The integration of environmental, social and governance (ESG) factors is here to stay, as shown by the growth of sustainable investment regulations from below 50 in 2015 to more than 500 today (source: Preqin). Investors that are signatories to the Principles for Responsible Investment (PRI) combined now manage over USD 100 trillion in assets.
The efforts of the PRI and other industry groups have been instrumental in putting to bed the fiduciary duty debate. The relevance of sustainability-related investing as a secular growth driver should be no longer in question and is integral to navigating this environment, with opportunities for active managers.
When disruption reigns, we need effective mediating institutions more than ever to continue ESG integration and bring about regulation conducive to investing the trillions needed to meet Sustainable Development Goals (SDGs) worldwide.[1]
We believe investors must join the conversation in times of crisis response and beyond, to advocate for regulation that is constructive and consistent on a global scale.
Short-term reactions set the long-term agenda
The war in Ukraine and its consequences are a case study in interconnected challenges— from climate change to energy security and inflation. In 2022, energy supply shocks rocked global commodity prices and inflation, forcing Europe to re-think its energy policies. As a result, European countries chose to diversify energy supplies by including more gas and coal as a stopgap, a move that could extend reliance on fossil fuels.
For the European Union to reach its climate targets, this temporary measure must be just that. Better still would be to value low-carbon projects short-term to increase future resilience. Not only is clean energy infrastructure faster to develop than thermal or nuclear, it reinforces security of supply while being deflationary. This logic can be seen at work in the US Inflation Reduction Act, which includes nearly USD 400 billion in incentives for clean energy programmes.
“The wide scope of the EUR 2 trillion NextGenerationEU recovery plan speaks to an understanding at the highest levels of decision-making that we need not only a greener, but also more digital and more resilient Europe”
Maya Bhandari,Global Head of Multi-Asset
Sustainable investment must look long-term, but act ‘right now’. 2022 showed this approach can be difficult to translate into policy for regulators.
Regulation as a virtuous circle
Carbon pricing schemes, which are meant to disincentivise greenhouse gas (GHG) emissions, illustrate this issue. As European Union Emission Trading System prices surged in 2022, the European Commission responded by providing financial aid to participants in the scheme and including European Union Allowances in the financing of the RePowerEU plan.
While understandable under current political constraints, such choices reflect the idea that, when crisis strikes, short-term relief warrants a trade-off against long-term sustainability goals. This needs not be the case.
Another approach is to embrace, not avoid, the rising carbon prices and their positive externalities.
European regulation could go further by taxing cross-border emissions, which would level the playing field for companies subject to EU-ETS rules while pushing exporting markets to develop their own carbon tax. Meanwhile, EU companies that decarbonise first will gain a competitive edge by selling increasingly valuable allowances. Citizens should be encouraged to join these efforts, for instance through incentives to electrify, which would nicely synergise with the initiatives above.
Overall, climate change mitigation requires structural changes and ambitious policies reflecting the fact that we live in an interconnected world. As such, it cannot be separated from geopolitics, food security, biodiversity loss or even public health: 58% of infectious diseases confronted by humanity worldwide have been at some point aggravated by climatic hazards, according to Nature magazine.
“Examining the interconnections between drivers of previous industrial revolutions, and previous technological advances, can help assess the role and value of today’s: are they independent quick fixes or vital components in a new environmental infrastructure?”
Edward Lees and Ulrik Fugmann, Co-Heads of the environmental strategies investment team
Investors can contribute to this dynamic through stewardship, but most importantly by investing in the key technological drivers for a resilient future economy.
Financing the ‘interconnected resilience’ infrastructure
Sustainability and efficiency are core to the promise of ‘Industry 4.0’. As with previous industrial revolutions, it will emerge on the back of an infrastructure platform – based on such advances as the smart factory, autonomous systems, 3D printing and machine learning. Combining these technologies could allow capacity and resources to be used ever more efficiently, and usher in a sharing economy based on ‘open source’ approaches to information and innovation.
One must be careful not to dismiss this new paradigm. Throughout history, the assumption that disruptive products and services would retain high marginal costs and linear growth has been disproven. For example, in 2012, the International Energy Agency expected global solar energy generation to reach 550 TWh in 2030—it exceeded 1 000 TWh in 2021.
Despite these promises, investors who seek to join this new paradigm face several imperatives, which are not without challenges:
- Understand the breadth and the inter-relatedness of challenges and opportunities ahead
- Identify companies that will survive and prosper, not just rising trends
- Target positive environmental outcomes within an unconstrained approach to investment.
This article is part of the COLLECTIVE INSIGHTS section of our 2022 Sustainability Report where our experts share their views on three key topics: climate, biodiversity and geopolitics.
[1] When the SDGs were announced in 2015, they came with a target to achieve them by 2030: at an estimated cost of USD 5-7 trillion annually; source Why it is essential that we close the SDG data gap, and how it can be done (bnpparibas-am.com)
Disclaimer
Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
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