Proactive Investors - With major environmental, sustainability and governance targets approaching, 2024 is going to be the "year of near-term, high-impact solutions", according to Berenberg, which shared their top picks of companies that provide solutions to key issues.
Some widely adopted ESG deadlines are looming ever larger, the investment bank noted, with less than six years to reach many interim corporate targets, the UN’s Sustainability Development Goals, or for the EU to cut emissions by its planned 55%.
"As such, regulators and investors are increasingly focusing on near-term, impactful solutions to help tackle the issues facing the planet," wrote analyst Lauma Kalns-Timans in a note to clients.
ESG investing is also evolving, the analyst said, because in order to cut emissions rapidly investors are realising the importance of engaging with high-polluting companies to improve their processes, and not just invest in the best-in-class ESG companies.
She thinks 'transition investing', to encourage the progress of companies towards net zero, will "grow substantially in popularity in 2024" as more ESG investors come to this realisation, and EU and UK regulators provide frameworks for the inclusion of transition investing in asset management, with performance tracking also becoming easier and thus more influential.
Transitioning and high-impact, high-carbon companies such as Rotork PLC (LON:ROR), DCC PLC (LON:DCC) and steel dust recycler Befesa are highlighted as potential transition beneficiaries.
With more than 2.4 billion voters heading to the polls this year, with elections in many major economies, climate action is likely to be one of the key issues of debate, too, with a Labour victory in the UK likely to see a return to greener policies.
However, the return of Donald Trump in the US would likely be "detrimental to biodiversity, but not necessarily to renewable investments", Kalns-Timans said.
With valuations of renewables depressed, solar input prices becoming cheaper and power purchasing agreements "reasonable", 2024 has the potential for a recovery in renewables stocks, the analyst added.
Top picks to benefit are SSE PLC (LON:SSE) and Germany's RWE (LON:0HA0), alongside solar developers Solaria and Grenergy.
Methane and water
The 'emission of the year' is methane, which contributed almost a third of the increase in global temperatures and is 84 times more potent than carbon in the short term.
Drivers in 2024 include EU and US regulations, including fines within the US’s Inflation Reduction Act and pledges to cut emissions from 40% of the oil and gas sector.
Top pick for this theme is again Rotork, which the analysts say is an enabler of methane emission reduction through its electric actuators that cut methane leaks from pipes, which is expected to grow from a 5% share of revenue to 20% by 2030. Also exposed to efficient water infrastructure equipment, another theme.
Water is another immediate business risk, with issues such as extreme weather continuing to shift from purely a governmental and social risk to a business risk affecting company financials.
Kalns-Timans sees water reuse continuing to gain traction as the EU launches its water resilience initiative, making Veolia and NORMA Group.
AI and built environment
AI has faced some scrutiny over its social impact and also its sustainability footprint, with data processing already under sustainability scrutiny given it already accounts for up to 3.2% of electricity demand.
After a year when AI hit the headlines due to the rise of ChatGPT, in 2024, the analyst noted that governments will make their first attempt to properly regulate, with the EU likely to be first to pass regulation, while US states are working on bills to address the influence of the technology.
Expecting the testing, inspection and certification (TIC) sector and companies that provide data centre environmental solutions to benefit from the trends of more prevalent AI use and growing regulatory scrutiny over security, responsible use and sustainability, top pick is TIC specialist Bureau Veritas.
While AI is a new focus, the built environment has been lagging behind as it has escaped much critical focus, despite over a third of energy and process emissions coming from buildings.
Regulation, such as the EU’s Energy Performance of Buildings Directive, is beginning to target this.
Top picks include Volution Group PLC (LON:FAN), which is an energy-efficient ventilation producer benefiting from sustainability regulation tailwinds, and Heidelberg Materials, which focuses on zero-carbon cement development in 2024.