The sustainable investor for a changing world

The recent UN climate change conference in Glasgow has if anything brought a broader focus on environmental issues and added to the growing awareness and momentum behind the need for positive change, argue Edward Lees and Ulrik Fugmann of the Environmental Strategies Group. Here they identify promising sectors and present their approach to sustainable investing.  

Listen to the podcast with Edward Lees and Ulrik Fugmann for a discussion on the COP26 achievements and disappointments and what this means for investors or read the article below:

As we assess COP26, we see for example that there are now 137 countries committed net zero and 141 countries pledging to reverse deforestation. But, overall, all the commitments and pledges still leave us short of the target of containing global warming, even if we consider announced efforts to phase down coal use and to limit the use of fossil fuels in general. 

Relating the outcomes to our own universe investment, we welcome the added focus on natural capital – this is a game changer. Now nature is recognised and prioritised as a way towards decarbonisation and detoxification and as a carbon sink.

From an investment perspective, that means greater attention for sustainable agriculture and technologies to improve soil qualities and avoid pesticides and fertilisers. Companies in these areas have been overlooked, while they have promising outlooks. The same goes for companies working on improving ocean health, for example, by addressing the plastics problem.

Directing capital intelligently

What has become clearer is that the private sector must play a role alongside governments. For us as investors, we believe this means that we must ensure that capital coming into the sustainability field goes to companies that are actively solving problems such as waste, pollution, ecosystem restoration and the energy transition by investing in both the primary – new issues – and secondary markets. We see as a way of accelerating the push for a more sustainable and inclusive world.

Part of the solution is to allocate capital to companies of any size almost. Here we want to highlight the explosion of start-ups – new companies coming to the market. We believe it is important that we as investors contribute to the financing of these young, innovative and often trend-setting companies. In the area of energy transition, for example, we were early investors in what was at the time the risky area of green hydrogen since we believe in helping companies to accelerate growth.

Allocating more to green from brown  

By investing in young, promising companies, we believe we are living up to our motto: let’s be part of the solution. A lot of money is going to investments such as safe, large-scale infrastructure installations, but it is important to realise that 50% of the solutions that are needed to get to the Paris goals are at a very early stage and will need substantial support to get to scale.

We believe we must invest in not just large caps, but in the innovative companies that can move the needle. These companies are showing that sustainability is the way forward. We are glad that many established players are also coming to this realisation. It is, for example, harder now for incumbent carmakers to hold on to combustion engines. We are noticing this throughout the car industry. There is more and more pressure on the less green sectors and we see this as a sign of hope.

As investors, we believe there are opportunities on “both sides of the coin” – we take long positions in the environmental champions that we expect to outperform over time, but we can also go short companies unwilling or unable to move away, or drop outright, unsustainable practices.

We believe this is a useful way of increasing the cost of capital for these companies and of ultimately recycling capital out of unsustainable companies into sustainable ones.

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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