Corporate &Investment Banking

Sustainable Finance and Advisory

Top 10 Sustainability Trends for 2024

The complexity of a global energy transformation anddrive for equitable solutions became clear in 2023. As
we look to 2024, companies and governments willcontinue to contend with the real-world challenges
and opportunities of achieving their sustainability
objectives. Projects across the globe have beenchallenged by a confluence of macro factors such as
inflation, interest rates, supply chains, labor dynamics,
and permitting hurdles. However, there may be
glimmers of a reprieve in 2024 from the macro storm,
while largely supportive government policies, broad
investor attention, and maturing technologies are
expected to continue providing healthy tailwinds.
The regulatory environment garnered significant
attention last year as it became increasingly dynamic
and detailed, with the advancement of rules andguidelines likely continuing this year across European
jurisdictions, APAC countries, and across U.S. cities,

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states, and Federal agencies. Emerging areas ofsustainability will continue to grow in sophistication,such as nature-based solutions, water management,
and the understanding of impacts and reliance uponbiodiversity.
Meanwhile, the financial markets will grapple with
the nuances of an emerging carbon market, andsustainable finance will surely evolve into new
structures to meet issuer and investor needs.
At Wells Fargo, we will remain focused on identifying
opportunities to innovate our products and insights
to keep pace with the rapidly evolving sustainability
landscape impacting our clients.
In 2024, we’ll be watching the development of our Top
10 Sustainability Trends below and remain nimble forwhat’s to come. If there is one thing we know for surein sustainability, there is a never a dull moment.

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Summary of Top 10 Sustainability Trends for 2024

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1

Reality of Approaching Targets Begins to Set In Following Preliminary Net Zero Commitments
Many companies use emissions reduction targets to demonstrate their commitment tosustainability, and 2024 will be a pivotal year in understanding progress towards such targets.

2

Sustainable Investing: Market Share to Hold Steady; Climate Comes into Focus for Indexes
Sustainable funds experienced diminished flows throughout 2023 due in part to the challenging
macro environment. Expect volumes to remain at similar levels with greater investor focus on“Climate” and “Transition” related themes instead of “ESG.”

3

Consistent Demand for Sustainable Loans Remains Amid Market Volatility
The sustainable use of proceeds and sustainability-linked loan (SLL) market is expected to
expand, with 2024 being a significant year for integration of KPIs into credit agreements via an
amendment approach (“sleeping” SLLs).

4

Carbon Markets: A Mixed Bag
While COP28 failed to deliver a global carbon market, voluntary markets are coalescing aroundemerging principles to establish quality, credibility, and transparency in carbon credits.

5

Nature: New Vocabulary and Complex Compliance
Nature will continue to garner attention as a developing topic with proposed disclosure
frameworks.

6

Macro Factors Continue to Impact the Energy Transition
The energy transition has faced challenges due to the cost of renewable energy projects, supply
chain disruptions, and labor dynamics, which have been compounded by inflation and risinginterest rates.

7

Regulatory Standards Begin to See Global Synchronization, but Detract from Real Economic
Progress
Global efforts to standardize disparate sustainability disclosures will likely persist in 2024, while
compliance with complex requirements may dampen progress in the real economy.

8

ESG Ratings Subject to Revision Amid Greater Disclosures and Higher Reporting Standards
As disclosure requirements continue to expand, ESG ratings produced by various companies
may face standardization regulations and are expected to evolve.

9

Measurement of the Ever-Elusive Scope 3 Emissions Gets a Kickstart
Whether the anticipated final SEC Climate Disclosure Rule includes Scope 3 reporting
requirements or not, recently-passed California legislation is expected to accelerate the timeline
for reporting Scope 3 emissions.

10

A Monumental Shift is underway in Commercial Real Estate
Commercial Real Estate is beginning to recognize sustainability as a value driver amid highinsurance premiums and enhanced building performance standards.

1. Reality of Approaching Targets Begins to Set In Following
Preliminary Net Zero Commitments
The depth of the challenge to achieve net zero goals
became apparent to many in 2023. Over the past
few years, the world’s largest companies set longerterm net zero targets, yet the credibility of suchtargets has recently been called into question.1 With
asset owners and managers increasingly committing
to sustainability in their investment decisions andsharpening expectations of corporates, we expect
a period of reckoning ahead. Investors, as well
as regulators and civil society organizations, areincreasingly seeking evidence of concrete actions andtransition plans.2
The year ahead will be a pivotal check-in year for many
companies. According to an analysis of the world’s
largest companies, the overall robustness of net zerotargets and alignment with Paris standards remains
low.3 We may see corporate modifications of target
setting across the market in 2024, reflecting not alack of trying, but rather adaptability to the reality ofchanging economic conditions, geo-political factors,
technological feasibility, and consumer behavior.
Costs and access to quality data will remain a barrier
more broadly as corporates work to catch up to
their targets. According to a 2023 IBM survey, themanagement of data represented the top obstacle
for corporate Environmental, Social and Governance(ESG) reporting and performance efforts, withexecutives citing an overload of manual data,
consolidation difficulties and data mapping acrossbrands and geographies as key challenges.4 However,enhanced quantitative reporting and transparency
can also provide executives with critical insights todevelop actionable decarbonization pathways anduncover meaningful opportunities for value creation.
The role of AI in the energy transition will also become
more clear in coming years.

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Firms can undertake best practices aligned with
their respective stakeholders as they pursue their
net zero commitments, such as:
1.

Provide greater specificity of decarbonization
pathways, technologies and adaptations;

2.

Align “low emission” thresholds to feasible,
scientifically-based decarbonization
trajectories;

3.

Track regulations, frameworks, GHG
accounting, calculations and impact
reporting; and4.

Provide transparency to stakeholders about
their progress towards interim targets.

Corporates have the opportunity in 2024 to continue
ingraining sustainability into their core strategies
and leading the market with more thoughtful targets,enhanced disclosures, and measurable impact, but
management teams will be faced with the ongoingtask of reconciling today’s market challenges withimpending commitments.

1. Science Based Targets initiative, “Net-zero ambition 500: companies across the globe committed to leading the science-based net-zero transformation”
2. Climate Action 100, “Key Findings: Net Zero Company Benchmark”
3. Net Zero Tracker “Net Zero Targets among world’s largest companies double but credibility gaps undermine progress”
4. ESG Today, “Over 70% of Businesses View ESG as a Revenue Enabler: IBM Study”

2. Sustainable Investing: Market Share to Hold Steady; Climate Comes
into Focus for Indexes
Global sustainable funds were a mixed bag in 2023.5
Fourth quarter notwithstanding, the macro backdrop
was challenging for the market as a whole, between
inflation, a series of interest rate hikes, and uncertainty
around a recession. Sustainable funds were notimmune, experiencing more muted flows throughout
the year. The stark geographic divide persisted,with Europe showing resilience with continued net
inflows in sustainable funds, while the U.S. witnessed

outflows. Year-to-date, sustainable assets acrossEquity and Fixed Income totaled just under $2.2Tn, up
a modest 5.8% from the end of 2022. As a percentage
of total assets, market share slipped to 6.2% fromthe record high of 6.7% achieved in Q2’23. For 2024,
we expect more of the same – a muted landscape,Europe continuing to dominate, and a market sharefor Equity and Fixed Income sustainable Assets Under
Management (AUM) in the 6-7% range.

Figure 1. Sustainable Equity and Fixed Income AUM ($ billions)
EquityFixed Income% of Market

5.0%
1,733

4Q20

5.3%
1,915

1Q21

5.5%
2,149

2Q21

5.8%
2,241

6.0%

6.0%

2,444

2,300

6.0%

1,974

3Q21

4Q21

1Q22

2Q22

6.0%

1,844

3Q22

6.3%

2,068

4Q22

6.4%

2,191

1Q23

6.7%

6.5%

6.2%

2,344

2,278

2,189

2Q23

3Q23

YTD
2023

Source: Wells Fargo Securities, LLC.

Sustainable investing funds have evolved fromexclusionary/negative screens to thematic, and now
to a greater focus on net zero alignment. AUM insustainability-themed equity ETFs grew 18% in 2023,
and the proportion tied to MSCI ESG ratings held
steady at ~55%.6 While ESG ratings will likely remain
a common screen, we also see a growing shift byinvestors to seek quantifiable environmental andsocial impact, sound corporate risk management, andpractical, strategically-aligned transition pathways.
On the debt side, investors remain undersuppliedin labeled sustainable finance bonds while asset

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owner demand persists. This dynamic is supporting
modest primary and secondary market benefits forwell-structured transactions. These benefits may
include incremental investor attention and demand
resulting in new issue execution momentum, which
can de-risk the capital raising process and potentiallylead to pricing or secondary trading benefits. Frothy
expectations and exuberant pronouncements
regarding the potential growth and impact ofsustainable finance have given way to a more ‘duediligence focused’ approach from investors, regulators,
and the public at large – each of whom continues toview sustainability as a priority.

5. The global sustainable fund universe includes open-end funds and ETFs that, by prospectus or other regulatory filings, claim to focus on sustainability, impact, or ESG factors.

Figure 2: 2023 Sustainable Finance Market by the Numbers$1.24T

63%

3.1%

26.7%

in global labeled sustainablefinance bond and loan
supply (-21% vs. 2022)of global labeledsustainable finance bonds
and loans in Green format(up from 58% in 2022)of total USD IG Corporatebond supply in labeledsustainable finance format(~$38 billion in 2023, downfrom ~6% in 2022)of total EUR IG Corporatebond supply in labeledsustainable finance format(~€141 billion in 2023, downfrom 29% in 2022)

+7.9%

+2.5%

2.9bps

2.4bpsUSD ESG bond fund flows
relative to starting AUM outperforming compared tobroader fixed income flows(+4.0%)EUR ESG bond fund flows
relative to AUM performing in line withbroader fixed income flows(+2.8%)

median "greenium"
observed in November
2023 for USD IG Corp.
bond secondary trading

median "greenium"
observed in November
2023 for EUR IG Corp.
bond secondary trading

Source: Bloomberg, EPFR, and Wells Fargo Securities, LLC.

Investors are more clearly defining their approaches
and utilizing more specific themes such as “Climate”
or “Transition” rather than “ESG.” Investors are also
incorporating labeled sustainable finance bonds in
integrated or weighted strategies rather than pure“green bond” funds. Such changes come in response tolack of defined approaches (e.g., what is a “sustainable
investment”) or to minimize tracking error risk given

sector concentrations for both highly-rated ESG
names and labeled issuance.
In 2024, we expect issuance to remain at similar orslightly higher levels as corporate sustainability teams
mature in sophistication and asset owners (particularly
European firms investing across currencies) continue
to send the market a demand signal for labeled bonds.

3. Consistent Demand for Sustainable Loans Remains Amid
Market Volatility
2023 saw ~$400 billion in global sustainable loan
volumes, accounting for 34% of the sustainablefinance market.7 Sustainability-linked loan (SLL)
concepts emerged out of the large high-grade
corporate market in the early innings of thesustainable finance market but reached a pluralityof mid-sized companies in 2023. Some of theseenterprises which exhibit nascent sustainability
strategies pursued novel concepts focused onsustainable facility utilization. The leveraged loan
market also saw sustainable format activity in 2023,
with pricing adjustments on SLLs modestly expanded

5

6. Bloomberg. Data as of 12/15/2023.
7. Bloomberg. Data as of 12/15/2023.
8. Wells Fargo Securities, LLC

in the pro rata leveraged market as well as in the lower
grade asset-based lending market.8
With an expected refinancing wave in 2024, thesustainable loan market will primarily be driven by
integration of SLL concepts at the time of refinanceor amendment, especially the “waking up” of sleeping
SLLs, loans that contain ESG language but do not
yet integrate established KPIs, which have deeply
permeated the market in the past 18 months. A
second area of growth is expected to exist in nonpublic transactions relating to transition finance inthe energy sector as well as SLL activity in the fund

finance market. Lastly, as lenders seek to execute on
their financed emissions strategies and seek to comply
with relevant regulatory disclosure requirements suchas the green asset ratio (as it applies for European
lenders), the integration of sustainable formats will
likely evolve from opportunistic origination to a key
lever to satisfy lender targets.
Catalyzed by recent governmental climate andinfrastructure investment regimes, the global
syndicated loan market will see continued demand
for asset level financing, in structures with andwithout sponsor recourse, underpinning projects

which support ventures ranging from establishedrenewables such as wind and solar to nascenttechnologies such as new fuels, plastics recycling, andcarbon capture. In the U.S., additional Departmentof Energy Loan Programs Office loans are expected
to be committed or disbursed in 2024 related toearly-stage, yet-to-be commercialized technologies,
carving a path to ultimate scalability. Novel blended
finance structures are also expected to be used more
frequently, particularly greater use of government
project loan guarantees as well as the potential use
of municipal conduits for certain assets in the waste,water, and carbon capture space.

Figure 3: Wells Fargo Perspective on Syndicated Sustainable Loan Market
2023 Trends

2024 Considerations

Market Headwinds

Market Tailwinds• Increased use ofcompany specificmetrics and softdemand for ESG
ratings use• Flattish volumes• Macroeconomic
environment• Loan refinancing cycle• Heightened lender
engagement anddiligence• Emergence of market
innovations (e.g.,
sublimits for green
spending and greenbaskets in syndicatedcommodity finance)• Increased use ofproceeds activity• Geopolitical tensions• Incorporation of
biodiversity metrics• Climate change apathy• Expansion in fundfinance• Green-hushing• Increased cross-borderappetite from EMEA
and APAC lenders forgreen assets• Societal polarization• Shifts into nondisclosed markets• Materiality of pricing
adjustments amid
rising interest rateenvironment• Execution of lenderfinanced emissions andborrower sustainability
goals• Continued corporate
investment insustainability
improvements• Execution of sleeping
SLLs• Regulatory
advancements

Source: Wells Fargo Securities, LLC.

4. Carbon Markets: A Mixed Bag
After high hopes for a global UN-sanctioned carbon
market, a deal failed to materialize at COP28 overdifferences largely between the U.S. and the EU bloc.
Disagreements centered around the level and role ofregulations and how to ensure the integrity, quality andtransparency of carbon credits.
Despite the lack of consensus at COP28, significant
collaboration between the Voluntary Carbon Markets
Integrity Initiative (VCMI), the Integrity Council for
the Voluntary Carbon Market (ICVCM) and otherorganizations resulted in the development of a6

landmark market integrity framework, establishingvoluntary guardrails around quality, transparency andaccountability across value chains.9 The guidance
aims to provide rigor around integrity claims in the
carbon markets. This framework comes against the
backdrop of increased disclosure requirements and theemergence of regulation for the industry.
In the US, the Commodity Futures Trading
Commission (CFTC) approved a proposed guidance
and request for public comment regarding thevoluntary carbon markets. The CFTC stated in their

9. McKinsey “COP28: Climate finance” https://www.mckinsey.com/capabilities/sustainability/our-insights/sustainability-blog/cop28-climate-financeDecember press release that their goal “has been to
help shape standards in support of integrity, which
will lead to transparency, liquidity and ultimately pricediscovery.”10 The CFTC’s interest in the carbon market
has raised awareness across current and prospective
market participants and may provide a needed boost
for the listing and contract design process.
Many financial institutions, national governments
and supranational agencies have continued to invest
in the growing carbon markets, from payment firms
empowering customers to reduce their carbon
footprint through the purchase of credits11 to theWorld Bank leading a coalition of 15 countries toensure the integrity and impact of carbon credits
generated within these regions.12 Some corporates
are choosing to develop their own projects rather

than rely on external providers13 or make advanced
purchase commitments to support the developmentof early-stage carbon projects.14
As the market aims in 2024 to coalesce around quality
and integrity standards, we expect to see companies,
marketplaces and international organizations continue
to develop novel approaches including blockchain andtokenization, use of certifications (such as “silver, gold,
platinum”), and insurance. Cross-border cooperation
will be critical to implementing a functional carbon
market architecture with greater connectivity
between the compliance and voluntary carbon
markets to enhance liquidity. Oversight, transparency
and monitoring will likely be pillars for the carbon
markets to rebuild trust and establish market
integrity.

5. Nature: New Vocabulary and Complex Compliance
Nature, biodiversity, and water will occupy the minds ofmost corporate sustainability leaders in 2024 as they
consider incorporating nature risks and dependencies
into corporate disclosures.
Under the Kunming-Montreal Global Biodiversity
Framework, 196 nations committed to halting andreversing biodiversity loss by 2030, including theprotection of 30% of the world’s terrestrial, inland
water, coastal and marine areas and encouraging,enabling, and ensuring corporate nature-related risk
disclosures in signatory states. One of such disclosure
frameworks is the Taskforce for Nature-related
Disclosures (TNFD), which launched its final framework
earlier this year. Several large companies have sincecommunicated an intent to disclose a TNFD-aligned
report. Based on client feedback, the first corporate
TNFD reports may be seen as early as 2025, based on
2024 data. Some first movers have already launchednature positivity commitments, nature strategies and7

investment plans, and are exploring the Science-Based
Targets Network (SBTN)’s guidance for nature.
Practitioners will closely be watching (and in somecases preparing to comply with) a rapidly advancing
regulatory regime in the European Union. Unlike theproposed SEC rule focused on climate disclosures, the
EU Corporate Sustainability Reporting Directive as wellas the European Sustainability Reporting Standards
do not stop at GHG emissions-related issues, but also
include disclosure requirements“It is clear that we cannot solve [the global
biodiversity and climate crises] in isolation –we either solve both or we solve neither.”- Sveinung Rotevatn,
Norway’s Climate and Environment Minister

10. CFTC Issues Proposed Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts | CFTC
11. Deloitte “Consumers will increasingly use their wallets to help fight climate change with carbon-offset purchases” https://www2.deloitte.com/us/en/insights/industry/financialservices/financial-services-industry-predictions/2023/financial-firms-carbon-offset-market.html
12. World Bank “World Bank Carbon Credits to Boost International Carbon Markets” https://www.worldbank.org/en/news/press-release/2023/12/01/world-bank-carbon-credits-toboost-international-carbon-markets
13. Reuters “Carbon credit market confidence ebbs as big names retreat” https://www.reuters.com/sustainability/carbon-credit-market-confidence-ebbs-big-namesretreat-2023-09-01/
14. Sylvera “The State of Carbon Credits 2023” https://www.sylvera.com/resources/the-state-of-carbon-credits-reportrelated to biodiversity, among others. Notably, theEU approach would require in-scope companies toprovide their strategy to achieve no net biodiversity
loss by 2030 and full recovery by 2050, alongsideother metrics.15 Foreign companies operating in the EU
may be in scope under the regulation in certain cases.
Further, the EU recently adopted a landmark, highlynegotiated biodiversity law requiring countries in the
bloc to restore 20% of land and sea habitats by 2030.16
The EU has also implemented the EU Deforestationfree Regulation (EUDR) requiring ‘deforestationfree’ verification of enterprises trading in cattle,
cocoa, coffee, palm oil, rubber, soy, wood, and theirderivatives. Such verification is currently challenged bydata availability and quality in the supply chain.17
The domain of proposed nature disclosure andstrategies generally comes down to a few tenets:18
1.

Natural assets are rapidly degrading globally due
in part to unsustainable extraction practices;

2.

Natural assets are critical to support theeconomy with an estimated $44Tn in economic
value generation being modestly or highly
dependent on ecosystem services;3.

Many companies depend on natural inputs
and may contribute to their deterioration –understanding these dynamics should informrisk management and business resiliency
practices;

4.

Natural capital is undervalued and many now see
it as a significant investment opportunity; and5.

Nature plays a critical role in emissions andtemperature control and can be a key lever inaddressing the climate crisis through enhanced
carbon sequestration from nature-based
solutions, such as reforestation, agroforestry,
and urban ecosystems (like green roofs).

In 2024, Wells Fargo will seek to help companies get
situated in the emerging nature and biodiversity
discussion and understand how it impacts businessstrategy, risk management and long-term capitalneeds. Nature is an issue that resonates broadly. It canstimulate corporate and public engagement, anchor
childhood education and help drive understanding ofclimate change by bringing it down to earth, literally.

6. Macro Factors Continue to Impact the Energy Transition

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Efforts to advance energy transition projects andthe electrification of value chains globally have been
impacted by a macro “perfect storm,” but an easing offactors could be on the horizon in 2024.

and energy projects also take years to materialize, so
those that launched prior to COVID were significantly
impacted by macro conditions which had dramatically
impacted profitability of projects.

As inflation and interest rates rose over the last
two years, coupled with supply chain delays, project
economics were significantly impaired, subjecting
projects to cost overruns and cancellations. Renewableenergy, in particular, was more exposed to rising costs
than traditional energy projects, largely a result of
the high upfront investment cost for wind and solar
projects, compared to the traditional cost structureof coal- or gas-fired power plant (mostly fuel costs),
which are spread over time.19 Large infrastructure

Supply chains have compounded challenges, as theindustry continues to manage equipment shortages
required for green energy projects. Companies havefound themselves re-evaluating the actionability ofstrategies and taking stock of potential impacts on
credit quality. The need to strengthen and shorten
supply chains has gained the attention of U.S. private
and public sectors alike, pointing to the opportunity
for a clean energy–driven manufacturing renaissance.20
That being said, domestic manufacturing has been

15. European Financial Reporting Advisory Group, "Draft European Sustainability Reporting Standards"
16. European Parliament, “EU Nature restoration law: MEPs strike deal to restore 20% of EU’s land and sea”
17. Deloitte, "Food Regulation Highlight: 5 Key takeaways on the new EU Deforestation Regulation"
18. World Economic Forum, “The Future of Nature and Business”; https://www3.weforum.org/docs/WEF_The_Future_Of_Nature_And_Business_2020.pdf
19. The New York Times, “Renewable Energy Could Be a Casualty in the War on Inflation. Here’s Why.”
20. Deloitte, “2024 renewable energy industry outlook”

stimulated by the Inflation Reduction Act and otherfederal initiatives, further driven by startups andcorporate investment alike, presenting a substantial
opportunity for economic growth.
Finally, labor dynamics are playing an importantrole in the advancement of clean technology, where
workers are asserting their role in the multi-faceted
transformation of industry, as seen in the 2023 United
Auto Worker’s strike. Reskilling programs, community
activism, and engagement from labor organization, in
coordination with various government programs, areexpected to play a pivotal role for years to come.
The compounding factors of inflation, interest
rates, supply chains, labor dynamics and lengthy
lead times for many clean energy projects havecreated a complex landscape to navigate. However,with inflation cooling, and rate decreases signaled
by the Federal Reserve for 2024,21 we could see theeasing of adverse macro factors on energy transition
projects. The Inflation Reduction Act, Department ofEnergy programs and other U.S. federal initiatives willcontinue to be deployed and spur the scaling of criticaltechnologies. Furthermore, new announcements from
COP28 around the renewable energy buildout andthe transition from oil, gas, and coal, will likely createa renewed focus on finding solutions in the public andprivate sectors to expand economically viable energy
transition projects. This will lead to greater financing
needs and an opportunity to expand sustainablefinance across asset classes, a role Wells Fargo isparticularly well suited to play.

7. Regulatory Standards Begin to See Global Synchronization, but
Detract from Real Economic Progress
Sustainability disclosure requirements have expanded
dramatically over the past decade, providing an
increasingly challenging landscape to navigate
across jurisdictions. Over 1,255 sustainability-based
policy interventions have been introduced globally
since 2011.22 In the context of regulatory complexity,
many corporates are spending time reconcilinga substantial number of diverse regulations suchas the EU’s Corporate Sustainability Reporting
Directive (CSRD), EU Taxonomy and the upcoming
EU Corporate Sustainability Due Diligence Directive(CSDDD, or CS3D). The International Sustainability
Standards Board (ISSB) announced in June 2023
inaugural standards that seek to create a common
language for disclosing the effects of climate-relatedrisks and opportunities on a company’s prospects.23
Furthermore, the ISSB also incorporated TCFD
recommendations into its reporting standards tofurther drive simplification.24 Increased adoptionof ISSB could potentially harmonize and reduce thenumber of disclosures corporates must undertake.

9

ISSB is climate-centric, focused on general disclosuresand climate change. In the EU, regulations suchas CSRD and CSDDD have a focus broader thanclimate, seeking to encompass a more full spectrumof ESG. This begs the question of how ISSB willsolve for the harmonization across regions topromote comparability at the global level. Further
developments may come in 2024 from the European
Union, where climate rules and their implementation
may be simplified.
In the U.S., there has been divergent approaches toclimate-related disclosures. Some states that have
Democratic legislative majorities, such as California
and New York, have taken action to enhance
climate-related disclosure and/or drive clean energy
investments.25 At the federal level, there have beensome proposals on GHG emissions and climate-related
financial risks disclosures from the Department of
Defense, General Services Administration, NASA andthe SEC.26

21. The New York Times, “Fed Leaves Interest Rates Unchanged at Meeting and Signals 3 Cuts Next Year”
22. ESG Book, “Global ESG regulation increases by 155% over the past decade.”
23. IFRS, “ISSB issues inaugural global sustainability disclosure standards”
24. IFRS, “ISSB and TCFD”
25. New York State, “New York State Climate Action Council Finalizes Scoping Plan to Advance Nation-leading Climate Law”, California State, “California Climate Commitment”
26. Federal Register, “Federal Acquisition Regulation: Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk”; U.S. Securities and Exchange Commission, “SEC
Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors”

The broad efforts to standardize disclosures – while
important for transparency purposes – can havethe unintended consequence of distracting fromreal-world economic progress and environmental/social impact. Corporates are juggling rules andrequirements that differ across jurisdictions, requiringa considerable deployment of expert resources forcompliance. The complex regulatory expectations
may be subduing sustainability ambition and may
ultimately constrain actual progress in the real
economy. We expect that regulatory consolidationand streamlining will continue in 2024, hopefully withan eye for reducing complexity and focusing on real
economy progress.

8. ESG Ratings Subject to Revision Amid Greater Disclosures andHigher Reporting Standards
ESG ratings came to prominence as a tool to assess
a company’s management and mitigation of nonfinancial issues which, if not managed, can adversely
impact corporate performance. Product safety, climatechange adaptation, pollution prevention practices,energy efficiency, employee health, diversity, equity,& inclusion, and human rights have, in various ways,
impacted corporate bottom lines. Investors havesought to understand these risks in their portfolios andutilized ESG ratings produced by various providers in
the market as part of their analysis.
As understanding of ESG-related risks continues todevelop, the ESG ratings landscape will necessarily
evolve. In the wake of more stringent reporting
frameworks and regulations globally, the level ofcorporate disclosure has expanded. Along withincreased investor scrutiny, corporate issuers are
responding with more data-driven approaches todisclosure and risk management. The enhanced
disclosure will likely lead to an ongoing refinementof ESG ratings approaches and is expected to lead togreater differentiation among corporates.
The topic of ESG ratings is already a complex one,with corporate issuers and investors contending
with disparate methodologies across raters. One
study found that the correlation between the leading
providers’ scoring of the same company can be as low
as 0.54, compared to a correlation of 0.99 between
traditional credit ratings of the same company.27 Calls
for increased standardization and transparency have
led to the emergence of proposed ratings regulations.
Most recently, the EU published a proposal for ESG
ratings regulation which aims to enhance the “integrity,

10

27. MIT Sloan and University of Zurich, “Aggregate Confusion: The Divergence of ESG Ratings”
28. KPMG, “ESG ratings — the EU’s journey to regulation begins”
29 S&P Global, “Consolidation among ESG data providers continues amid COVID-19 pandemic”
30 London Stock Exchange Group, “London Stock Exchange Group acquires Beyond Ratings”

transparency, governance and independence of ESG
ratings provided in the EU” by requiring providers
to maintain independence. “Independence” isdefined as providers not being able to offer otherservices like credit ratings, benchmarks, consulting,audit, investment activities, insurance, or banking.
Agreement on the final regulation is expected in mid2024 and it would take effect six months later.28
As regulatory expectations become more clear anddisclosure data quality improves, we foresee further
consolidation within the ratings and broader climatetech space. Several large financial companies havelooked to expand their ESG data offerings throughM&A in recent years. Institutional Shareholder
Services has purchased four separate ESG data andresearch providers since 2015. Moody's Corp. struck
three separate ESG deals in 2019 alone, including
acquisitions of Vigeo Eiris, Four Twenty Seven Inc. anda minority stake in SynTao Green Finance.29 And MSCI,S&P Global, DBRS Morningstar and the London Stock
Exchange Group have each announced several ESGrelated purchases of their own.30 Ultimately, the ESG
ratings landscape will continue to evolve as investors
incorporate the growing body of public disclosure
into their holistic investment analysis. S&P Global
Ratings demonstrated this theme by announcing
in August that it would no longer publish new ESG
credit indicators in its reports or update outstanding
ESG credit indicators, but rather incorporate material
risks into its core credit analysis. Whether other credit
agencies will also evolve remains to be seen, but 2024
will likely continue to show a normalization of ESGrelated disclosures into financial evaluations across awide range of use cases.

9. Measurement of the Ever-Elusive Scope 3 Emissions Gets a KickstartWith the passing of legislation in California in early
October mandating climate-related reporting,the timeline for Scope 3 emissions reporting has
immediately accelerated. Many were quietly expecting
disclosure requirements in the U.S. to focus on
Scopes 1 and 2 emissions for the time being, pending
clarity on Scope 3 emissions. Even the SEC has beenstalled on its proposed Climate-Related Disclosure
Rule, with particular discussion around Scope 3
disclosure. The California disclosure rules are quite
ambitious, with similarities to the EU regulations,
thereby tacitly advancing in-scope companies'
reporting obligations as we await finalization fromthe SEC. The clock is ticking—starting in 2027, U.S.
companies with significant revenue that are, “doing
business” in California, are expected to disclose

their Scope 3 GHG emissions data as part of the
Climate Corporate Data Accountability Act (SB 253);
reporting for Scopes 1 and 2 will be required a year
earlier, in 2026. The impact is expected to be farreaching, as the law applies to both public and privatecompanies with total annual revenues in excess of $1
billion that conduct business in California. The sister
law, SB 261, requires “covered entities” with annual
revenues >$500 million to publicly disclose theirclimate-related financial risks in accordance with
TCFD recommendations, and any measures they haveadopted to mitigate and adapt to those risks. Those
reports must include climate-related vulnerabilities
concerning their employees, supply chains, consumer
demand, and shareholder value, among others.31

Figure 4. Select Disclosure Developments and Associated Timelines
GHG
Emissions
Reporting

SB 253

SEC

CSRD

ISSB

First
ReportingJan. 2026

TBD

Varies based on entity
structure, earliest
reporting is Jan. 2025

Effective Jan.
2024, subject
to jurisdictional
mandateCompany
Scope

Public and privatecompanies that do
business in CA with a
total annual revenue
over $1 billion

Public companies

Public and privatecompanies

Subject tojurisdictional
regulatory adoption
by countries

Scope 1 & 2

Required

Required

Required if material

Required if material

Scope 3Required beginning in
2027

Required if material in
Required if material
initial proposal, pending
final rule

Required if material

Assurance

Limited assurance for
Scope 1 & 2, moving toreasonable assurance
in 2030. Limited
assurance for Scope 3
beginning in 2030.

For certain registrants,
limited assurance on
Scope 1 & 2, moving toreasonable assurance
after two years. No
assurance for Scope 3.

Subject tojurisdictional
regulation

Limited assuranceon all sustainability
information fromfirst year of reporting.
Reasonable assurance
likely required further
down the road.

Source: California Government, U.S. Securities and Exchange Commission, International Financial Reporting Standards, and Deloitte.

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31. Morgan Lewis, “California Requires Companies to Disclose Climate Change Risks, GHG Emissions”

The California laws come as good news forstakeholders seeking more detail and metrics fromcompanies; this past proxy season did see an uptick
in shareholder proposals on corporate value chains.
And by leapfrogging the SEC’s Climate-Related
Disclosure Rule, which has been delayed numerous
times (expectations now set for April 2024), theykickstart any pending Scope 3 disclosure processes.
Certain companies have been proactively supporting
the decarbonization of their supply chain throughformal programs and outreach efforts. In Europe,demonstrating a similar emphasis, the CSRD’s
foundational concept of “double materiality” centersaround understanding risks and impacts acrosscorporate value chains and key stakeholders.
Scope 3 emissions and other value chain assessments
will continue to be a challenge, but with increased
focus by regulators, consumers, and investors on
quantifiable impact, measurement and tracking
methodologies are bound to improve, as are
the business strategies that underpin them. By
incorporating sustainability across the value chain,companies can get ahead of impending expectations
and maybe even unlock tangible long-term value for
their franchise.

10. A Monumental Shift is underway in Commercial Real Estate
The real estate industry is poised for a monumental
shift in thinking, building, and operating. Real estate
operators need to consider the emerging risks
and opportunities of a fully-integrated and wellformulated sustainability strategy.

were over $50 billion of insurance losses from severe
convective storms in the United States, representing
approximately 60% of global losses. If severe storms
continue to drive insurance losses, reduced coverageavailability and higher premiums could meaningfully
impact net operating income (NOI) and property
valuations. In 2024, real estate operators should
expect that stakeholders will require a more thoroughassessment of physical climate exposure with an eye
towards risk mitigation.

Years of insurable losses due to storm frequency andseverity are starting to hit landlords in the pocketbook
with double digit premium increases across allproperty types in 2023. Through October 2023, there

Figure 5. Severe Weather Events since 1980 (Historical and Projected)
Projected storm
count (2024-2029)*

220
170

212.5

131

120
57

70

67

33

20
-30

1980-1989
Droughts

Flooding

1990-1999
Freeze2000-2009
Severe Storm* Linear projection based on average annual storm count from 2020 - 2023
Source: FHS Risk and Wells Fargo Securities, LLC.

12

2010-2019

Tropical Cyclone

Wildfire

2020-2023
Winter Storm

Building performance standards (“BPS”) are also
getting real. January 1, 2024 will mark the official
commencement of New York City’s local law 97, which
imposes annual GHG emissions caps dependingon the building’s specific use, with the caps getting
stricter over time to achieve an 80% reduction in
GHG emissions over a 2005 baseline. Residential andcommercial buildings that fail to comply will be subject
to fines and penalties. According to Bloomberg,
projected fine exposure in 2024 is forecasted tobe modest with only 11% of building anticipatedto be out of compliance; however, fine exposure is
projected to increase substantially beginning in the2030 compliance period with up to $900 millionof annual fines (assuming no further intervention
by 2030). New York City represents only one of 45
members of the National Building PerformanceStandards Coalition, a nationwide group of states andlocal governments that have committed to inclusively
design and implement building performance policies
and programs in their jurisdictions with the goal of
adoption by Earth Day 2024 (for the first cohort).31
This is in many ways the U.S. playing “catch up” with
its European brethren across the pond. There
continues to be a push for policy augmentation in
the EU with lawmakers in the European Parliamentand Council recently announcing they have reached aprovisional agreement to strengthen the EU’s Energy
Performance of Buildings Directive (EPBD), aimed
at reducing energy use and emissions in buildings.
The revisions include a required phase out of fossil
fuel boilers by 2040, as well as a target for all newbuildings to be zero emission by 2030. With theproliferation of legislation across the globe aimed
at decarbonizing real estate, there is urgency forowners, investors, and lenders to evaluate net zerotransition plans.

13

32. National BPS Coalition, "About the National BPS AddeCoalition"

The sustainability discussion in commercial real estateis also shifting from one focused primarily on expensesavings to now one focused on being a revenue driver.
There are three primary means for achieving revenue
growth tied to sustainability:
1.

The Green Premium. Net zero aligned occupiersmust find sustainable real estate and areincreasingly willing to pay a premium.

2.

Solar for the win. In states with high energy
costs, there are potentially several ways forlandlords to monetize solar options such as arooftop lease to a solar company. These leases
can provide additional revenue for 10-25 years
and building owners may also be able to front
load benefits due to the many tax credits andincentives available for renewable projects.

3.

Electric Vehicle (EV) charging stations represent
another avenue for landlords to achieve newrevenue sources. EV charging stations turna single parking space into a fuel stationthat can generate revenue 24-hours per day.
Landlords can charge per kilowatt hour, or as anadditional monthly fee included in a residential
or commercial lease agreement. The icing on the
cake is that governments at all levels and even
local utility companies are encouraging adoption
with tax credits, incentives, grants,
and rebates.

In 2024, the real estate industry will undoubtedly
hope to find stabilization in the capital markets andcontinue evolving based on external forces. Although
the chapter on new ‘norms’ is still being drafted, it issafe to assume that sustainability will prominently be
on display.

Contacts

Geneviève Piché
Head of Sustainable Finance & Advisory
genevieve.piche@wellsfargo.com

Readie Callahan
Managing Director
readie.callahan@wellsfargo.com

Sabina Chatterjee
Managing Director
sabina.chatterjee@wellsfargo.com

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