Companies that aim to harness the potential of artificial intelligence may need to reinforce their capabilities in areas ranging from data privacy and regulatory compliance to talent management, according to the latest annual edition of MSCI ESG Research’s Climate and Sustainability Trends to Watch, which outlines a series of currents for investors to keep an eye on in the year ahead. 

Investors might well be examining whether companies developing AI foundation models or AI-driven applications for consumers are integrating guardrails and guidelines covering privacy. While AI has the potential to unlock improvements in labor productivity, investors might also ask which companies will invest in their employees alongside AI and which will limit their focus to cutting costs.  

The ability of companies to manage the basics in connection with AI is one of eight trends that could command the attention of companies and investors in 2024. 

The importance of investments in nature will only increase — Investors are increasingly able to assess the possible impacts of nature-related loss on their portfolios. Rising levels of debt distress in developing countries could fuel the market for debt-for-nature swaps that, with risk guarantees from multilateral development banks, could generate interest from private investors. The voluntary carbon market could see an increase in nature-related investments. 

Climate transition risk in private markets comes into focus — Investors are sharpening their view of risks to private assets that may accompany the transition to a low-carbon economy. Distressed-debt funds, for example, appear to face the highest levels of climate-transition risk compared with other private equity or debt. Private companies in distressed-debt portfolios could see an average fall in their operating margins of 133 basis points in a market with a hypothetical global carbon price of USD 75 per ton.  

Homeowners and workers confront climate hazards — Extreme weather and other effects of climate change are increasingly affecting where and how people live and work. In three U.S. states that face higher-than-average exposure to acute climate hazards — Oklahoma, Arkansas and Mississippi — the cost of homeowners insurance relative to income is already among the least affordable in the country. Rising levels of heat and humidity add to the costs for workers and management alike. Measuring risk holistically – and managing it – is an immediate challenge. 

Challenges for corporate oversight — 2024 could present new challenges for corporate oversight amid an acceleration of efforts to assess the quality of listed-company audits. The number of audit deficiencies flagged by overseers in the U.S., U.K., and India rose 302 percent as of September 2023 from a year earlier, according to the report. At the same time, more and more companies are aiming to recruit directors whose skills match evolving demands that range from technology and cybersecurity to engineering and sustainability. That may compound the difficulty of finding candidates who are not already filling director roles elsewhere; the number of board seats occupied by directors who possess each of three core competencies (finance, risk management and industry experience) fell overall at large-cap companies globally in 2023.  

On the lookout for orphaned emissions — Financial regulators in a growing number of countries are poised to roll out requirements that companies publish their greenhouse gas emissions and other climate-related financial information. Still, it will be important to distinguish genuine corporate climate transition plans from differences in accounting. Companies have used methods ranging from excluding emissions from business units slated for sale to structuring finance as corporate debt issued by special purpose vehicles to keep fossil-fuel assets without counting their emissions in top-line tallies. 

Scrutiny of supply chains ups the need for corporate action — The European Union’s requirement for products to be free of commodities produced on recently deforested land is slated to come into effect, potentially ushering in the first of a series of similar initiatives globally that will force companies to not only ramp up their risk assessments and reporting but to monitor such risks proactively. For example, the need for action could drive demand for satellite monitoring, blockchain ledgers for grain, and electronic tagging of cattle. Besides food producers needing to revamp their traceability efforts, sustainable finance frameworks in the EU and elsewhere will also obligate companies to report on risks to human-rights, including modern slavery. 

The SFDR’s unintended consequence for climate capital — EU funds that have sustainability as a main objective need to consider so-called principal adverse indicators (PAIs) as prescribed by the bloc’s Sustainable Finance Disclosure Regulation. Yet as of June 2023, companies in emerging markets fell short far more often than their developed-market peers on PAIs tied to compliance with international norms and board diversity. Emerging-market issuers also lagged on carbon and energy-related indicators. While such roadblocks may get in the way of companies’ inclusion in sustainable investment products and portfolios, the learnings may be applied in the future; the EU Commission is expected to revise the SFDR’s technical standards this year. Still, investors may be watching for any changes that affect how their capital is steered and for any shift in the balance between sustainable-investment objectives and imperatives for a global climate transition.  

Ultimately, amid the challenges, there are silver linings.