AI Privacy, ESG Alts and Other Investing Themes for 2024

Artificial intelligence’s threat to privacy could intensify. Alternative investments may work well for devotees of environmental, social and governance precepts. Demand for minerals needed for renewable energy is driving mergers in the mining field.

These are among the insights in ISS ESG’s compilation of 10 key trends for 2024 concerning sustainable investing. ISS ESG is a sustainable investment unit underneath parent ISS Stoxx, the owner of CIO magazine:

AI and Privacy. Noting the lack of regulation for AI, except in China, the report predicted that liabilities will grow for AI-using companies in the future, adding that the “uncompensated loss of privacy may be the greatest impact of AI.” An advertising business, for instance, could end up paying a sizable chunk of revenue for violations, the paper warned.

Copyright infringement is another vulnerability AI could inflict, the report stated. Software giant Microsoft Corp. is facing a class action lawsuit, filed in September, accusing it of using “stolen private information,” as it aided OpenAI’s chatbot. ChatGPT became the fastest-growing consumer application in history earlier this year, reaching 100 million active users in January only two months after it was launched. Microsoft has invested billions in the company. The New York Times and several book authors, including George R.R. Martin (“A Game of Thrones”) and Michael Connelly (“The Lincoln Lawyer”) have filed legal actions accusing OpenAI of filching their work.

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Alts and ESG. Some investors are putting money into such alternatives as retrofitted real estate, which have great possible futures. The key to success is deftly analyzing the often-illiquid and sometimes-opaque financial workings of alts. Climate risk can have a bearing on alternatives, and investors need to figure out its impact on different categories of investments beyond traditional stocks and bonds.

Alts investing, the report stated, provides investors “with an idiosyncratic opportunity to generate alpha and to actively consider the net zero transition,” referring to reducing carbon emissions to offset what the issuer releases.

The report noted that a lot of data are available to assess ESG’s risks and opportunities. ISS ESG, for instance, has ratings for ESG quality and financial soundness. It’s possible to do a “climate scenario analysis” to connect climate risks and balance sheets, the study averred.

Renewable Energy Minerals. Solar and wind installations, mega-storage batteries and increased electrification of buildings’ systems, to replace those using fossil fuels, demand such minerals as lithium (for the batteries) and copper (for transmission lines and electrical components). An electrical vehicle needs “six times the mineral input of an internal-combustion engine.”

This all has prompted merger and acquisition deals in the mineral space. The largest transaction that the report listed for last year was Anglo-Swiss commodities firm Glencore PLC’s $775 million purchase of minority stakes in two Brazilian mining outfits, Alumina do Norte do Brasil (aluminum) and Mineracao Rio do Norte (bauxite).

The report delved into such other challenge-posing trends as:

The European Union has new regulations banning sales of commodities and products associated with razing and burning of forests.
Corporate reporting on environmental impacts on supply chains is poor. But an international organization, the Taskforce on Nature-related Financial Disclosures, has come up with recommendations for better reporting. The U.S. Securities and Exchange Commission has proposed highly criticized rule that would require public companies to disclose the greenhouse gas emissions generated in their supply chains.
The increase in digital health technology enhances the risk of cybersecurity threats and privacy violations.
Institutions demand better climate scenario analysis tools, amid a global regulatory push for improved climate-related disclosures.
The EU is looking at prohibiting so-called “forever chemicals,” found in cooking pots and pans, paint, food packaging and cleaning products. Use of these PFAS chemicals, short for perfluoroalky and polyfluoroalkyl, may lead to expensive and damaging lawsuits against manufacturers.
Investors are calling for better linking of ESG performance and financial returns.
Sustainability reporting remains fragmented, among different standards.”

Bonnie Saynay, global head of ESG investor research at ISS ESG, said in a statement: “Regulation, technology, natural capital, and climate change are among the major forces likely to shape the ESG investment landscape in 2024.”