A new era of ESG measures are areas at the top of the agenda at asset manager Allianz Global Investors (Allianz GI), who recently outlined their sustainability journey and thoughts for the future at a conference.

Alongside impact investing, transition finance, rising climate costs and the role of sovereign funds, Allianz GI’s team expressed interest in exploring what exactly ‘ESG 2.0‘ will look like, with a focus on specific, high-quality identification and measurement of risk materiality to screen for all styles of investing.

According to the team, a combination of new, innovative data capture and rising evidence of disruption through the supply chain is expected to drive better understanding on how to substantiate and quantify financial risks.

“Scoring has been relied upon to construct a lot of portfolios, and scoring is a first level dashboard that is not a perfect instrument, because it is often very broad and creates a lot of tension when investors latch onto them,” said Matt Christensen, global head of sustainable an impact investing and AllianzGI.

“So, when thinking about ESG 2.0, we have worked with our investment teams to focus on what the most important factors are, and what key data points are available about risk factors and opportunities that are not just numbers.

“We have developed software to help our team collect all of the raw data, and we are now using that to look much more closely, on a granular level, at key factors on a sector or company level, and that is allowing us to have much more specific conversations with investment teams. I think that is the trajectory of development in this space, and I think the old method of just telling them a score will go away over time.”

Impact investing, which has been a sustainable investment theme for Allianz GI throughout 2023, is expected to continue to play a large role in 2024, with an emphasis on increasing impact convergence to support the scaling of impact AUM. Utilising blended finance strategies in emerging markets and impact investing in developed markets are set to become areas of interest over the next year.

Additionally, client requests and evolving regulation means that ‘transition finance’ is at the front of the team’s mind, with Christensen saying that everything happening with SFDR right now is an attempt to have transition be about “putting money to work”. The UK’s forthcoming SDR regulations were cited as the best current example of sustainability momentum, a view shared by Diane Mak, director of impact measurement and management at AllianzGI.

“The UK’s SDR is probably more aligned to how we think about impact, but obviously, the objectives the two sets of regulations set out toward were different in the first place. The UK’s SDR is more about labelling, and so that fact that they have defined and categorised transition is quite helpful and is quite aligned to how we think about our impact approach across our portfolio.”

Another expectation is that the role of sovereign funds, which for so long have failed to match the ambition and actions of corporates, will come under further scrutiny. Investors are expected to increasingly target this area going forward, with COP28 and the next wave of nationally determined contributions in 2025 highlighting the issues in this area.

And finally, the scale and scope of the cost of climate-related impacts is expected to continue to rise, according to Christensen, with the return of the El Nino weather phenomenon holding the potential to accelerate this. Fiscal policy will need to adjust to this new reality, and prompt tough questions around, for example, the current $7trn in fossil fuel subsidies.