As 2024 draws to a close, it becomes a time for reflection on the year’s developments and predictions for the coming year. So, within PA Future‘s end-of-year series New Era, members of the sustainable investment community will be doing just that, as well as sharing some eco-friendly Christmas hacks and the one thing they want to see under the tree this year to accelerate the transition.
Here, Lewis Grant, senior portfolio manager for global equities at Federated Hermes, discusses why ESG is more important than ever, not from a moral or ethical perspective, but because companies with good or improving ESG characteristics will generate superior financial outcomes.
What was the most sustainable investment initiative your team undertook in 2024?
Reuse and recycle doesn’t only apply to Christmas presents and gift wrap: this year we’ve been thinking about the vast amounts of data and meeting notes we’ve collected over the years that may contain useful information and signals, either about the companies we’re invested in already or about wider market lessons we can learn. The ease with which we can now apply artificial intelligence models to sift through this data has allowed us to extract new signals, for example considering trends in sentiment in successive meetings with investee companies, essentially upcycling our trove of historic information to help us better invest for the future.
Were there any unexpected challenges or triumphs in your sustainability journey this year?
In the last 12 months we overhauled our framework for assessing the sustainability of the businesses in which we invest, a more granular and forward-looking assessment than ever before. Built on more than a year of research and data gathering, we implemented what we call QESG3.0 in the summer of 2024. However, this release came at a challenging time for sustainability and ESG-focused investors in the US, who will likely experience headwinds if the US withdraws from the Paris agreement. This was not a challenge we foresaw as a team.
What do you predict will be the biggest trend in sustainable investment in 2025? Are there any emerging sectors or trends you are particularly excited about?
The rise of AI has changed the trajectory of future energy demand, and correspondingly those companies providing energy efficiency solutions for data centres have delivered strong returns over the last 18 months. We anticipate this accelerating and even broadening into other alternative energy infrastructure names. In particular, we are excited about those companies which bridge the gap between green and brown energy infrastructure, offering sustainable solutions for the long term but able to benefit if sentiment towards sustainable investments wanes further.
How do you think global events or economic shifts might influence sustainable investing next year?
Superficially, sustainability in the US could come under pressure following the election result, with the US likely withdrawing from the Paris agreement. However, climate change is already upon us, and instances of extreme weather will only increase in regularity and severity. We therefore consider ESG as more important than ever, not from a moral or ethical perspective but because companies with good or improving ESG characteristics will generate superior financial outcomes. Short-term thinking is leading to interesting valuations for more sustainable companies, which sets up an opportunity for long-term investors willing to weather any potential volatility. Further, good governance should remain a core requirement for any investment: in a world of reduced regulation, companies need strong, risk-aware leadership who can navigate the increasingly volatile macroeconomic backdrop.
What are the top challenges sustainable investment teams will face in 2025, and how will you tackle them?
The reliability of ESG information is a longstanding problem. Progress towards more standardised and insightful disclosures has been slow.
This is where our engagement with companies provides crucial insight. Many companies continue to realise the value of hiring from the widest talent pool possible and of ensuring that their employees are valued and treated fairly, and in conversation they can demonstrate their commitment to this. In 2025 we will need to dig deeper to determine which companies continue to capitalise on the financial benefits of sustainability.
If you could set one new industry standard or regulation in 2025, what would it be?
As investors, we have been using sustainability-related data for more than 15 years and our answer to this question remains unchanged: we need better, standardised, more timely information about the exposures and activities of our investee companies. There has been huge progress, particularly with regards to carbon disclosures, but as a global investor we continue to face discrepancies in reporting standards across the breadth of ESG issues. On our wish list for 2025 would be a worldwide mandatory adoption of a framework in line with the TNFD recommendations – with appropriate phase-in time, clearly – to help bring to nature-positive investments the same focus as carbon reduction.
What’s the most eco-friendly Christmas hack you’ll be trying this year?
This is less of a hack, and more trying to apply the lessons we know but often fail to apply: this year my family is making a conscious effort to source food locally. We’re very fortunate to live surrounded by many amazing farm shops, including a highly regarded turkey farm, which can help to reduce the food miles of our Christmas dinner. In previous years we’ve also been guilty of buying far too much food at Christmas and this year we have set ourselves the objective of not overindulging, although this is as much about waistlines as it is about reducing waste!
The one thing you’d love to see under the tree to help accelerate sustainability in 2025?
Christmas is my favourite time of year, and I’m as guilty as anyone of buying random presents – often plastic gadgets – that bring short-term joy and are tossed aside after the festive season. I’m looking at you robot floor mop, and you self-heating mug (I wish I were joking). Under the tree this year I’d love to simply see an envelope – a gift of tickets or an experience. It’s somewhat twee, granted, but spending less on goods and more on services/experiences would make the gift-giving season more eco-friendly and potentially forge longer lasting – more sustainable – memories.
