Navigating sustainaibility at a crossroads

2024 has certainly been a mixed year for sustainability. Top-down forces have undoubtedly been altered as the US voted in a conservative government determined to push the anti-ESG movement. At the other end of the spectrum, the bottom-up forces continue to push the agenda on that side of the Atlantic. Most of the state-level and private sector drive for climate and social progress has, to some degree, been galvanised by the contrary agenda being pushed at national level.

Despite this noise we have seen steadfast commitment from leaders in regions such as the UK and South Africa, with our very own Nedbank leadership pledging a continued vigour for addressing the sustainability challenge. This is a central feature in our effort to be a purpose-led banking group.

The annual World Economic Forum (WEF) Risk Report appears to echo this sentiment as policymakers, business leaders, academics, and civil society representatives continue to voice the medium- and long-term risks associated with a deteriorating natural world. The infographics to the right illustrate the 2-year and 10-year risks from the latest survey.

It is interesting to note that misinformation and disinformation feature as the most cited short-term risks for the second year running. The longer-term, however, paints a somewhat different picture. Here the effects of climate change and environmental degradation start to feature more prominently.

Fourth on the list is ‘natural resource depletion’, and nothing speaks truer to this than the state of global fresh water. My colleague, Madhushree Agarwal, has contributed a piece to this report on the outlook for global water security and which regions are most exposed to demand and availability shortfalls.

As a portfolio manager in our London office, Madhushree notes how their Sustainable range of funds can play an active role in addressing the global water crisis.

Looking at the top five cited 10-year risks, the below chart highlights the evolving landscape as revealed by the WEF survey over the past 18 years. The trend suggests a pivot from economic and technological risks into those closely related to a degrading natural world.

The economics of climate-related events

In a recent presentation by Johan Rockström, the leading author on the Planetary Boundaries framework, he noted that “the climate crisis manifests itself first and foremost in floods and droughts.” This was most certainly evident in 2024 as the world came to terms with several economic costs attributable to a warming world.

In a record-breaking event, the eastern region of Spain received nearly 772 millimetres of rain in just 14 hours, leading to severe flooding and the deaths of 224 people. According to a study published in Advances in Atmospheric Sciences, scientists found that climate change made events like this twice as likely and 12% more intense compared to pre-industrial times.

Dubai experienced its heaviest rainfall in 75 years over a 24-hour period, causing widespread flooding and infrastructure damage. While closer to home, persistent droughts affected large parts of Southern Africa, severely impacting agriculture and water supplies.

As oceans heat up, the probability of more frequent, and often out-of-season, hurricanes increases. Hurricane Helene struck in late September 2024, causing extensive damage and resulting in 219 deaths. It was one of the costliest disasters of the year, with the National Oceanic and Atmosphere Association (NOAA) estimating damages in the vicinity of $80billion.

There are obvious and more obscure ways that investors can hedge themselves against such risks or even look to participate in these events in a manner that supports portfolio resilience. One area that has received significant attention over the past two years is that of catastrophe bonds, also known as ‘cat bonds.’

Cat bonds are high-yield debt instruments designed to help insurance and reinsurance companies manage the financial risks associated with natural disasters like hurricanes, earthquakes, and floods. These bonds allow insurers to transfer some of their risk to investors in the capital markets.

If a catastrophic event occurs, principal and interest on the bond may be deferred or forgiven to provide funds for claims. Investors in cat bonds earn higher interest rates but risk losing their principal if the event happens. The typical maturity of cat bonds is around 3-5 years.

According to research by Artemis, in 2024 there were 93 transactions, nearly matching last year’s record of 95. As per the chart below, this activity boosted the cat bond market to $49.5billion, a 10% increase from 2023. The market has grown by an average of 8% annually over the past decade, except for a slight dip in 2019. It has nearly doubled since 2014, when the market was $25.3billion.

Energy, commodities, and the road to net-zero

Historically, higher electricity consumption has been associated with higher GDP per capita, and ultimately social well-being. This correlation is often attributed to the fact that electricity is a critical input for various economic activities, including industrial production, services, and household consumption.

As economies grow and develop, their energy needs increase, leading to higher electricity consumption. To avoid the low-income trap, developing economies target investment in grid infrastructure that ensures energy access for all and meets their national decarbonisation goals.

In a recent article by The Economist, they highlighted that global investment in grid infrastructure reached nearly $400billion in 2024, with projections for it to rise to $600billion annually by 2030. Some of the key drivers behind this investment trend include:

• Decarbonisation: Adding wind and solar power requires extensive grid upgrades

• Electricity demand: Increasing use of electric vehicles, home-heating systems, and industrial processes

• Economic growth: Rising energy needs in developing countries, especially India and China

• Artificial Intelligence and data centres: Significant energy consumption by data centres, leading to increased infrastructure investment

• Grid fortification: Enhancing resilience against extreme weather events

The relationship between electricity consumption and income is not purely linear and can vary based on factors such as energy efficiency, economic structure, and technological innovation (see chart below). A key objective for many countries is to attain high GDP per capita while realising improved energy efficiencies.

Advancements in renewable energy and energy-saving technologies have the ability to decouple economic growth from energy consumption to some extent. This relationship highlights the importance of sustainable energy policies that balance economic growth with environmental considerations.

Madhushree Agarwal also contributed a section to this report on the hidden costs of AI and how the major tech companies are seeking to balance innovation with environmental responsibility.

I often get asked how investors in the South African market can gain access to the green transition. The listed exchange here is fairly limited in terms of the technology opportunity set, however via our resource sector there is the possibility to gain exposure to the critical minerals that are central to grid, battery, and vehicle electrification.

The natural line of questioning then moves to the cost and impact of this greener alternative to traditional fossil fuel-based systems. Like many things in life, there are trade-offs. Yes, the transition will not come without its negative environmental effects. Yes, there is massive employment risk for those who rely on the coal and oil value chains. However, the consequences of not acting are more far-reaching and dire than maintaining business as usual, and the employment opportunity provided by the transition has been highlighted as a key area for job creation. As our Chairman so wonderfully put it in his foreword, “we recognise that the cost of the transition is an investment, and the real cost is inaction.”

We love numbers in our industry, and the International Energy Agency’s research suggests that the world requires circa 9 million metric tons of coal per year, exceeding the total mass of steel, aluminium, copper, graphite, nickel, silicon, lithium and cobalt that they believe is needed to meet our needs between now and the middle of the century. Ultimately, reaching net-zero emissions by 2050 will need more refined metals, but a decline in the total amount of extraction from the earth.

• Reaching net-zero emissions by 2050 will need more refined metals, but a decline in the total amount of extraction from the earth

• Demand for energy-transition metals is expected to grow, but overall material extraction will decrease, especially for coal

• Mining industry must improve efficiency to help reduce emissions

• Recycling and technological advances are reducing the need for new metal

Climate change, employment, and food security

We joined a workshop with our Nedbank Insurance colleagues earlier in the year where the WITS Global Change Institute put forward that South Africa’s agriculture sector stands to lose more jobs because of climate change than what the energy transition will enact on the fossil fuel sector.

As Southern Africa warms, droughts become more frequent, absolute annual rainfall decreases and the ability for crops to produce consistent yield becomes an emergent risk. One of the fiercest areas that climate change affects people directly is via food security and, more specifically, soft commodity prices.

2024 was hotter than even scientists had forecasted, boosted in part by the El Niño event that occurred. Whether a mild La Niña in 2025 will result in cooler temperatures remains to be seen, but given the trendline since the turn of the century, it would be remiss the assume the trajectory would be altogether altered.

My colleague, Matt Cornwell, has touched on this later in the report, the price of cocoa forcing the Palomar team to exit their investment position. Through the years I have learnt that it is those commodities with specialised areas of production, such as cocoa and coffee, that experience the greatest price effects of a strong El Niño. Conversely, commodities with diverse geographic footprints, such as maize and wheat, are largely cushioned against global-level weather events.

Summary of the past four Climate COP Meetings, and what to expect in 2025

COP26 - Glasgow Climate Pact (2021) - COP26, held in Glasgow, Scotland, was critical for accelerating global climate action. The Glasgow Climate Pact was adopted, emphasising the need to reduce carbon emissions and limit the global temperature rise to 1.5 degrees Celsius. After several countries protested, notably India and China, the commitment was amended from the ‘phasing out’ to the ‘phasing down’ of coal, alongside reducing deforestation and increasing funding for climate adaptation.

COP27 - The Implementation Summit (2022) - COP27, known as the Implementation Summit, took place in Sharm El-Sheikh, Egypt. This conference aimed to turn previous commitments into actionable plans. Major outcomes included the establishment of a loss and damage fund to support vulnerable nations, enhanced transparency frameworks, and increased pledges for climate finance from developed countries.

COP28 - The UAE Climate Summit (2023) - The latest COP meeting, COP28, was held in Dubai, United Arab Emirates. It focused on scaling up mitigation efforts and enhancing global cooperation. Key results were the adoption of a global stocktake to assess progress toward goals, significant investments in renewable energy, and agreements to bolster resilience against climate impacts. These meetings mark significant steps on the global agenda to tackle climate change, highlighting the ongoing need for international collaboration and concrete action to mitigate the adverse effects of climate change.

COP29 - The Finance COP (2024) - At COP29 in Baku, Azerbaijan, major strides were made in climate finance to ensure resources for stronger climate action. Known as the New Collective Quantified Goal on Climate Finance (NCQG), developed countries pledged to increase annual climate finance to $300billion by 2030, with the aim to reach $1.3 trillion per year by 2035. This is intended to aid developing nations in transitioning to clean energy and enhancing resilience.

Upcoming COP30 - The Global Stocktake (2025) - COP30 will be held in Belém, Brazil, in November 2025. Expectations are high, with a focus on accelerating climate action to meet the goals of the Paris Agreement. The meeting will feature a significant event known as the Global Stocktake. This process, which occurs every 5 years, is designed to assess the collective progress towards achieving the long-term goals of the Paris Agreement. The Global Stocktake will evaluate the effectiveness of current climate actions, identify gaps, and provide guidance for enhancing future efforts. It aims to ensure that countries are on track to limit global warming to well below 2 degrees Celsius, with efforts to keep it within 1.5 degrees Celsius.

Climate finance: Mind the gap 

The Trump administration will likely make a swift exit from the Paris Agreement, withdraw the US’ financial contribution to global climate funds, and halt the deployment of federal money into the domestic green economy, as actioned under the Biden administration’s Inflation Reduction Act.

At the COP discussion tables, there has been a growing frustration among developing countries regarding the insufficient climate finance contributions from the world’s largest emitters. The Overseas Development Institute has assessed each country’s fair share based on historical emissions, GDP, and population (see right-hand chart).

Despite this backdrop, many developed nations believe that some of the increasingly affluent developing countries should also contribute to the new climate finance goals. The US’ exit from the agreement will leave a noticeable gap, and it will be fascinating to see which countries step up to fill that void.

While the challenges in climate finance and international cooperation are formidable, the strides made at COP29 and the forthcoming efforts at COP30 highlight a commitment from certain corners of the globe to address climate change. The New Collective Quantified Goal on Climate Finance and the Global Stocktake are pivotal steps towards ensuring that financial resources and climate actions are aligned with the objectives of the Paris Agreement.

Despite the setbacks and political shifts, the efforts to bridge the finance gap and the push for more ambitious climate plans underscore the potential for transformative change. Sustainability is not just a necessity, it is a shared vision for a healthier, more equitable planet. As we move forward, collaboration and innovation at the international, domestic, and company-level will be key to forging a sustainable future.

Sustainability in 2024: A year in numbers