. (Simon Mundy)

3. ESG backlash evolves into DEI attacks

In the US, most state legislatures convene for only a few months of the year, and fresh lawmaking sessions typically begin in January. For the past two years, Republican-led states have attacked environmental, social and governance investing to protect local oil and gas businesses, or simply to spite green-minded Democrats.

Some of these ESG attacks are expected to continue. On December 18, Tennessee’s attorney-general sued BlackRock for alleged ESG malfeasance. 

But there is evidence that Republicans will shift their attacks from environmental “E” concerns to the “S” part of the acronym. This week a Texas law went into effect that bans state universities from maintaining diversity, equity and inclusion (DEI) departments. Among other things, the law halts programmes and activities to promote issues around race, ethnicity or gender identity.

It is unclear how powerful the law will be and how it will be enforced. For example, the University of Texas in Dallas renamed its DEI office the “office of campus resources and support”.

Other states are making plans for anti-DEI bills. The governor of Utah said on December 20 that he wanted to pass legislation that would stop universities from requiring “diversity statements” as part of the hiring process. Oklahoma’s governor in December issued an order to stop DEI efforts at state agencies.

How these DEI attacks will affect companies remains an open question. A handful of asset managers and banks have been boycotted in Republican states owing to ESG allegations. But if these DEI attacks accelerate, companies could soon find themselves in trouble in the “S” category as well as the “E”. (Patrick Temple-West)

4. A crunch year for climate finance

At last month’s COP28 climate summit in Dubai, the push for an agreement to move away from fossil fuels dominated the headlines. At this year’s COP29 in Azerbaijan, international climate finance will take centre stage.

The burning question here is how to mobilise capital for green investment in the developing world — both to deal with the effects of climate change, and for low-carbon development. There is a colossal amount of work to do.

For green energy finance, watch to see what comes from the World Bank and other big multilateral lenders such as the Asian Development Bank, which are working to make more aggressive use of their balance sheets, show a clearer focus on climate-related projects, and do a better job of “crowding in” private-sector investment.

COP28 negotiations on climate adaptation were viewed by many in the international development sector as a grave disappointment, as wealthy nations worked to minimise their financial obligations. Pressure on this front is bound to grow as this year progresses.

Another key indicator of the health of global green finance is the newly established fund to cover climate-related loss and damage costs in developing nations. The first commitments to this fund were made at COP28 — but at less than $1bn, they were a mere downpayment towards the far larger sums required. How quickly that fund can move this year towards full operations, and start raising the kind of money it needs to be effective, will be a vital sign of how serious rich world governments are about climate finance as a whole. (Simon Mundy)

5. Elections, elections and more elections

The new year is going to be historic for democratic elections — with worldwide implications for corporate sustainability and ESG investing.

Taiwan kicks things off, with voters heading to the polls next week in a presidential election that puts the wide-ranging impact of semiconductor production on the agenda. Indonesia, the world’s biggest coal exporter, follows a month later.

Narendra Modi — whose government has presided over a swelling wave of green investment, while stressing its continued need for coal — is expected to win a third term as India’s prime minister in the spring. And the European parliament will hold elections in early June, amid a resurgence of rightwing populism in parts of the continent. These polls could have implications for the EU’s financial support for green industries, and its push on corporate sustainability disclosures. Mexico and South Africa are among the other economically important nations that will go to the polls in 2024.

In the UK, Prime Minister Rishi Sunak has confirmed the next general election will be in 2024 rather than let it creep into January 2025. Green issues are a clear dividing line between Sunak’s government, which has pledged to “max out” oil and gas production, and the opposition Labour party, which has put clean energy at the centre of its economic strategy.

The biggest showdown is set to be in the US, where Donald Trump is on course to win the Republican nomination and challenge President Joe Biden again. The first Republican contest is scheduled for January 15 in Iowa.

If Trump is to stroll down Pennsylvania Avenue next January for his second inauguration it will have severe consequences for the climate and ESG investing. Trump withdrew the US from the Paris climate accord in June 2017; the agreement is surely on his hit list again. The Securities and Exchange Commission’s climate disclosure rule — if it survives in court — would be reversed by a Trump administration 2.0.

What a Biden re-election means for sustainability is less clear. It is highly unlikely that the US Congress will adopt another round of green subsidies at the size of the Inflation Reduction Act. If Biden wins it is likely that key players on his climate agenda — from Treasury secretary Janet Yellen to climate envoy John Kerry — will step down. (Typically there are many substitutions after a president’s re-election). So even if the US keeps its pro-climate strategy, it is difficult to see how the policy advances or even accelerates in 2025 and beyond.

Either way, 2024 is set to be a wild year for democracies. Better buckle up. (Patrick Temple-West)

Smart read

Here’s a challenging new year read from FT Africa editor David Pilling, who argues that the UN’s 17 Sustainable Development Goals — with 169 subsidiary targets — are doomed to failure because they “prioritise everything. In the real world, that is to prioritise nothing”.