Six Sustainability Trends to Watch in 2024

Projecting into 2024, the sustainability landscape is expected to continue evolving rapidly, driven by stricter regulatory frameworks, increasing societal pressures, and the direct risks associated with climate change. Companies and their leadership teams have embraced sustainability transitions in recent years, but developments in 2024 will require a more comprehensive approach to climate and sustainability strategies.

Navigating this transformation is crucial for businesses, especially in the UK and EU. Pimlico Strategy & Insights provides an overview of six pivotal sustainability trends for this year for our clients, focusing on the unique risks and opportunities they present, guiding businesses toward sustainable growth and resilience.

Raising the Bar on Disclosures

In 2024, the scope of sustainability disclosure regulation is expanding. From January 1st the Corporate Sustainability Reporting Directive (CSRD) came into force for approximately 50,000 companies and listed SMEs operating within the EU, who will now be required to start publishing annual sustainability reports from January 2025 for the financial year 2024.

The European Sustainability Reporting Standards (ESRS) will be obligatory for use by companies as mandated by the Accounting Directive. By requiring the use of common standards, the Accounting Directive, as amended by the CSRD  in 2022, aims to ensure that companies across the EU report comparable and reliable sustainability information. 

The CSRD applies to EU companies that satisfy at least two of the following criteria: a balance sheet total of €25 million, net turnover of €50 million, and/or a staff headcount of 250 or more. Additionally, non-EU companies with operations in the EU, including a physical presence, must also adhere to this directive. Penalties for non-compliance can include fines up to €25,000, imprisonment for individual directors, or corporate fines that may amount to the greater of €10 million or 5% of the company’s global annual turnover.

Also, companies in the UK with more than 500 employees and financial institutions with in excess of £5bn in assets under management have until the end of June 2024 to disclose, for the first time, information aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). As a result, 2024 is set to be a pivotal year in which a much wider array of companies across Europe will undertake the challenge sustainability data gathering and reporting. This will require greater efforts on sustainability strategies among internal and external stakeholders, aligning reporting with strategic objectives, and ensuring that sustainability targets and transition plans are credible.

Rules to Counter Greenwashing

This year measures to counter greenwashing in the UK and EU are set to intensify with the implementation of stringent regulations designed to curb misleading environmental claims by companies. The Financial Conduct Authority (FCA) in the UK is poised to enact its specific anti-greenwashing legislation, requiring all regulated firms to ensure their sustainability-related communications are clear, fair, and not misleading. This rule signifies a pivotal shift towards greater accountability and transparency in sustainability messaging, urging firms to rigorously define what constitutes sustainable practices and greenwashing. It also calls for thorough risk assessments and a reevaluation of internal control systems and governance structures.

Parallel to the UK's initiatives, the EU is also reinforcing its stance against greenwashing. The European Parliament has approved the Green Claims Directive announced in March 2023 that bans businesses from making vague or unverified environmental claims. Expected to be incorporated into the national laws of EU member states by early 2026, this directive targets claims like 'eco-friendly' and 'carbon-neutral', particularly those reliant on carbon offsetting, and introduces new requirements for product repairability information. In both the UK and EU companies must now be prepared to submit scientific evidence to support claims made when marketing "green" products and services.

Evolving Approaches to ESG

The Environmental, Social, and Governance (ESG) landscape, particularly in terms of ESG ratings providers, will continue to face intensified scrutiny in 2024. The criticisms levelled against ESG last year highlighted significant concerns with the absence of standardised approaches, transparency, and limited scoping for ESG ratings, generating demand for more reliable and detailed environmental assessment methodologies. Analysis from JP Morgan shows this is especially true where ESG factors are influencing consumer choices, public opinion, and investor actions, and more businesses are adopting sustainable practices due to economic and legal pressures. This evolving landscape offers investors lucrative opportunities to support companies that are embedding sustainability strategies into their core business models, products and services.

In 2024, alongside efforts to comply with the CSRD and other disclosures, there will be a greater focus on enriching the 'E' in ESG, reflecting a crucial shift in both business strategy and regulatory attention. By adopting more comprehensive ESG approaches, businesses and investors can break down environmental targets and strategies and thereby better navigate the growing complexity of the ESG landscape. Pimlico has observed that rising demand for new sustainability analysis methodologies is in turn enabling innovative forms of industry benchmarking and opportunity analysis, in many cases helping to build stronger connections between sustainability strategies and commercial growth.

Historic Progress on Nature Disclosures

In September 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) finalised its recommendations, establishing a crucial framework for managing and reporting on nature-related risks and opportunities. This framework, consisting of 14 disclosures organised into four key pillars – governance, strategy, risk and impact management, and metrics and targets – is designed to standardise and improve the quality of nature-related information. This enhancement will aid investors in integrating nature considerations more effectively into their investment decisions, addressing the gaps in current nature-related data availability and comparability.

There is positive momentum in the adoption of TNFD recommendations heading into 2024, with a significant percentage of TNFD forum members indicating their intention to align with these recommendations in their upcoming fiscal year reporting. The increasing number of organisations planning to adopt the TNFD framework signals a growing awareness of the importance of nature-related issues in financial decision-making. The TNFD's overlap with other sustainability reporting standards such as the ISSB and the European Sustainability Reporting Standards (ESRS) is also motivating more companies to align with these recommendations.

However, as Fidelity International has noted, unlike climate-related disclosures that have standard metrics like greenhouse gas (GHG) emissions, nature-related reporting faces the challenge of establishing equivalent metrics, necessitating transparency from companies regarding their chosen metrics and associated limitations. The gradual increase in disclosures, as seen in the trajectory of TCFD adoption, suggests that companies will likely adopt a phased approach to align with the TNFD recommendations.

Embracing Dynamic Materiality

As we navigate the disclosure movement in 2024, the concept of 'materiality' in sustainability is evolving. Previously, materiality assessments in businesses were static, offering a snapshot in time and often leading to outdated business priorities. Now, with the emergence of dynamic materiality, there's a paradigm shift. This approach is interactive and continuous, allowing companies to adapt their strategies and disclosures to align with future conditions and emerging business needs. Dynamic materiality, a key component under the EU’s CSRD, requires companies to conduct materiality assessments and ensure reporting extends beyond direct operations to the entire value chain.

Companies reporting under the CSRD are required to adhere to the European Sustainability Reporting Standards (ESRS), encompassing a broad range of both qualitative and quantitative ESG disclosures. The CSRD uniquely integrates concepts of both "impact materiality" and "financial materiality" in sustainability analyses. The scope and depth of reporting under ESRS will primarily depend on the results of a "double materiality" assessment. This method, as outlined by the ESRS, combines considerations of both financial materiality and impact materiality. Under this dynamic framework, businesses must continually reassess ESG topics to address emerging risks, maintain a current and holistic understanding of material issues, and engage stakeholders to update and evolve ESG strategies and metrics.

Investing in Sustainable Aviation

In 2024, the International Air Transport Association (IATA) expects an increase in the use of sustainable aviation fuels (SAF), with projections indicating that SAF could account for 0.5% of total airline fuel consumption. This rise in SAF usage, while contributing to the aviation industry's efforts to reduce its carbon footprint, is anticipated to add $2.4 billion to the sector’s fuel expenses. The aviation industry's recovery post-pandemic is expected to lead to higher overall fuel consumption, surpassing pre-pandemic levels and resulting in increased CO2 emissions. In response to these environmental challenges, the industry is also preparing to comply with the International Civil Aviation Organization’s (ICAO) carbon offsetting scheme, CORSIA, with costs estimated to be around $1 billion in 2024.

This development coincides with the UK government's plan to implement a SAF mandate from 2025, aiming for a 10% SAF blend by 2030 as part of its Jet Zero Strategy. This strategy, focused on achieving net-zero aviation emissions by 2050, includes the early development of eight UK-based SAF production facilities. The UK’s Department of Transport has released a comprehensive second consultation for this mandate, setting forth operational guidelines to meet aviation sector emission reduction targets. The mandate dictates that all aviation turbine fuel in the UK must meet stringent sustainability criteria, including a carbon intensity at least 40% lower than conventional kerosene. The UK's move towards a SAF mandate represents a significant step in reshaping the sustainable fuel market, encouraging innovation, and setting a precedent for global efforts to reduce the environmental impact of aviation.

In 2024, the evolving sustainability landscape presents a range of challenges and opportunities for businesses. Adapting to new regulations and shifting societal expectations is increasingly important. Understanding these changes is key to managing risks and identifying potential benefits in adopting sustainable practices. For businesses looking to navigate this changing environment, consulting with experts such as those at Pimlico can offer practical insights and strategic support, aiding in the navigation of these sustainability trends.

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