Commentary

Five ESG trends for the new year

January 16, 2025

Aerial view of a curved and winding road in the middle of a lush green forest.

As we turn the page on another year, the investment landscape is poised for transformative shifts. Despite the narratives suggesting a retreat, Environmental, Social and Governance (ESG) considerations remain at the forefront of corporate and investor agendas. These factors are not just influencing how businesses operate, but are also reshaping how capital flows, decisions are made and risks are assessed globally.

In this commentary, we highlight five ESG trends set to shape the year ahead, revealing both challenges and opportunities for investors and businesses alike.

1. Enhanced regulatory frameworks and mandatory reporting

The era of voluntary ESG reporting is coming to an end. Governments and regulatory bodies worldwide are tightening disclosure requirements, aiming for greater transparency and accountability. For instance, over 50,000 companies globally will start publishing reports in line with the EU’s Corporate Sustainability Reporting Directive (CSRD), effective as of the 2024 financial year. In the United States, despite the polarization of ESG, the California climate disclosure laws will impose strict climate-related reporting obligations for businesses to report climate-related information, while Canada’s Sustainability Standards Board (CSSB) has just published the first sustainability disclosure standards, signaling a move towards harmonized ESG standards.

These regulatory shifts demand readiness from companies to avoid fines and maintain competitiveness, offering investors richer datasets to assess ESG risks and opportunities.

2. The energy security and decarbonization nexus

Geopolitical instability and growing energy demands have elevated energy security to a strategic priority. At the same time, the global race to decarbonize continues to accelerate. Renewable energy investments, energy storage solutions and the deployment of innovative carbon capture technologies are central themes driving this dual agenda.

Many of our holdings are benefiting from this trend. One such example is Landis+Gyr Group AG (LAND SE), a leader in smart metering, grid edge intelligence and smart infrastructure technology, who is helping companies decarbonize their operations. In 2023 alone, Landis+Gyr’s smart metering technology helped to enable a reduction of 8.9 million tons of direct CO2 emissions among customers, while contributing to the company’s growth.

3. Climate adaptation finance continues gaining momentum

While decarbonization remains critical, the rising frequency of climate-induced disasters has underscored the need for climate adaptation strategies. 2024 saw insurance companies suffer $10.6 billion of climate-attributed losses, according to Insure our Future. Investments in climate-resilient infrastructure, disaster recovery, ecosystem restoration and sustainable agriculture are gaining prominence as businesses recognize the economic benefits of adaptation alongside mitigation.

Companies that proactively address physical risks and implement strategies to safeguard operations are becoming more attractive to investors, as they represent opportunities for long-term sustainable growth and stability. Such an example is our holding Installed Building Products Inc. (IBP US), an insulation and building products company whose portfolio includes sustainable insultation, waterproofing, fire-stopping and fireproofing products. In addition to helping companies adapt to physical risks, IBP is aiming to reduce its carbon producing electricity usage by 50% from 2020 by 2030.

4. ESG integration into core business strategies

ESG as a standalone acronym may be fading, but its principles are permeating every aspect of corporate strategy. Businesses are embedding ESG considerations into supply chains, workforce management and product innovation, aligning with stakeholder expectations while mitigating risks.

For example, procurement strategies now emphasize circularity and resource efficiency, while governance practices are evolving to enhance transparency and build investor trust. This shift from a compliance-driven approach to a strategic imperative positions companies with robust ESG frameworks as long-term winners in the eyes of investors.

5. Digital infrastructure and resilience

In an increasingly interconnected world, digital infrastructure has become the backbone of economic and societal resilience. The rapid shift towards digitalization, coupled with the rising frequency of cyberattacks and natural disasters, underscores the need for robust and adaptive digital systems. Investments in secure data centers, resilient cloud services, and advanced cybersecurity measures are gaining momentum as businesses and governments prioritize safeguarding critical digital assets.

Furthermore, integrating digital infrastructure with renewable energy sources and smart grids enhances both energy efficiency and reliability. Companies advancing in digital resilience – those equipped to withstand and recover from disruptions – are increasingly attractive to investors seeking stability and innovation in the face of growing uncertainties.

Conclusion

The ESG trends shaping the new year highlight the dynamic intersection of sustainability and business resilience. For investors and companies alike, staying ahead of these trends is not just about compliance but about seizing opportunities for growth, innovation and competitive advantage in a rapidly transforming world.

Global Alpha Capital Management Ltd.
January 16th, 2025