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Sustainable investing: the challenge for investors
Article published in Le Temps, 15 August 2022
Sustainable investment has become a key topic for private and institutional investors. However, the acronyms used (ESG, ITR, SFDR, etc.), the complexity, and the rapid developments in this field leave many investors confused. The fundamental question we are often asked is: why should we, and how can we, integrate sustainability principles into portfolios?
Today, powerful market forces are at work to encourage and facilitate an environmental transition that has become indispensable: consumer pressure, regulatory actions, business model transitions across industries, and fair capital allocation by investors.
In this context, integrating sustainability principles in the construction of one’s portfolio supports a fundamental and structural transition of our economic models. It will also allow for better preservation of invested assets, favouring companies that will benefit from future transitions, while reducing exposure to future losers of the ongoing revolution.
Environmental stability for sustainable growth
The concept of environmental stability forms the basis for functional societies, sustainable economic growth and attractive long-term financial returns.
In order to safeguard this stability, scientific research has now quantified a number of global environmental limits that must not be exceeded. These concern CO2 emissions, water quality, biodiversity, etc. While the situation is alarming, since we have already crossed the alert thresholds for most of these limits, the science is very clear on what needs to be done to restore or limit the damage caused to our ecosystems.
The environmental transition will be built around four major axes:
Electrification.
Electricity is becoming the dominant energy vector. From around 20% of the world’s energy demand in 2020, it will rise to over 70% in 2050. To produce electricity, we will have to switch from fossil fuels to cleaner energies (water, wind, solar and possibly nuclear).
Agriculture and nature preservation.
Between now and 2050, we will need to feed an additional 2 billion people while restoring large areas of arable land for reforestation and biodiversity projects. We will have to rethink our production and consumption methods.
Materials.
We will have to decouple the trajectory of economic growth from the extraction of raw materials. The “take, make, waste” model must be replaced by “reduce, re-use, recycle”. Building materials must be rethought; cars will be shared and their components recycled.
Carbon.
The market economy model must be expanded to include all its externalities. Carbon emissions will have to become increasingly expensive, creating the incentive mechanisms needed for industrial actors to adopt real transition strategies.
Read also: What is the role of investors in financing the transition towards sustainable food systems?
Sustainability, a source of value creation
A transformation of our economic models towards a more sustainable economy is underway. It is a real revolution. New players with major growth potential will emerge. The fear of some investors that investing sustainably means sacrificing performance is unfounded.
Recent geopolitical events and the resulting tensions will only add to the urgency of the transition. The concept of energy independence, for example, has never been more relevant than it is today.
Integrating sustainability into investor portfolios
In recent years, investors have felt free to integrate sustainability criteria according to their preferences. Many have chosen ESG as the scoring tool, which allows us to compare the current practices of different companies across a range of environmental, social and governance criteria.
Today, we need to look further ahead. The ongoing transition promises to affect all economic sectors, across all geographies. Just as the technological advances of the last fifty years have disrupted all business models, this transition to sustainability will impact all of our investment universes. As with the technological revolution, new leading companies will emerge, while others will disappear.
The ongoing revolution therefore invites us to rethink the way we invest. More than ever, sustainable investing must become a matter of conviction. This implies a capacity for fundamental research, allowing us to better understand the transition trajectories of companies, sector by sector. The analysis must be forward-looking and will require a wide range of skills: climatologists, scientists, engineers and analysts.
Everything suggests that sustainable portfolios will very quickly evolve beyond ESG. When constructing portfolios, fundamental research will make it possible to favour companies that stand to benefit from the current transition, and to limit exposure to future losers. This same research will also identify the emergence of new players with new business models, offering attractive growth potential.
With the sustainability revolution now firmly underway, we believe that building portfolios aligned with sustainability principles is the most effective way to support this transition, while ensuring the best preservation of invested assets over the long term.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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