The sustainability cycle 2024: what we said and what happened
December 23, 2024
Topic of the week:
By Ana Guzmán Quintana
At Portocolom we have a crystal ball in the main meeting room. It’s a curious icebreaker, but it also reminds us that our job is not to divine the future, but to make informed decisions that align profitability, risk and impact. In early 2024, we shared our forecasts for how sustainability would influence financial markets. Now, as the year draws to a close, it is time to review how much has been achieved and what has changed.
1. A sustainability business cycle: When it comes to sustainability, we are experiencing a cyclical pattern similar to that of the economy and financial markets. Between 2018 and 2020 we experienced an initial expansion, followed by a COVID-driven boom, which underscored the need to address critical challenges such as education, health, growing social gaps and climate change. After an exuberance in valuations and expectations, came the recession starting in 2022 with the trigger of the Ukraine war and the rise of anti-ESG messaging in the United States.
Today, we believe we are entering a phase of consolidation, where investment in sustainability and impact begins an expansive cycle… of quality. We have adjusted expectations, learned from mistakes and redefined strategies. This stage of reflection not only strengthens the market, but also generates more solid foundations for sustainable growth in the long term.
2. Regulation: between progress and challenges: European regulation has continued to advance, as we anticipated, although it has not simplified data analysis. Many companies, especially small and medium-sized ones, face difficulties in adapting to the new requirements, exacerbated by the lack of qualified personnel to audit sustainable data.
Meanwhile, differences between the climate stance of the Fed and the ECB have intensified. The United States maintains a pragmatic approach, prioritizing economic and legal objectives, while Europe reinforces its commitment to the Paris Agreement. Looking ahead to 2025, the return of Donald Trump introduces uncertainty: although his rhetoric is critical of climate initiatives, renewable energy investments in the United States have grown by 60% since 2020, creating more than 310,000 jobs. It is unlikely that such a dynamic and strategic segment will be completely dismantled, even under less favorable policies.
3. Returns: sustainability with nuance: as we predicted, sustainability-related sectors, after suffering in 2022, have begun to regain their investment appeal. Although traditional sectors such as agricultural commodities and energy have shown resilience, sustainability continues to prove its value in long-term strategies.
However, recent geopolitical events have impacted returns. Conflicts in the Middle East, Sudan and Ukraine, along with tensions in Taiwan, have generated uncertainty in the markets. Additionally, deregulation policies promoted by Trump are affecting the perception of ESG investments, which could face challenges in the short term, although the long term continues to offer opportunities for those who prioritize impact.
4. ESG: more complex debates and clearer positions: in 2024, we anticipated that extreme pro-ESG messages would moderate, and they have. The massive reclassification of funds to comply with regulations reflects a greater maturity in the sector. On the other hand, anti-GES movements have intensified the debate, especially in the United States.
While some entities have abandoned climate partnerships, many others have strengthened their commitment. Sustainability is no longer just a matter of marketing, but of business integrity. This underscores an important change: the focus has shifted from talk to concrete action.
5. Greenwashing and «green hushing«: although the risk of greenwashing is still present and litigation has increased, 2024 has seen the rise of green hushing, a more cautious approach by companies to avoid overpromising that could be challenged. While it may seem like a step backwards, this cautious approach is cementing real commitments, removing companies from the media noise and strengthening their credibility.
6. Governance and long-term vision: As we predicted, shareholder voting policies have broadened their focus. While environmental issues are still present, governance and social aspects are increasingly being prioritized. This return to balance in decision-making is essential to maintain a sustainable and financially sound approach.
A sustainable future needs commitment
At Portocolom we continue to believe that sustainability is not a passing fad, but a philosophy that requires total commitment. There is no room to be “half-hearted” in this movement. Cycles will continue, but with each iteration, the market learns, adjusts and evolves towards a more robust and consistent model.
As we always say, we cannot predict the future, but we can make decisions that bring us closer to the world we want to build. On this path, each phase of the cycle is as valuable as it is necessary.
The beacon of the markets:
The final stretch of the year in terms of financial markets will undoubtedly be marked by the meeting held last Wednesday by the US Federal Reserve. Although the market expected a 25 basis points cut to the 4.25% – 4.50% range (as it has happened), the truth is that the change of tone, much more aggressive than expected by the Fed, has been remarkable. Powell stated that they must be very cautious from now on with the decisions to be taken, and that the pace of rate cuts will slow down significantly from now on.
The main reasons behind this change of pace announced by the FED would be the following:
- The Fed remains convinced that the economy is on an “appropriate path”, and in fact they are revising upwards their growth estimates for 2024 to 2.5% (from 2.0% previously). They also revise 2025 growth up by one tenth of a percent to 2.1%.
- They reduce unemployment rate estimates to 4.3% for the next few years. These represent historically low levels that can be considered as structural “full employment”.
- The two previous points could already lead to a reduction in the pace of rate cuts on their own, but this is compounded by the surprising increase in inflation forecasts for 2025, from 2.1% to 2.5%. In addition, the Fed is delaying the 2% inflation target until 2027.
In conclusion, the Fed foresees an economic environment of sustained growth and low unemployment, but with rising inflation expectations in the short term, to which we could add that the new Trump administration, as we mentioned in previous editions of this weekly note, could implement certain fiscal policies that would increase inflation. Given this scenario, it is not surprising that the FED has wanted to take a step back, lowering its rate cut estimates for the future, and even with some of its members being against the rate cut that we have seen this December.
Equity markets have not taken kindly to this change in the outlook for the US economy, and practically all stock markets suffered significant setbacks last week (although these were slightly attenuated in Friday’s session). The US indices, S&P 500 and Nasdaq were down -2% and -2.25% respectively in a week, while the Eurostoxx 50 was down -2.10% at the close of trading on Friday.
In fixed income, the rise in yields that began several weeks ago also continued, with the German 10-year bond (Bund) reaching 2.31% and the Spanish bond 3%. The US Treasury bond was also very affected after the FED meeting, reaching a yield of 4.60%, a level not reached for 8 months, which represents a rise of 100 basis points since the end of the summer, when it was trading at a yield of 3.60%.
In currencies, the dollar has been clearly favored by this expected slowdown in the Fed rate cut, trading last week at a two-year low against the euro, crossing at 1.035 eur/usd.
The phrase:
And we say goodbye with the following quote from Seneca, Roman philosopher, politician and writer: “There is no one less fortunate than the man whom adversity forgets, because he has no opportunity to test himself”.
Summary of the performance of major financial assets (12/23/2024)
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This document has been prepared by Portocolom Agencia de Valores S.A. for the purpose of providing general information as of the date of issuance of the report and is subject to change without notice. Portocolom Agencia de Valores S.A. assumes no obligation to communicate such changes or to update the contents of this document. Neither this document nor its contents constitute an offer, invitation or solicitation to purchase or subscribe for securities or other instruments or to make or cancel investments, nor may they form the basis of any contract, commitment or decision of any kind.
The information contained herein has been obtained from public sources believed to be reliable and, although reasonable steps have been taken to ensure that the information contained herein is neither uncertain nor unequivocal at the time of publication, we do not represent that it is accurate and complete and it should not be relied upon as if it were. Portocolom Agencia de Valores S.A. assumes no liability for any loss, direct or indirect, that may result from the use of the information provided in this report. Past performance of variables may not be a good indicator of future performance.