With interest rates looking to have peaked and now expected to plateau and fall during 2024, greater attention can be repaid to ESG and regulatory matters, institutional investors in the U.K. and Europe say.
One such enduring trend that looks set to dominate conversations across European asset owners over the coming year is the ongoing climate crisis — and how to adjust portfolios accordingly.
"After another climate COP it is time to deliver on the pledges and implement the initiatives needed to bring the world economy closer to a Paris-aligned pathway," said Jan Kaeraa Rasmussen, head of ESG and sustainability at PensionDanmark, Copenhagen. "At the center of these efforts is the necessary acceleration of climate investments in the global south through a massive mobilization of private capital."
Signs of this were seen at the December COP conference, hosted in the United Arab Emirates, where more developed countries pledged to contribute a total $12.8 billion over the next four years to the Green Climate Fund, which has a mandate to support emerging markets' shift to a low-carbon economy.
Rasmussen argued that renewable energy is no longer an infant technology, and can offer an attractive return proposal in high growth markets such as India, Indonesia, Brazil and South Africa. However, he did concede that blended finance — development finance used to encourage private investment — may be necessary in some developing countries to tamper perceived investor risk and increase openness to such exposure.
Thijs Knaap, chief economist of APG Asset Management, also identified climate issues as of primary concern for the new year.
"We need a transition to an economy that emits much less CO2 and preserves biodiversity, and even from a cold, economic perspective we should get there sooner rather than later," he said. Knaap believes 2024 could be a year to make significant progress, bar any "distractions" such as geopolitical events or an economic downturn in China.
APG Asset Management runs around €541 billion ($582 billion) in assets under management, including on behalf of Stichting Pensioenfonds ABP, Heerlen, Netherlands.
The specter of global warming is an issue that is also at the forefront of concerns for U.K. pensions funds. Continuing with this dominant trend, a spokesperson for the £16.6 billion ($20.8 billion) West Yorkshire Pension Fund, Bradford, said: "Climate remains the single largest engagement topic and we continue to push companies to adopt ambitious, transparent and practical plans that will deliver real world CO2 emission reductions."
However, while progress has been made in particular by U.K. and European companies, "we note dilution in other companies' ambitions at a time when efforts need to be redoubled. To increase our leverage, we continue to support several collaborative engagements. Our voting in the upcoming AGM season will be consistent with our engagement efforts," the spokesperson said.
This is not to say that the dominant economic talking point of last year — rising interest rates to combat inflation — is going to fade into obscurity in 2024. Rates may have been held across the Federal Reserve, European Central Bank and Bank of England in December last year, but more hawkish positions on the European side means these central banks will likely reduce rates only later in 2024. Increased volatility and geopolitical uncertainty also remain on the agenda.
Magdalena Hogberg, head of strategic allocation and quantitative analysis at the 486 billion Swedish kronor ($46.4 billion) pension fund AP4, Stockholm, noted how shifts in the investment environment can provide opportunities: "Top of mind is to align the portfolio and investment structure to be able to take advantage of the increased volatility and dispersion that arise from a higher interest rate environment and continued macroeconomic and geopolitical uncertainty."
According to a Natixis report from last month, in terms of asset allocation, 56% of institutional investors said they were actively derisking their portfolios as they headed into 2024. More than two-thirds (69%) are bullish on bonds, with 62% expecting longer-duration bonds to outperform short duration.
While climate and ESG will be more prominent concerns for money managers in 2024, there is also a more novel concern that is taking center stage: artificial intelligence. Last December, two U.S. senators introduced a bill aimed at identifying and preventing AI manipulation of financial markets.
AI "is similarly going to be front of mind," said Caroline Escott, senior investment manager at Railpen, which acts as the in-house manager of the £34 billion Railways Pension Scheme, London. "It has the potential to generate significant opportunities but also risks, including the amplification of discrimination, proliferation of misinformation and privacy violations — particularly in relation to generative technologies."
Railpen's recently published 2024 Global Voting Policy highlighted for the first time current expectations of companies' governance and internal controls on AI development and deployment.
Pending regulation is also on the minds of European institutional investors.
In the environmental space, in 2023 the Task Force on Climate-related Financial Disclosures was disbanded having fulfilled its remit. In its place came the International Sustainability Standards Board, a potentially ground-breaking positive development for unified climate data disclosure.
In 2024, the EU taxonomy on sustainable activities will incorporate the four final environmental objectives on which asset managers must report, including biodiversity, and the new EU Deforestation Regulation will also impose stringent due diligence requirements on corporations.
"It will be more important than ever to ensure full traceability across the value chains in the companies we invest in," PensionDanmark's Rasmussen said.
Escott identified a different regulatory challenge, namely the changes to governance structures within listed companies. Escott is also chair of the Investor Coalition for Equal Votes, and is a vocal opponent of proposed alterations to London listings in December 2023 which would widen access to dual-class share structures, or unequal voting rights.
"Shareholder protections and high standards are fundamental to sustainable value creation and thriving capital markets. As a U.K. asset owner with an extensive history of early-stage investment in high-growth U.K. firms, we want to ensure we can access well-run, high-performing companies, so maintaining these protections will remain high on our 2024 agenda," Escott said.
