ESG Feature – A just transition
These positive impacts are known as climate solutions and include innovations like carbon capture and storage technolo- gies, which collect the harmful gases that linger in the air above us.
“It is a big opportunity and the addressable markets are expanding dramatically,” Kinder says, while Jeavons describes investment in climate solutions as a “theme in focus, which will continue for decades to come”. Indeed, BNP Paribas AM tracks an environmental solutions universe, and the growth multiples are “two to three times higher than what we are seeing on typical growth indices, like Nasdaq”. “It is reflected in the fundamentals that this is a huge industry with a lot of structural tailwinds, like policy and reg- ulation,” Kinder says. “There are the net-zero targets and then there are the stimulus packages that came out of Covid designed to build back in a green way rather than take an agnostic approach. “We are seeing a lot of subsidies for energy transition to build securer systems which are deflationary in nature. “Inflation in oil and gas and the situation in Ukraine is caus- ing a lot of problems with energy poverty and security. So, there is a lot of public and regulatory support for something greener, more secure and more inclusive. “For a number of reasons, the addressable markets around cli- mate change solutions are increasing and at the same time their costs are decreasing to become price parable with con- ventional technologies, such as in the case of cars. “We are three years, maybe four, from an electric vehicle cost- ing around the same as a conventional car,” she adds.
Show me the money For investors looking to fund such innovations, the options stretch beyond buying companies and engaging with manage- ment to improve their operations. Debt is a good way to fund green or social innovation within companies. Indeed, with larger players needed a steady stream of capital over many years, lenders have some influence over how the debt will be invested if they want more funding in the coming years. “It is not just an equities game,” Niklasson says. “The equity market will be important in assessing carbon footprints but in terms of addressing sustainability, fixed income is incredibly powerful.”
And demand for funding through debt and equity is only expected to rise. “There are big risks, but, potentially, it could create big opportunities,” Stansbury says. “The energy transition is going to increase demand for certain products,” he adds. “We want to invest where supply is natu- rally constrained in that it will prevent vast numbers of new entrants destroying the future economics of that industry.” For Stansbury, these constraints are geological, technological
30 | portfolio institutional | April 2022 | issue 112
and regulatory. “These low-carbon innovations have huge quantities of copper in them,” he says. “Copper is scarce, there have not been many large discoveries of copper during the past decade, so if demand is going to rise, so could the price.”
A complex strategy Supply/demand imbalances are not the only area where inves- tors can make a return if investing in a just energy transition. Better behaved and sustainably-focused companies which treat staff, suppliers and customers with respect could offer an efficiency dividend.
“If you align yourself well with the transition you are likely to experience lower costs because you are more efficient and have a happier, more productive workforce,” Jeavons says. “Taking those steps will be good for the economy long-term and be supportive of investment returns.” And remember, targeting net zero in a socially responsible way is a long-term trend. “From an active management perspective, the next decade in terms of the global shift, for better or for worse, will present opportunities,” Niklasson says. “From a returns perspective, it is not as simple as concluding that the returns will come because the transition will not be linear, far from it.” The returns could be there for those who move first and bene- fit from rising valuations.
“Incorporating ESG criteria into an investment strategy should not be detrimental to returns,” Stansbury says. “If anything, the more investors incorporate this dimension into how they allocate capital, the more you stand to be rewarded for moving first. Companies that invest in a just transition may see more demand for their shares, so their valuations may rise.
“It might be profitable as an investor to back companies that are transitioning from brown to green in anticipation of inves- tors doing the same thing over time,” he adds. It is not just about trustees showing that they are integrating climate and social risks into their portfolios. “They will even- tually need to consider the impacts their investments have, with a greater focus on sustainability and the circular econo- my,” Jeavons says. Whatever strategy asset owners employ to target this invest- ment goal, it will not be easy. It is complex. Time and geopolit- ical events are against those working towards net-zero strate- gies in a just way. “This shift is so much more complex because there are so many inter-dependencies, and it is difficult to map out what the consequences could be and where you draw the line,” Niklasson says. “To what extent do we go to ensure that this transition works for everyone across the world? That is going to be difficult.”
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