Take Five: New Year, New Targets
The first week of 2024 gave a few glimpses of the challenges and opportunities to come for policymakers, companies and investors.
New year, new targets – Asset owners might reasonably start 2024 looking for signs of policymakers implementing headline commitments from COP28, specifically accelerating their transition away from fossil fuel use in energy systems, tripling renewable energy capacity and doubling energy efficiency improvements. To be fair, climate negotiators barely arrived back from Dubai before official business in many countries wound down at the end of the year. But these new targets demand swift action and one might expect leading jurisdictions, such as Europe, to be quick out of the blocks. The European Commission is committed to propose a new climate target for 2040 no later than six months after COP28, with the process due to kick off next month, and potentially be discussed at a European Council summit in March. But negotiations could be tense, not only because they will take place in the shadow of Europe-wide elections in June, but because member states are falling behind existing targets for 2030, suggesting the bloc will fail to deliver on the 55% emissions cut pledged in the nationally determined contribution submitted prior to COP28. In the week following the Dubai conference, a Commission assessment of draft national energy and climate plans called for countries to “enhance their efforts” on emissions reductions and “set out clearer plans” for adaptation. The plans would deliver a 38.6-39.3% share of renewables in their energy mix versus a 42.5% target, plus energy efficiency improvements of around 5.8%, well below a collective 11.7% target. Figures released this week in Germany reflect both the progress and continued uncertainty. Agora Energiewende calculated that coal dropped from 34% to 25% of German electricity generation last year, with renewables rising above 50% for the first time, but the think tank warned that only 15% of 2023’s emissions reductions could be regarded as permanent.
Tax deduction – Europe has been on the front foot, however, in terms of implementing global tax reforms aimed at reducing corporate use of tax havens and ensuring a fairer distribution of tax revenues to developing countries. Alongside the European Union, Australia, Canada, Japan, Korea, Norway and the UK introduced a 15% global minimum tax rate on Monday, one of the key planks of a wide-ranging package which broadly aims for more tax to be paid in the location where it is generated. The initiative, driven by the Organisation for Economic Co-operation and Development, has been accompanied by a growing focus on tax transparency by investors, which have increasingly filed resolutions to ensure investee firms are paying tax at full and fair levels. The impact is likely to be sweeping, even though some have argued that it will generate less revenue for governments than expected. It may not be the only tax shake-up on the agenda this year, with plans by France and Kenya for a global climate tax to be discussed at next year’s G20 summit hosted by Brazil.
Electric shock – 2024 looks set to be a competitive and challenging one for Tesla, the pioneering electric vehicle manufacturer, led by Elon Musk, who now also splits his time between social media and space transport and communications interests. Chinese rival BYD sold more EVs than Tesla in the last three months of 2023, shifting 526,000 battery-only vehicles over the quarter, outstripping the US firm for the first time. Tesla still sold 1.8 million vehicles overall in 2023, but missed its initial two million sales target and had to discount heavily throughout the year. The firm also saw ongoing challenges to its business practices in Europe, with large investors weighing in on the side of Swedish unions over Tesla’s refusal to recognise collective bargaining rights. PensionDanmark, which divested a large stake in the firm in early December, was joined by PFA, KLP and Folksam in urging the firm to “reconsider your current approach to unions”.
Pay up – Just before 1pm on Thursday, the median FTSE 100 CEO’s earnings for 2024 surpassed the median annual salary for a full-time worker in the UK. According to the High Pay Centre, median FTSE 100 CEO pay, excluding pension, stands at £3.81 million, 109 times the median full-time worker’s pay of £34,963, representing 9.5% and 6% rises respectively over levels reported in March 2023. With inflation subsiding, it remains to be seen how much pressure there will be for pay restraint at AGMs in the 2024 proxy season. Pay was at the forefront of investors’ minds last year, on both sides of the Atlantic, with UK asset owners exploring new approaches and Diligent Market Intelligence reporting that support for advisory ‘say on pay’ proposals at S&P 500 companies increased over the previous year, and four remuneration-related shareholder proposals winning majority support. Perhaps Musk might face labour relations troubles at home as well as abroad.
AI everywhere, all at once – More investor attention to artificial intelligence can be expected in 2024, both due to increased regulatory action, and further evidence of the growing prevalence of the technology in business life. This week, Microsoft – a large shareholder in OpenAI, developer of ChatGPT – said it was introducing a new ‘AI key’ to its keyboards, comparing its significance to the addition of the Windows key 30 years ago. The innovation will allow easy access to Copilot, Microsoft’s AI tool, on Windows 11 PCs, having already integrated AI into Microsoft 365 and its Bing search engine. Investors are already engaging with developers and users of the technology to understand the governance measures in place to ensure responsible development processes are being followed and social harms avoided. These efforts will be supported both by domestic regulation and initiatives such as the UN’s Global Digital Compact, but the learning curve is likely to be steep given AI’s rapid and wide application.
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