by Bastien Dublanc, Investment Director @ Clim8 Invest
As I was travelling on the train back to Paris last Sunday, I was torn between my two passions – great tennis (what an epic final at Roland Garros!) and sustainable finance, with expert commentary around the G7 communique dominating my newsfeed. Trying to unpick what really matters in high-level policy papers is not always easy, but it is a crucial part of our role as asset managers. This allows us to validate our assumptions and get a sense of where regulators might shift their attention.
“We emphasise the need to green the global financial system so that financial decisions take climate considerations into account”. (G7)
At the heart of Clim8’s mission is building a truly sustainable investing model. We believe that trillions have to be directed towards green finance to ensure that we comply with the Paris agreement (limiting global warming by 1.5C above pre-industrial levels by 2100).
The question is: Where do you start? Which solutions are practical enough to turn intentions into actions? And what tools are readily available to investors?
Today, not much is clear. But a couple of initiatives that were highlighted in the G7’s communique are in my mind helpful in bringing mandatory disclosures to help investors assess companies on their non-financial merits.
Firstly, climate-related disclosure is taking centre stage. Financial and non-financial companies will have to disclose how they are positioned to address climate-related risks (governance oversight, strategy) and the metrics that support a more informed vision about the potential carbon risks. The UK is expected to become the first G7 country to implement mandatory climate-related disclosure.
Secondly, but with far fewer details fleshed out, we’re pleased to see the G7 group endorsing the taskforce on natural disclosure (TNFD, created in 2020) to notably help investors to assess companies’ impact under the environmental and biodiversity angle.
Standard and common reporting rules should help investors to better compare companies’ impact on multiple fronts and direct capital towards companies that allocate capital accordingly. But at Clim8, we haven’t waited for these rules to be implemented and we thrive on finding ways to measure companies’ impact, although we acknowledge this is far from a perfect science.
What about climate?
“To be credible, ambitions need to be supported by tangible actions in all sectors of our economies and societies. We will lead a technology-driven transition to Net Zero, supported by relevant policies [….] and prioritising the most urgent and polluting sectors and activities” (G7)
Sectors that were highlighted as priorities were energy generation and distribution, transport, heavy industry, homes and buildings, agriculture, forestry and other land use.
At Clim8, our investment methodology focuses on these sectors, recognising that positive environmental impact comes from decarbonising them at a fast pace, and this should be a collective ambition.
Highlighted sectors are no different from the International Energy Agency (IEA) net-zero research paper released earlier this year and which contains much more detail about the roadmap to net zero by 2050. Here are some of the key milestones for each of the sectors discussed that provide much greater clarity relative to the G7’s statement:
Power: no new coal plants from 2021, 1GW of wind and solar capacity addition p.a to 2030 with coal phase out in advanced economies aimed at reaching net zero in the power sector by 2035.
Transport: 60% of car sales are electric by 2030, ICE ban in 2035, low carbon transportation fuels available for aviation and marine
Buildings: all new buildings are net zero carbon ready by 2030
Industry: 90% of by 2040, requiring an intense replacement cycle that is low carbon to happen between 2040 and 2050 (hydrogen development is instrumental in supporting this transition along with carbon capture and storage)
No new coal mines or oil fields will be developed from now on.
Shifting to the pledges and numbers, G7 announced:
The end of “inefficient” fossil fuel subsidies in G7 countries. In 2015 and 2016, up to $100 billion annually were allocated via tax breaks, public finance and direct spending.
A $100 billion public-private contribution every year up to 2025 to help developing economies to transition towards net zero
A $2.8 billion fund to stop using coal and support transition
The launch of the $2 billion Climate Investment Fund that can attract in its first year up to $10 billion of financing
A $500 million fund to protect oceans and marine life
To put these numbers into perspective, we need, according to the IEA, $4 trillion of annual investments in clean energy alone to reach net zero. In a nutshell, we’re not there yet.
Equally, countries might have kept their biggest initiatives for Glasgow (COP26, this November) to announce more granular targets and roadmaps to feel comfortable with the decarbonisation pathways of our economies (We hope…).
Accountability versus inevitable policy response
The leaders committed to the “green revolution” that would limit the rise in global temperatures to 1.5C – so far so good. They also promised to reach net-zero carbon emissions by 2050, halve emissions by 2030, and to conserve or protect at least 30% of land and oceans by 2030.
The most important word here is “promise”, however. There will be undoubtedly new net-zero pledges and targets communicated along COP26. But what if current world leaders and business leaders fail to deliver by 2025? 2030? There will be forceful, abrupt and disorderly measures aimed at rectifying our carbon emissions trajectory. And investors need to be ready for that. A task force backed by the UN – the UN Policy Response Initiative – aims at helping asset managers to anticipate what policies might come into force and how this could impact portfolios.
At Clim8, we try as much as possible to minimise these risks by following what abrupt measures could come and investing in sectors and industries that are the least likely to be exposed to these abrupt changes.
With investing, your capital is at risk. For illustrative purposes only and does not constitute investment advice.
Considering the extensive information and news flow published in 2020 about sustainable investing, you are probably wondering where to start. Sustainable investing can be an ‘alphabet soup’, with countless acronyms and jargon and you may also be wary of greenwashing. How can you put your money to work for the planet without compromising on returns? Vincent Gilles, our Chief Investment Officer offers his views on a sustainable investing guide to start you on your journey.
1. Eliminate the negative
Ask yourself the following questions: what do you not want to invest in? What does not align with your values? Build an exclusion list specifying those sectors in which you do not want to invest. Oil and gas, airlines, tobacco and arms are regular contenders on sustainable investors’ lists.
2. Find the positive
Think about your values. What do you care about and wish to impact – social equality, clean water, recycling? Define where you most want your investments to make an impact and make a list to help you narrow down your choices.
3. What’s in a name?
Sustainability-focused funds are fairly easy to identify these days. Names tend to fit the purpose. Look out for titles that include words such as ‘clean’, ‘green’ or ‘sustainable’ as around 80% of ‘sustainability’-focused fund names will contain at least one of these words. However, as we point out in the Greenwashing guide, a name is just a starting point. In our view, you should take it with a pinch of salt until you can back it up with solid evidence.
4. Delve into the history
Not all sustainable funds are brand new and fresh to the market. This is a good thing, as they will have a track record of their past performance. Many funds have been around for years and some were simply rebadged as ‘green’ funds. This doesn’t necessarily mean they are misleading or greenwashing as ‘negative impact’ assets may have been sold off and replaced with ‘greener’ ones. After all, we are focusing on transitioning our economy.
However, some digging may be required to verify what activity has happened. Ask the fund management team or asset provider if the information is not available on their website.
5. Keep your eyes peeled for greenwashing
With everyone trying to jump on the ESG bandwagon and insufficient regulations yet in place, greenwashing in our view can seem rife. Misleading claims may encourage investors with good intentions to put their money into funds that do not actually benefit our planet. Don’t fall into this trap – read our Greenwashing guide.
6. Misleading metrics
It’s one thing saying a fund is aligned to some Paris Agreementmetric but how does the fund manager report its impact and adherence to those goals? Ultimately, you want to know what impact your money is having. Unfortunately, many current metrics cannot yet be verified with universally proven methodologies. The good news is that change is coming as accuracy improves with coherent reporting frameworks. Until then though stick to known measurable targets such as, for example, levels of carbon emissions. Expect to see those appear clearly in an impact report on any report on any ESG provider’s website.
7. Return with impact
Investing sustainably does not necessarily mean accepting lower returns. This is, in our view, an age-old misconception. Look for information on a provider’s website that will show you both financial and impact performance over longer periods of time. Always bear in mind that past performance is not a reliable indicator of future results.
8. Aligned to global principles
For example, look out for evidence that the provider has signed up to the United Nations’ Principles of Responsible Investment (PRI); guidelines instructing providers on how they can effectively incorporate ESG thinking into their investment philosophy and processes. Providers signed up to this code of conduct are certifying that their firm has made a public commitment to responsibly invest.
With investing, your capital is at risk. This information is for illustrative purposes only and does not constitute investment advice. Past performance is not a reliable indicator of future results.
Climate catastrophe-lead headlines fill our newsfeeds on a daily basis. And the frequency appears to have been increasing exponentially since the start of the COVID crisis. From Australian bushfires that burn for months  to devastating hurricanes in the Caribbean , it has been near impossible to escape these devastating events and reports. For some, it can be rather overwhelming at times, especially when linked with a sense of helplessness. However, we believe there are many ways in which you as an individual can help fight climate change with your daily actions.
Discover your power – how can individuals make a difference?
How you choose to live your life can have an impact every single day. What changes can you make to maximise that impact and help fight climate change? Here are some of our views:
Transport – if possible, switch your main mode of transport to cycling (running is even better)  and reduce your total emissions by up to 11% .
Shopping – buy products and services from low carbon footprint companies. Apps such as CoGo and Pawprint can point you to eco-friendly options for different/various aspects of your life.
Food waste – minimise food waste and decrease your emissions by as much as 30% . Olio encourages users to impart unwanted food to others, whilst chef Jamie Oliver, publishes waste-curbing recipes.
Diet – move to a vegetarian diet and slash your emissions a further 25% .
Less is more – buy less. Full stop. And when you do buy something, select long-lasting, quality items.
Energy – switch to a renewable energy contract to take your emissions down a further 26% .
Packaging – choose unpackaged products and take your own bags when out shopping. Zero-waste shops encourage customers to use refillable food containers whilst local fruit and veg shops rarely use plastic-wrapped produce.
Travel – where possible when going on holiday, opt for ground transport over air. Traveling by train can emit as much as 66% fewer emissions . If unavoidable, offset your emissions using a company like ClimatePartner.
Your greatest impact
One vital component is missing from the list above – money. How and where you put your money is one of the most efficient and impactful ways to make a difference  .
Since the Paris Agreement was signed in 2015, global banks have invested USD 2.7 trillion in fossil fuel companies . Sadly, this figure continues to rise despite countries setting ambitious targets to prevent our planet warming more than 1.5 degrees.
Thankfully, you no longer need to invest in fossil fuels to make money. According to Nordea Bank’s recent research, choosing to place your money in a sustainable bank or investing in a sustainable fund is proven to have 27 times more impact on your carbon footprint than eating less meat, using public transport, reducing water use, and flying less .
As David Attenborough so eloquently put it, “it is crazy that our banks and our pensions are investing in fossil fuels, when these are the very things that are jeopardising the future we are saving for”.
Capital at risk. For illustration purposes only and does not constitute investment advice. Past performance is not a reliable indicator of future results.
The process of directly trading individual stocks or bonds in the hope of making a profit by ‘beating the market’. This can be achieved when either an individual chooses where to put their money themselves e.g. day trading or when they invest money in a fund where the investment manager makes active investment decisions on their behalf.
Actively managed fund
A fund where a management team or investment manager actively decides how to invest an investor’s money in order to meet predefined investment goals.
The variety of life found in a single location, ranging from animals and plants to fungi and viruses. Biodiversity encompasses genetic variation within species depending on the ecosystem they are part of e.g. African vs Indian elephants
The reason a brand exists beyond making a profit e.g. Unilever’s Lifebuoy soap aims to reduce the spread of disease caused by lack of sanitation in developing countries by actively encouraging people to make handwashing part of their daily routine.
Carbon capture and storage (CCS)
Also known as carbon capture and sequestration. The process of permanently removing carbon dioxide from the atmosphere at source and then storing it, typically underground. The source of the carbon is usually a factory or power plant. (Our view is this is a controversial approach both in terms of cost and safety).
The total sum of greenhouse gases produced by a group, individual or company to support human activity both directly and indirectly. Often measured over a given timeframe.
Also known as climate positive. An activity or company that is removing more greenhouse gases from the atmosphere than it is emitting.
An activity or company that is removing the same amount of greenhouse gases from the atmosphere as it is emitting or one that does not emit any greenhouse gases at all (though in our experience, there are very few examples of the latter). This only applies to Scope 1 and 2 (definition below). They are generally said to be releasing net zero carbon emissions.
The process of a company placing funds into certified and tradable carbon removal schemes in order to counteract their carbon emissions output. Carbon offsetting is typically split into two categories:
Avoidance – projects that avoid emissions from being released from the outset e.g. forest conservation prevents deforestation and provision of clean stoves in developing worlds prevents wood being burnt for cooking.
Removal – projects that remove emissions from the atmosphere after they have been released e.g. planting trees.
Also known as climate negative. An activity or company that is removing less greenhouse gases from the atmosphere than it is emitting.
The cost applied to carbon emitted into the atmosphere. Pricing is typically determined in two ways:
A carbon tax – a set price allocated per tonne of CO2 emitted.
An incentive to emit less – usually the purchase of a limited number of permits (known as carbon emissions trading).
CDP (formerly known as the Carbon Disclosure Project)
The CDP is an independent not-for-profit charity that set up and now manages the global disclosure system which aims to help investors, cities, regions and companies handle their environmental impact. It houses large databases of company environmental information including in depth insights on carbon emissions and environmental strategies.
Center for International Climate and Environmental Research (CICERO)
CICERO is a climate research institute based in Oslo, Norway that works with governments and organisations worldwide, providing insight on how to solve climate change challenges. The institute is particularly well-known for the research it did on the effects of man-made emissions on the climate, the management of international agreements and civil society’s response to climate change.
An economic system that eliminates waste and aims to ensure materials and products are continually kept in use whilst retaining their total value. The system focuses on removing pollution and regenerating natural systems.
Climate change is the long-term alteration in the planet’s average weather patterns. Although climate change has occurred several times throughout Earth’s history, the term specifically refers to the change in weather systems and rise of average temperatures experienced since the mid-1800s (the beginning of the Industrial Revolution). High levels of carbon dioxide have subsequently been released into the atmosphere causing unprecedented changes in weather systems, never seen before in history.
Climate disclosures standards board (CDSB)
An international group of environmental Non-Governmental Organisations (NGOs) and businesses that have united to form a non-profit organisation. The CDSB is committed to changing today’s global corporate reporting model to one that equates natural capital (see Natural capital for definition) with financial capital.
Companies are provided with a framework that aims to enable them to report on environmental information with similar or substantially the same rigour as financial information. This degree of transparency is intended to provide financial institutions and investors with the level of detail required to analyse the risks and opportunities associated with climate change.
Conference of the Parties (COP) is the major decision making body of the UNFCCC (see below for definition). All 197 nations (known as parties), bar a few failed states1 signed the UNFCCC treaty in 1992. The parties meet annually to vote on the latest decisions for implementation.
COP is the only climate crisis forum in the world where the poorest countries’ opinions carry equal weight to the richest countries’ opinions. No agreements can be made unless there is a full consensus. The next COP meeting, COP26, will take place in Glasgow, UK in 2021.
1 states that cannot perform the two fundamental functions of the sovereign nation state in the modern world system
Corporate governance factor
Also known as governance or governance factors, it makes up the G in ESG (see below for definition). Corporate governance is a toolkit of rules, processes and practices that dictate how a company is governed and to what purpose. It spans a wide range of factors from outlining the distribution of responsibilities and rights amongst different stakeholders to rules on how decisions are made.
This structure aims to enable the governing body (typically the Board) to deal more effectively with the daily challenges of running a company. Company laws are designed to ensure companies are operated and managed in a way that is in their shareholders’ best interests and that conflicts of interest are appropriately mitigated.
Corporate social responsibility (CSR)
Also known as corporate responsibility or corporate citizenship. Corporate social responsibility is when a company consolidates social and environmental issues into its planning and operations. It is a self-regulating model that shows company employees, external stakeholders and the public that businesses can be a force for good.
The transition of an economy from one that relies heavily on burning fossil fuels to one that uses advanced methodologies to sustainably reduce and compensate greenhouse gas emissions.
Diversity and Inclusion
Also known as social justice. Diversity refers to the characteristics and traits that make individuals unique such as gender, race, age, orientation, disability, religion, beliefs etc. whilst inclusion refers to the social norms and behaviours that ensure people feel welcome in their surrounding environment.
When applied to the workplace, diversity implies that the group of people employed by an organisation directly reflects the diversity of society in which it operates. Whereas inclusion infers that every individual is treated fairly, able to contribute to the organisation’s success and has equal access to resources and opportunities.
Also known as divestiture. Divestment is the opposite of investment. The process of selling an asset such as equipment, real estate or a subsidiary for moral, political, social or environmental reasons e.g. Fossil fuel divestment means selling off investments in the fossil fuel industry.
Environmental factors refer to the E in ESG (look below for definition). This includes all the physical and non-physical influences that affect the organisms living in that area. When applied to a company framework, these factors pertain to all environmental elements in the political, regulatory, technological, economical and demographic landscape affecting how a company survives, grows and operates e.g. waste management, energy use, greenhouse gas emissions, treatment of animals, climate change, biodiversity, natural resource use.
ESG stands for Environmental, Social and Governance – three key factors required to measure and evaluate the ethical and sustainable impact of an organisation. Commonly used to gauge a company’s future financial performance and its behaviour against other companies.
Method of investing focused on delivering ESG criteria and impact when building portfolios or selecting which company to invest.
Investors that are actively avoiding putting money into companies that have a negative impact on society e.g. tobacco, arms and gambling.
A non renewable source of energy that releases carbon dioxide and other greenhouse gases when burnt. Sources include coal, petroleum, oil shales, bitumens, natural gas, tar sands and heavy oils and are generally found beneath several layers of sediment and rock. These contain carbon and derive from the remains of organic matter produced by photosynthesis; a process that began over 2.5 billions years ago.
Loan issued by a company or government to finance new and existing environmentally focused projects such as renewable energy. Investors put money into this loan in return for green bonds.
A type of marketing that uses inaccurate or misleading messaging to imply a product, service or organisation is more environmentally-friendly than it actually is. (Learn more in our Greenwashing guide)
Hydrogen Fuel (H2)
A zero-emission fuel, otherwise known as a clean fuel, that when burnt with oxygen in a fuel cell only produces water. Hydrogen can be sourced from a variety of domestic resources including nuclear power, biomass, natural gas and solar power, using extraction methods such as biological processes or electrolysis. Hydrogen is currently very expensive and is still not produced at industrial levels but many Governments have committed vast amounts of subsidies that should help costs reduce to a level that could make H2 competitive within 10 years.
Different types of hydrogen fuel exist:
Grey hydrogen – the most common and dirtiest hydrogen fuel. Grey hydrogen is made from fossil fuels using an energy-intensive process called steam methane reformation. 11 tonnes of carbon dioxide is emitted for every tonne of hydrogen produced.
Blue hydrogen – same process as grey hydrogen but carbon is captured and buried underground.
Green hydrogen – the cleanest and most expensive hydrogen fuel. Pure hydrogen is extracted from water using electrolysis (a powerful electric current runs through water separating hydrogen from oxygen), powered by renewable energy sources (definition below).
The basic rights and freedoms that every human on this planet from birth until death is entitled to without discrimination and regardless of nationality, ethnicity, religion, sex, race or any other status. Human rights include the right to work, education, life and liberty, and freedom of expression and opinion.
Investments are made based on the level of environmental and/or social impact achieved as well as financial return. Investors base decisions on impact evidence rather than where their values lie.
An evaluation of how an organisation’s activities affect the planet both positively and negatively through calculating how a company’s profitability would be affected if their social and environmental impacts were monetised.
An international treaty that entrusts state parties to reduce their nations’ carbon emissions. It was established in 1997 in Kyoto, Japan at COP3 (see definition above) though only enforced on 16 February 2005.
The severe exploitation of people for commercial, criminal or personal gain. These people are ‘controlled’ and forced to do an activity against their will. They are often unable to leave the situation because of threats, coercion, violence, deception or abuse of power. Modern slavery comes in a variety of forms including bonded or forced labour, forced marriage and human trafficking.
The world’s stocks of air, land, water, renewable and non-renewable resources (plants, animals, forests and minerals). These stocks are considered capital because they provide goods and services to humans and other species and are the basis for all economic activity.
The process of deliberately excluding companies in investment decisions that are involved in objectionable activities or sectors such as fossil fuel production and arms.
Net zero carbon
Net zero is reached when a company’s carbon emission rate equals its carbon absorption rate throughout its full value-chain i.e. Scope 1, 2 and 3 (see definitions below). In order to achieve this, companies find ways to improve operational efficiency and subsequently reduce carbon emissions in line with a predetermined science-based target (see definition below) of 1.5°C.
Any remaining emissions that cannot be removed will be reconciled by allocating funds to certified greenhouse gas removal schemes.
A source of energy that cannot be replenished in our lifetime and will eventually run out e.g. Oil, Coal.
Also known as Paris Climate Agreement or Paris Climate Accord. The Paris Agreement is short for the Paris Agreement Under the United Nations Framework Convention on Climate Change and is a legally binding international treaty on climate change adopted by 195 countries and the European Union.
It was established at COP21 (see definition above) in Paris, France in 2015 and requires that every state party does everything in its power to limit global warming to 1.5°C. The treaty sets out to improve on what was agreed in the Kyoto Protocol (see definition above).
A fund that replicates an index. The most famous type of passive investment is Exchange Traded Funds. In passive investment, the involvement from fund managers is minimal and, as a result, costs are usually much lower than those of actively managed funds.
An investor buys and holds a diversified mix of assets for long periods of time with minimal trading efforts. The most common form is index investing when investors buy assets that mirror the market index.
Physical risks of climate change
Risks associated with climatic events such as hurricanes and droughts that will affect a company’s physical assets i.e. supply chain, markets, customers and operations.
A set of investments in any kind of securities (listed or not), selected along specific strategies or criteria.
Actively looking for companies to invest in that have sustainability practices embedded in their core structure such as socially responsible business practices or environmentally friendly products.
Product carbon footprint
Also known as life cycle product carbon footprint. It is the climate impact of a product and is measured in carbon dioxide equivalents (CO2e). The footprint is calculated by measuring the total greenhouse gas emissions throughout the product life cycle, from extraction of raw-materials to end of life.
A purpose-driven company focuses not only on profit but takes a stance on issues beyond their products and services.
Something that can be restored, regrown or renewed.
Also known as alternative energy. Renewable energy is a source of energy that never runs out e.g. Solar, Wind, Tidal
When an investor considers ESG (see definition above) risks and opportunities in the decision-making process.
Science-based targets (SBT)
A set of goals, informed by independent climate science, that provide a company with a clear pathway to reducing their greenhouse gas emissions. Targets are required to be in line with the Paris Agreement (see definition above).
Scope emissions (1, 2 & 3)
Company greenhouse gas emissions are split into three scopes:
Scope 1 – also known as direct emissions. Emissions generated from company activity that can be directly controlled by the company e.g. heating, fleet vehicles, refrigeration
Scope 2 – also known as indirect emissions – owned. Emissions created during energy production prior to the company purchasing it and when energy is consumed by a company.
Scope 3 – also known as indirect emissions – not owned. Emissions generated from every other activity throughout a company’s value chain outside Scope 1 and 2. They include both upstream and downstream emissions.
A financial instrument issued by a company that is bought, owned and traded by other enterprises and individuals. Examples include stocks and bonds.
A single unit of equity ownership in a financial asset or company. It ranks lower than debt in case of company liquidation. The rise in value of a company is best encapsulated in shares rather than debt (see above).
Social factors refer to the S in ESG (look below for definition). The company’s attitude towards social issues including human rights, labour standards, adherence to workplace health and safety, diversity and consumer protection. They also include how the company interacts with suppliers, the local community, customers and other businesses.
Socially responsible investing (SRI)
Also known as social investment or sustainable investing. Actively seeking out companies to invest in that generate financial returns and make a positive contribution to society. This approach allows for companies that are not inherently sustainable but are investing in clean technologies e.g. a fossil fuel company investing in renewable energy.
A share of ownership in one or more companies.
Identifying and choosing stocks to invest in based on a particular set of criteria.
Assets that have been prematurely devalued and no longer able to earn an economic return. Many fossil fuel assets risk being ‘stranded’ soon.
Any form of financial process including capital flows and risk management activities that integrates ESG criteria (see definition above) into decision-making processes and strategies.
The process of maintaining change in a balanced environment so needs are met today whilst not compromising future generations.
A classification system developed by TEG (see definition below) that provides businesses and investors with a set of criteria detailing which economic activities are deemed sustainable.
Technical Expert Group on Sustainable Finance (TEG)
A group of 35 international finance experts founded in 2018 to assist the European Commission in developing the following areas:
Taxonomy regulation (see definition above)
EU Green Bond Standard
EU climate benchmark and disclosure methodologies
Guidance on corporate disclosure of climate-related information.
The financial risks associated with the transition to a low-carbon and more climate-resilient global economy deriving from substantial technology, legal policy and market changes.
United Nations Framework Convention on Climate Change (UNFCCC)
The UNFCCC was the first international environment treaty to tackle climate change. Founded in 1994 and ratified by 197 countries, the original objectives were to “stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system and prevent human damage and interference with the climate system.”
The UNFCCC is the parent treaty of the 1997 Kyoto Protocol and 2015 Paris Agreement (see definitions above).
United Nations Global Compact
The UN Global Compact is the world’s largest corporate sustainability initiative. Businesses are encouraged to sign up and commit to sustainable and socially responsible practices. The initiative is based on 10 guiding principles covering environment, labour, human rights and anti-corruption that organisations should embed in their value systems and their approach to doing business.
United Nations Principles for Responsible Investing (PRI)
A network of international investors founded by the UN, created a voluntary set of six principles. These principles encourage investors to commit to incorporating ESG factors into their investment processes.
United Nations Sustainable Development Goals (SDGs)
Also known as the Global Goals. A set of 17 goals that were adopted by every United Nations member state in 2015 to tackle the planet’s greatest challenges across society, environment and economy today. They are a universal call to action to protect the planet, end poverty and improve human lives worldwide by 2030.
Values based investing
Investing in companies that align with not only gain financial return but align with personal values.
All activities and actions, from collection of waste through to recycling, that are required to manage waste.
With investing, your capital is at risk. For illustrative purposes only and does not constitute investment advice
When a company promotes unsubstantial and misleading green claims about its products or services, it can be called greenwashing.
Often used as a smoke and mirrors ploy, greenwashing distracts customers from the reality of a company’s operations and outputs. Fossil fuel companies are infamous for it. For example, they spend vast media budgets on promoting their latest green technology innovations, which only accounts for 4% of revenues. All the while, pumping billions of pounds worth into new oil research .
In the investment industry, greenwashing refers to money managers who claim to offer ‘sustainable’, ‘green’ or even ‘responsible’ portfolios without in our view transparent and conclusive evidence of their impact.
Currently, according to research conducted by The 2 Degrees Investment Initiative 85% of so-called green-themed funds (a specific niche of the wider overall market) all ‘green funds’ have misleading marketing .
Paved with good intentions: what drives greenwashing?
Greenwashing, in our view, leverages customers’ good intentions for cynical ends. In the belief they are investing their money to benefit the planet, on top of growing their nest egg, customers may ultimately be harming it further.
Even when they implement better investment standards in good faith, investment firms can find themselves greenwashing. A lack of understanding of impact investing, or the desire to appear further along on that journey than is truly the case can drive companies into a greenwashing quagmire.
Marketing departments must be fully in sync with the investment team, so that a clear and transparent roadmap can be implemented.
How is greenwashing hurting the investment industry?
Greenwashing in our opinion is detrimental to the entire investment and asset management industry regardless of whether individual companies are doing it or not. Younger generations are generally savvier and more demanding. They tend to actively seek out additional information on companies to see whether what is being advertised is backed up with hard evidence. A whiff of greenwashing could damage customers’ trust in the entire sector.
In the last few years, customers have become more eco-conscious, leading to a mass inflow of money to ‘greener’ funds. The ‘green’ investing sector hit $1 trillion in 2020 . Many firms realised that their existing portfolios could not benefit from this trend, not having the necessary green credentials to take on their competitors.
A wave of passive ‘ESG / green’ funds subsequently appeared in the market (see glossary for ‘passive fund’ definition) from companies wanting a foot in the door of this rapidly growing sector. However, due to a lack of regulation and active decision-making in passive funds, despite their ‘green’ claims, a number actually allocated funds where they shouldn’t have. As an example, one third of ‘low-carbon funds’ in the UK are currently invested in oil and gas stocks .
Unfortunately until effective regulation is fully implemented, it seems to us greenwashing is here to stay.
The term ‘greenwashing’ was first coined by an American researcher and environmentalist, Jay Westerveld in 1986. Visiting a resort in Samoa, Westerveld noticed they were promoting a new ‘reusable towel service’ which was ‘better for the environment’ yet several hundred metres away, they were cutting down thousands of trees for their latest expansion. The messaging was incoherent. Westerveld defined the term ‘greenwashing’ in an essay he wrote based on the irony of the ‘save the towel’ movement in the hospitality industry .
What regulations or laws are in place to prevent greenwashing?
A regulation came into force on 12 July 2020 though most of the provisions will not apply until 2022 and 2023 (since Brexit, we now have no clear information on how and if the UK will enforce any regulations). However, Her Majesty’s Treasury has stated that the sustainability and responsible investing agenda is and has been a focus of its Asset Management Taskforce. Further, the UK government has committed to reach net zero by 2050 and is currently conducting a review on how best to fund the transition to net zero1.
However, the EU Taxonomy Regulation (see glossary for full definition) is currently being further established; a set of recommended criteria that will help investors determine whether funds are ‘sustainable’. However despite the recently approved recommendations put forward to the European Commission, official roll out on transparency will not take place until 2022.
In the meantime, we would encourage firms with ESG offerings to carefully consider the requirement to be fair, clear and not misleading in their communications. This includes in setting out information about their investment process and investment decision-making so that it is clear to consumers what they are investing in and to help to ensure the industry provides consistent messages to the communities we serve
Do penalties exist?
Not explicitly. Though, in our view, it can surely only be a matter of time before greenwashing becomes history. And if regulations don’t lead the way, our view is savvy consumers will. Damage to a brand’s reputation can potentially be irreversible, especially in the financial services industry, where customers trust firms with their savings.
How to spot greenwashing in the investment industry?
Until additional regulation kicks in, customers have a responsibility to put their investigative hats on. In our opinion, here is how:
Enquire about the firm’s expertise – It is key to assess the experience of the fund management team and their sustainable investing credentials. How do they stay abreast of all the latest climate change news? Regular training should be in place to ensure the investment team is staying on top of trends. If those answers are difficult to come by or unconvincing, this should be a red flag.
Transparency is key – The investment firm may well be investing in sustainable initiatives but are they themselves sustainable as institutions? They should have net zero carbon plans (see glossary for definition) in place as well as a Diversity & Inclusion policy which should be implemented via a diverse team across the whole organisation. Energy efficiency certificates can be verified on certifiers’ websites. Beyond companies having plans, customers should also ask for evidence that those companies are acting on these plans backed up by real evidence. You have to walk the walk as well as talk the talk.
Demand information on how they embed ESG – The term ESG (see glossary for definition) is endemic. However, the current lack of full regulation makes it easy for investment firms to claim their funds are ESG-aligned. Therefore, customers should challenge the investment manager on their strategy to embed ESG in the investment process. While the following may be highly regarded systems that can be leveraged to enhance better decision making – Global Reporting Initiative, Sustainability Accounting Standards Board and the World Benchmarking Alliance, if it emerges that ESG filtering is more an add-on than core to the strategy, then more digging in our view is required.
Question the fund’s investment strategy and process approach – Frameworks and methodologies should be clearly aligned with their sustainability goals. Do they disclose their underlying investments and how those are tackling sustainability issues? Impact reports on how beneficial their investments have been for our planet in our view should be published annually and backed by solid evidence. Transparency in our opinion has to be key.
It is all in the wording – Be wary of websites flush with vague wording such as ‘we believe sustainability should be at the core of everything we do’ without hard evidence to back up such statements. Generic fund names e.g. ‘Sustainable ISA’ can also be misleading. Look for hard evidence as well as how such firms have defined sustainable investing.
Seek out engagement levels – Management teams should lead the way and hold their investment companies to account, constantly looking to improve their practices. What is their voting policy? Engagement is paramount in the transition to a greener economy.
Until regulations come fully into play, make sure you keep your wits about you. We expect more transparency and regulation to drip through in 2021, which should be helpful, at least in raising awareness.
We live in a world that needs to transition. We need new energy systems, new mobility solutions and new consumption habits, amongst others. The history of the tech company Aptiv is a testimony of the fast changing world we live in.
Aptiv: A new frontier for mobility
In 2009, the iconic American automotive giant General Motors went bankrupt. Bondholders proposed a reorganisation of the business through a legal process in the US known as Chapter 11. This was in order to keep the business alive and pay creditors over time.
During that process General Motors was forced to sell its powertrain unit. In 2011, this then listed on the stock market under the name of Delphi. Delphi subsequently became one of the leading manufacturers for the automotive industry.
Then in 2017, Aptiv was created. The spin-off of the powertrain unit kept the Delphi name, and Aptiv retained two divisions. These captured megatrends such as electric vehicles, hybrids and most excitingly, autonomous vehicles. Aptiv sends a powerful message to its customers and investors. It aims to be at the forefront of the “convergence of safe, green, connected solutions in new mobility and autonomous driving”. Let’s take a deeper look.
As cars electrify, so is the electric content in the car. Especially on the high voltage side. Aptiv estimate that the HV equipment for an electric car is 1.5-2.0x higher relative to a traditional ICE car. (Internal Combustion Engine, your typical car running on petrol/gasoline or diesel). Between 2019 and 2023, car makers are intensifying their electrification efforts. According to carmakers announcements, there could be up to 40 new platforms for EV and/or hybrid cars. This is expected to result in a significant increase of this market segment. High Voltage is a small market today roughly $1bn  but can grow at a staggering pace of 40% p.a. to 2022 . Aptiv has a dominant market share in this niche segment, but fast-growing segment, of around 30-35%. 
Autonomous vehicles: the new normal?
Let’s dig into an acronym – ADAS (Advanced Driver Assistance System). A few years ago, cool stuff such as rear cameras, parking assistance, or trajectory sensors were only found on high-end cars (mostly German). It has become mainstream and for the greater good (who has not thanked this system when trying a desperate and bold attempt to park your car when there is barely enough space?). It is still a fast-growing market (today in excess of $5bn) and Aptiv’s market share is above 20% . These systems are absolutely necessary to one of the most promising evolution of mobility: autonomous vehicles.
Aptiv has formed with Hyundai Motor a joint venture (or JV – they have both dedicated $2bn this JV) whose objective is to develop a robot taxi platform. The first model should be ready before the end of the year, and a new version for 2022. Hailing a ride from your smartphone is no longer new (Uber anyone?). However, riding in an electric/hybrid vehicle driven by a computer system is being tested commercially in Las Vegas. For once, what happens in Vegas doesn’t need to stay in Vegas.
These examples of leadership positions can translate into above average operating margins, a solid balance sheet, and a positive generation of cash through the cycle – enabling the company to be at the forefront of innovation. Yes, COVID-19 will likely have adverse effects on financial metrics in 2020, but barring a prolonged economic depression, the profound transformation of the car industry (potentially to “mobility as a service”) should provide secular tailwinds for the years to come.
In a nutshell, Aptiv’s strategic positioning fully aligns with future mobility trends and plays a critical role in offering solutions to tackle climate change. In addition, agencies (CDP, Dow Jones Sustainability Index) widely recognise its corporate governance practices (ESG) as being well above average. Aptiv was notably named for the 8th year in a row as one of the most ethical companies by Etisphere . Lastly, its ability to operationally and financially execute, and its leadership status, make Aptiv a supplier of choice for car makers that are embarked on this fascinating journey. It comes with a dual objective: make the roads cleaner and safer.
With investing your capital is at risk. This information is for illustrative purposes only and is not investment advice. Past performance is not a reliable indicator of future results. Clim8 Invest portfolios hold positions in Aptiv and therefore Clim8 Invest has an interest in providing a favourable analysis of this investment.
At Clim8 Invest, our goal is to offer our clients portfolios that make a positive impact on the environment. Our selection of actively managed funds and ETFs that have been designed with an investment philosophy we share and an above-average thematic exposure to our six core investment themes: Clean Energy, Clean Tech, Clean Water, Circular Economy, Sustainable Food and Clean Mobility.
These financial products are not invested in big techs (as of end-of September 2020). We select our investments with extreme care and a shared ethos on crucial points, such as avoiding Big Tech.
Solutions to climate change vs. Do less harm?
We struggle to see how Big Tech companies offer solutions to the demands of the circular economy; or how they participate in the development of clean energy. Their absence across our portfolio is, in our view, testimony to our high standards of due diligence and fund selection process.
Clim8 Invest’s mission as a sustainable investor is striking the right balance between:
– The ‘What’ (what are the products and services and how can they be solutions to address our six investment themes);
– The ‘How’ (how companies are behaving as corporate citizens, and notably take good care of the environment).
Climate commitments: a starting point
Does it mean Big Tech cannot become environmental stewards over time? Of course not. By decarbonising through specific pathways, and leveraging their extensive financial resources to implement bold measures we believe Big Tech can become leaders of the transition economy (the substance of this article).
At least when it comes to tackling the ‘How’, they have the power to perform extremely well. The ‘What’ however, remains the missing piece. For now.
The Clim8 Investment Team
Investments of this nature carry risks to your capital. Investing in equities involves a high degree of risk. This information is for illustrative purposes only and it must not be construed as investment advice.
The Clim8 Investment team doesn’t believe Big Tech (Google, Apple, Facebook and Microsoft) provides solutions to the climate crisis. Hence why we do not hold them in our Clim8 portfolios. More our team’s view on Big Tech here.
Still, we paid close attention to their recent climate commitments, taking the measure of Big Tech’s leadership to a net zero transition economy. And have ranked all four companies accordingly to provide clarity on the actual impact of such measures.
Net Zero by 2030
Announcement: September 2020
Science Based Target Initiative: Committed
Climate Investment Pledge: n/a
Facebook comes in 4th place as although their pledge is ambitious it falls short in a number of areas.
Facebook is unique as its social networking sites have immense influence on people’s thoughts and behaviours. Its largest footprint is arguably on how it impacts climate change education and the release of their Climate Science Information Centre was very exciting.
It was also however plagued by the sheer amount of climate misinformation spread via its algorithms and paid adverts. Unfortunately, no acknowledgement or strategy is outlined in tackling this as part of this announcement.
Facebook’s Net Zero commitment is holistic. It includes a commitment to set a Science Based Target (yet to be approved) and to invest in carbon removals as part of its offsetting strategy.
“Our approach to carbon removal builds on carbon credit purchases of more than 100,000 metric tons in 2019 from projects such as forest conservation.”
This impressive offset number however amounts to less than half of their 2019 emissions — meaning they fall shy of achieving Carbon Neutral status. Unsurprisingly, they also failed to provide any transparency on the offset projects they support.
The criteria for their intended carbon removal strategy is welcomed, even if it lacks in detail: “When selecting carbon removal projects, we will prioritize those that demonstrate additionality, are designed for permanent impact, align with social and environmental co-benefits, and enable climate justice and equity. In addition, project benefits need to be quantified using recognized standards and assured by an accredited third-party verifier.” – Facebook Sustainability
Their climate action strategy is focused on energy efficiency and they have achieved 3rd party certification (LEED platinum). They unfortunately fail to break down what they mean by 100% renewable energy. Are they planning on developing their own projects, purchasing of Renewable Energy Credits (RECs) or simply source from a renewable energy provider? These details matter.
They are the only ones to talk about material sourcing for their data centres — also explained by the fact they procure very few other raw materials. Their purchasing of a natural fiber-filled polypropylene (NFFPP) — derived from renewable jute fibers — has apparently reduced their footprint substantially but it’s not disclosed by how much.
Carbon-free by 2030
Announcement: September 2020
Science Based Target Initiative: n/a
Climate Investment Pledge:£10 million
Despite the somewhat comical wording, the Carbon-free commitment is ambitious: Google wants to bring their direct (Scope 1) and indirect (Scope 2) emissions to zero, 24/7.
Much like all of the large tech players, the big challenge here is the usage of fossil fuels to power data centres during those hours where the sun or wind don’t generate enough energy or as emergency backup.
Google is using its expertise to improve predictability of renewable energy. For example, through a collaboration with DeepMind they have developed a machine learning system that predicts power output from wind farms 36 hours in advance, which in turn makes it more valuable to the electricity grid.
In land-constrained countries Google is also showing creative ingenuity. For instance, by collaborating with local authorities for the placement of solar panels.
Unfortunately they only name one of the projects they have supported (a landfill gas project in upstate New York) and provide very little transparency on what they mean by ‘high quality’ offsets — a failed opportunity for shared learning. The only detail provided is a document from 2011 that describes in generic terms what offset projects are and what their due-diligence looks like.
To achieve their 2030 ambitions they will be exploring new tools “such as advanced nuclear, enhanced geothermal, green hydrogen, long-duration storage, or carbon capture.” – Google 24/7 by 2030
Where Google’s commitment lacks in ambition slightly is with regards to Scope 3, i.e. all other indirect emissions arising in the value chain. They manufacture far less physical products (e.g. Pixel Phones) than Microsoft or Apple, however, the lack of clear commitment on their Scope 3 (especially supply chain) emissions is a little disappointing. No mention of Science Based Targets either.
Carbon Neutral for its supply chain and products by 2030
Announcement: July 2020
Science Based Target Initiative: n/a
Climate Investment Pledge: undefined part of a $100 million Racial Equity and Justice Initiative Fund
This announcement is all about its products which is very exciting as this is by far their most material impact category (76% of emissions are in product manufacturing and a further 19% are the result of transport and use related to products).
They have already been Carbon Neutral for their Scope 1 (direct greenhouse gas emissions) and Scope 2 emissions (indirect emissions resulting from the use of electricity), and have recently extended this to parts of Scope 3 including business travel and employee commuting.
They provide lots of transparency on their renewable energy strategy for electricity (Scope 2) outlying the breakdown of the energy generation they own (12%), where they have an equity stake (4%) and where they have long-term contracts (86%). Unlike Google, they have not made a specific commitment to running on clean energy 24/7.
To make their products more sustainable they plan on:
Using 100% recycled materials: Which substantially reduces the footprint. For example, usage of 100% recycled aluminium in the enclosure of the 2019 MacBook Air helped cut the product’s carbon footprint by nearly half
Driving energy efficiency: Both in the manufacturing of their products, their offices and for their data centres. They also make a fantastic statement: “Simply put, the cleanest energy is the energy we don’t use.” This also extends to developing more efficient and durable products, and ensuring all of their suppliers use green energy
Enabling greener transport: Perhaps the vaguer of their pledges, they plan “to partner with our shipping suppliers to leverage fleet improvements, sustainable fuels, and supply chain efficiencies”
What is also particularly exciting is their communications around their products’ environmental impact through their environmental report cards — see an example for iPhone 12 here.
Their Carbon Neutral commitment is in fact aligned with a science-based Net Zero pledge, which involves an ambitious 75% reduction in emissions with a 2015 baseline. They plan to offset the remaining and unavoidable 25% through carbon removals. Carbon removal projects take carbon out of the atmosphere as opposed to avoiding them. Apple has decided here to focus on nature-based solutions that protect and restore forests, wetlands, and grasslands. Excitingly, they also disclose that they are supporting a mangrove restoration project in Colombia and a savannah conservation project in Kenya. Another win for transparency.
Carbon Negative by 2030
Announcement: January 2020
Science Based Targets Initiative: Targets Set
Climate Investment Pledge: $1 billion
Microsoft was the first to announce an ambitious climate commitment this year and what an announcement it was. Carbon Negative means they want to remove more carbon from the atmosphere than they emit, thus going beyond Net Zero. They are also the only tech giant to have an approved target from the Science Based Target Initiative.
Microsoft has been Carbon Neutral since 2012 (Scopes 1 & 2) and has pledged to remove all of its historical emissions since they were founded in 1975 by 2050— a display of true responsibility. Some of the carbon offset projects selected for this will hopefully be announced before the end of the year.
They are currently pursuing LEED Platinum certification for their campuses (no mention of data centres like Facebook) and on the renewable energy front, although they don’t disclose the exact breakdown of their own projects they have developed and invested in a number of projects. They also aim to further “green the grids around the world.” For example, they offer backup generation to the grid in Wyoming and are piloting integrated energy storage batteries with GE in Ireland.
Their $1 billion Climate Innovation Fund is particularly noteworthy. It’s a meaningful amount of money and the fund has clear application criteria. They have already started deploying the money with their first investment ($50 million) in Energy Impact Partners in July 2020.
Microsoft is truly putting a price on carbon across the organisation and their supply chain. They are the only ones to have mandated that their suppliers report on their own Scope 1, 2 and 3 greenhouse gas emissions data by beginning of 2021. They have also set an internal carbon tax that is (actually!) being implemented.
‘Unlike some other companies, our internal carbon tax isn’t a “shadow fee” that is calculated but not charged. Our fee is paid by each division in our business based on its carbon emissions, and the funds are used to pay for sustainability improvements.’
The Microsoft Sustainability Calculator provides cloud customers with transparency into their total carbon emissions — Scopes 1, 2 and 3 — resulting from their cloud usage. Microsoft is the only cloud provider to to provide this level of transparency.
Finally, they are also piloting Carbon Neutral Xboxes, meaning they have specifically calculated the lifecycle carbon emissions associated with an Xbox, actively reduced its impact where possible and offset the unavoidable emissions, e.g. relating to the product’s raw materials, logistics and/or transport. This is exciting as it’s bringing the conversation about climate change in consumers’ hands. After all, people care most about products, not companies.
Today, Microsoft’s level of ambition and progress puts them comfortably in first place when it comes to climate action. Close monitoring of announcements relating to Apple’s supplier engagement initiatives, Google’s updates to their Scope 3 strategy and the specifics behind Facebook’s Science Based Target will be key to see if they can retain it.
As the climate crisis becomes more pronounced, we can and should expect bolder climate action from all companies. The ‘tech giants’ have an even greater responsibility as they have the knowledge, means and resources to lead the way. Let’s hope they live up to their commitments and inspire others to follow suit. Humanity desperately needs the good news.
Clim8’s CIO Vincent Gilles shares another example of a company included in the portfolio that we have curated at Clim8 Invest.
Orsted is one of the few names in the clean energy space which is generally well known.
There is a good reason for this: this Danish company has turned itself from a traditional Government-owned and run Oil & Gas company into a recognised world leader in wind energy  changing its name on the way from DONG to Orsted.
By virtue of doing so, the company has not only become more profitable , which was not obvious at the start of their process, but also more valuable for its shareholders. The share price has nearly quadrupled in less than 4 years . And it has also won awards, for example the prize of the world’s most sustainable company.
Orsted is one of the top positions in our portfolios, held through several of the leading sustainability funds that we have curated through our in depth “due diligence” process.
As a reminder, we invest into a wide range of carefully selected shares and funds, all focused on sustainability. Orsted is regularly one of the top 20 positions in such funds.
A couple of figures to start with:
Orsted currently owns and runs about 7GW of off-shore wind assets with 3 GW in construction to be online by 2023 .
The company’s goal is to reach 15 GW by 2025, which should produce enough power to supply up to 30 million people (or equivalent to 45% of the UK population, an amazing figure) and finally 30GW by 2030.
Like the UK, Denmark is well supplied in natural wind resources  and, on average, Orsted’s assets produce more per MW of capacity than most other offshore assets .
We touched upon offshore in our article on Greencoat UK Wind plc, another one of our top holdings, but it is worth having a couple of figures in mind about the rise of offshore wind:
The UK has ambitions to go from 10GW in 2019 to 40GW in 2040
Germany from 8 to 20GW
Japan from 0 to 5GW
The US from 0 to 20GW
That tells you how ambitious Orsted’s targets are (or how slow the rest of the world is reacting).
The big kick behind this drive is politics and the ambition of so many countries to be as close to carbon neutral as possible by 2040 or 2050. But technological progress can also help enormously. The cost of manufacturing a MW of off-shore wind capacity collapsed in the last few years as wind turbines became bigger (sorry not bigger, gigantic!). Today, the cost of producing power with off-shore wind compares with that of generating with coal and gas .
In other words: we can produce both cheap and zero carbon already now.
Through the transition from an Oil & Gas national champion to its current state, c90% of power generated is zero carbon , Orsted has reduced its emissions by 86% since 2010, avoiding 11 million tonnes of carbon .
That’s about the same as telling 6 million people to stop using their car for a year.
The company‘s ambition is to remove the last piece of coal-based generation by the end of 2023 . It even has the ambition to have its scope 2 and 3 emissions (i.e. the indirect emissions resulting from their clients using Orsted’s energy) down by 50% by 2032 vs. 2018 .
Of course, these are very aggressive and lofty goals but. so far, Orsted has achieved its targets. And there is no better way to keep a company on its toes than by having very aggressive targets!
So is everything perfect in the Kingdom of Denmark? (sorry, could not help!) Yes, in principle, but there are some issues investors should keep in mind:
First. The stock has been a tremendous success. As said, the stock price has nearly quadrupled in less than 4 years and it is up nearly a third in 2020 . So, we cannot argue that no one has heard about Orste. But it is one of the very few ‘pure plays’ investors can turn to when trying to invest low / zero carbon.
Second. As a result, in our opinion, the stock could be described as well priced with a ratio of stock price on future earnings above 48x, as we write, which is significantly higher than many of its competitors (admittedly there are few of them) and peers (a slightly bigger group) . Typically, companies involved in clean power generation would trade close to 30x (for example, NextEra in the USA, also one of the companies that is likely to be in our top 20 holdings at any given time) 
So, using a slightly technical term, Orsted is currently trading at a premium to its peers which we believe is explained by the market perceiving it has better prospects to grow faster and more profitably than the rest of the crowd.
A last word on Corporate Governance: the current CEO, Henrik Poulsen announced earlier this year in June 2020 that he was stepping down . When the company announced the appointment of Mads Niper (the current CEO of Grundfos), we found remarkable the fantastic transparency of the company regarding the remuneration of the incoming CEO, a real example of great governance put into practice to the benefit of investors.
Investments of this nature carry risks to your capital. Investing in private equity involves a high degree of risk. Please invest aware. Please note this information is for illustrative purposes only and it must not be construed as investment advice. Past performance is not a reliable indicator of future results.
 Credit Suisse Utility Workbook 2019  Orsted Annual Report 2019, FactSet [3; 14; 15] FactSet  Orsted H1 Financial Report 2020  Global Wind Energy Council [6; 12; 13] Orsted  UK Government, German Government, EU Commission DG Energy, Global Wind Energy Council  BNEF, Credit Suisse  EU Commission, Danish Government, Orsted  Analyst Presentation, Orsted, 2019  EPA for the calculation of how much a car emits  FE Analytics, FactSet, Clim8 Invest  Orsted, Company Announcement, July 2020
You would have needed to be on another planet not to have heard that sustainable investments have outperformed markets since the Covid-19 crisis.
Over Q1 2020, out of 206 sustainable equity funds and ETF in the US tracked by Morningstar, 44% were in the top quartile in terms of performance, 70% in the top two and only 11% in the bottom quartile. The performance was good with assets in European sustainable funds down 10.6% in Q1 20 vs. a 16.2% decline in the overall European fund universe. Evidently, ESG and sustainable fund providers (yes even those who ask to be forgiven for investing in fossil fuels until very recently) have aggressively promoted this success. As for stocks, the S&P Sustainable index outperformed overall S&P by 0.9% over the last 3 months in $ terms, clearly benefiting the defensive qualities of such assets in a period of market turmoil.
Yet, the really striking data is to be found elsewhere.
Since inception in September 2007 until end of February 2020, the MSCI ACWI ESG leaders index (largely used in the market as a benchmark) returned 5.24% vs. 4.48% in the broad market. The interesting point here is that this data does not encapsulate March 2020 when sustainable and ESG funds did even better.
We have seen the interest in sustainable investment clearly within our own activity too, during our recent crowdfunding campaign, we secured 300% beyond our target – that being pre-launch and during a global pandemic.
Let’s take a deep dive and see whether outperformance is a happy coincidence or evidence of a long-term trend, to try to anticipate what the future may hold. Our conclusion is not only that sustainable investment is turning mainstream but that it has the basis for a sustained out-performance in the medium-term, irrespective of views on the environmental crisis.
Why the strength of sustainable investment in the recent storm was rationale, not emotional
There are 5 objective reasons why sustainable investment was a recent winner:
Sustainable and ESG investment funds nearly always have low exposure to commodities, in particular, Oil & Gas stocks, which were the worst hit during the market crash. So, as a result, sustainable investments were likely to outperform only by virtue of not being commodity-exposed.
Most sustainable and ESG funds entered the crisis with long healthcare and tech positions. Those were the two sectors that out-performed, which in turn compounded in performance terms the benefit of low exposure to commodities. I would argue that these two points are pretty uncontroversial.
There is a correlation between the quality of management and the sustainability of the business model of companies. Typically, we see that companies whose management has for a long time prepared to pivot towards a more sustainable model ended up with a more resilient business model. This, in turn, protected them to an extent against a collapse of their markets. There is a growing body of academic studies showing a positive correlation between ESG factors and a Company’s Financial Performance (CFP). More than 9 out of 10 companies show this positive correlation according to a recent Harvard research piece. By virtue of linking ESG and CFP, it is possible to establish materiality which is a key factor in our view.
It could also be argued that investors anticipated future political developments, with many countries putting the environment at the centre of their recovery programmes. Investors take a risk there but a limited one: calls to base future economic growth on cheap oil and gas have been muted. Investors were very rational in particular in light of the evidence provided by the CBI that clean investment accounted for 1/3 of the economic recovery in the UK post the 2008-10 financial crash. In the next few years, investment opportunities in electric mobility and energy efficiency, to take two examples, could provide a drive towards economic recovery in two key sectors.
The collapse of commodity prices, in particular oil, could have been a very negative development making pollution cheaper than in the recent past. Yet again, investors took a very rational view: with oil demand likely never to fully recover from the current crisis (“peak oil”), returns in the Oil and Gas industry are likely to collapse. A few years ago, E&P would yield 25%+ returns, with Brent price below $30/bbl, returns of renewables will at least match those of fossil fuel. Investors have anticipated the move.
What about the medium to long term?
The future is very positive sustainable investment. Let’s take our five point format and see the rational arguments for sustainable vs. “traditional” investment in the next decade:
Those long term reasons driving investors mentioned above, in particular, the link between ESG targets and financial performance will not disappear.
It is anticipated that billions if not trillions of investment money will leave fossil fuel/ polluting industries and be redeployed towards sustainable investment. This will simply happen because investors want it. It is worth having in mind that, if $2.6trn of investment were moved towards clean energy by 2035 to meet the COP 21 climate change targets, this would imply that c10% of the money invested in pension funds in the western world would leave polluting investments and be redeployed towards cleaner options. A simple demand and supply equation that can only help the relative valuations of sustainable assets. Already $30bn of investment moved towards sustainable investment in 2018, a 30% rise vs. 2016. In the first four months of 2020, in the thick of the C-19 crisis, according to Morningstar $35bn found their way into the European sustainable fund universe, a 50% rise vs. the same period last year. At the same time, the outflow for the overall European fund universe was $170bn.
Economics. We argue above that more money will be thrown in by Governments, but to an extent, this money is not necessary: wind and solar + storage are now competitive with coal and gas. After years of investments, hydrogen and storage are becoming competitive too. These technologies will amplify the trend towards clean/sustainable solutions not being a moral choice any longer but being the obvious choice based on an objective risk/reward analysis. Which fund manager would want to be invested in a heavily polluting asset when a clean asset delivering the same level of returns is accessible? The risk analysis frameworks are changing quickly for fund managers: clean energy is a way to reduce risks now, not just to diversify.
As more and more evidence of the growing environmental crisis emerges, regulations will continue to get tougher with polluters and encouraging sustainable solutions. I see the current US administration as an aberration, not a show-stopper. Those who look at the US in detail know that clean energy is progressing quickly.
We are making progress so that the definitions around sustainable investment and ESG are becoming clear and investors have frameworks. The EU taxonomy together with the UN SDGs is a solid base fund that fund managers can refer to. In turn, investors can more easily compare fund structures and performance. The situation is far from ideal but it is so much better than a couple of years ago. Thanks to this growing culture amongst investors, to dig deeper, the most egregious greenwashing will gradually disappear.
Where we could turn to be too optimistic
However rosy this scenario may appear, I can identify three risks that may at least partly derail it. Firstly, traditional polluting industries have benefited over the years from heavy levels of subsidies from Governments because they are large job providers. Oil gets $380bn of subsidies a year worldwide, nearly 3 times as much as clean energy (yes, shocking). It will be politically difficult for Governments to cut those industries adrift too quickly.
Additionally, while the number of funds claiming to be sustainable is growing exponentially, the number of assets to invest in remains limited. Anyone wishing to invest in zero-carbon power generation in Europe will likely end up investing in Orsted. It is a fantastic company but it trades on very high multiples.
To diversify their portfolio, investors have to consider investing in companies like Enel or Iberdrola who have reduced their emissions drastically but are not zero emitters. This simple example shows the type of dilemma investors will face until they have more assets to invest in that fit tight criteria.
Finally, if big Oil decides to re-direct their investment towards clean energy, they risk overpaying for assets and in turn affecting the value of such assets.
Overall, it’s clear that the positive arguments towards sustainable investment are much more powerful and, having turned mainstream, will be a strong source of performance for investors in the future for decades to come.
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