Vision of a future maker: Sustainable investing as a multi-decade opportunity

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  • Wednesday, 30 Sep 2020

This article was taken from The Edge.

DURING the pandemic-driven market downturn this year, ESG (environmental, social and governance) funds and indices have outperformed traditional funds and indices, highlighting the opportunities and strengths of sustainable investing.

According to index provider MSCI, its four global ESG indices outperformed the MSCI ACWI (All Country World Index) in the first quarter of 2020.1

Financial information provider Morningstar also found that from Jan 1 to June 30 this year, based on funds available to US investors, an impressive 72% of sustainable equity funds rank in the top halves of their Morningstar categories and all 26 ESG index funds have outperformed their conventional index-fund counterparts.2

Jane Ambachtsheer, Global Head of Sustainability, BNP Paribas Asset Management.Jane Ambachtsheer, Global Head of Sustainability, BNP Paribas Asset Management.

“This can in part be explained by the fact that business resilience is at the core of sustainable or ESG investing practices. A common objective of integrating ESG into fundamental investment practices is to improve how risk can be identified and mitigated. This means considering a broader range of financially material issues that traditional financial analysis may capture,” says BNP Paribas Asset Management (BNPP AM) Global Sustainability head Jane Ambachtsheer.

Although the resilience of ESG investment strategies and indices has been encouraging to date, the real value of ESG analysis in an investment process should be evaluated over the long term, Ambachtsheer adds, as opportunities identified may be structural and the effect on asset prices takes time to play out.

This, however, creates opportunities for investors to participate in the sustainable investing space.

Sustainability across assets

The overall sustainable investment approach of BNPP AM centres around four pillars: ESG integration, stewardship – which covers proxy voting, engagement and public policy, responsible business conduct and sector-based exclusions, and a forward-looking perspective on the ‘3Es’ (Energy transition, Environmental sustainability, and Equality and inclusive growth) which leads the pathway to economic sustainability.

“We have integrated ESG across our investment strategies, as we believe it enhances risk-adjusted returns and helps us make better-informed investment decisions. We are committed to being a ’future maker‘, using our investments, our voice and our leverage to shape a better future,” says Ambachtsheer.

By September 2019, BNPP AM became the first global asset manager to announce that its flagship fund range is 100% sustainable.

BNPP AM is recognised as a responsible investment leader globally and locally in Malaysia. It is one of only five asset managers to have achieved an 'A' rating for its approach to responsible investment – the highest currently awarded by ShareAction to any asset manager worldwide.

The firm is the most awarded global manager by key Asia-Pacific regional trade publications in the sustainable investment space in 2019/ 2020, clinching accolades such as the Best ESG Advisor by Asian Investor and the Best ESG Manager at the Asia Asset Management: 2020 Best of the Best Awards.

In Malaysia, the firm was named the ESG Asset Management Company of the Year by The Asset: Triple A Sustainable Investing Award for Institutional Investor, ETF, and Asset Servicing Provider 2020 and also snagged its fourth consecutive win for Best International Equity Fund Manager: FTSE Ethical World Developed Manager at Employees Provident Fund External Fund Managers Annual awards 2020.

Water and energy transition: Opportunities in sustainable investing

The call to shape a better future is an urgent one. The growing global population – forecast to grow by two billion to surpass nine billion by 2050, according to the United Nations' report titled 2019 Revision of World Population Prospects – will exert further stress on the Earth's resources.

According to some estimates, this trend, alongside rising incomes, will increase the demand for energy, food and water by 35% to 50% by 2030, according to Morgan Stanley's “The Business Case for Sustainable Investing” report.

There is an increasing gap between the supply and demand for water globally caused by drivers such as population growth, increasing urbanisation and greater affluence in developing countries.

At the same time, ageing global water infrastructure is in need of repair, water regulations are tightening, while extreme weather patterns are exacerbating the strains on global fresh water supply.

Some of these are also problems for Malaysia, where unusual hot spells and leakage from ageing infrastructure have disrupted water supply to the households.

However, it is not all doom and gloom as these issues are driving the transformation in environmental markets. Substantial capital investment is being pumped into companies active in the water industry, which is poised for rapid growth. This offers an evergreen, multi-decade opportunity with attractive potential returns for investors.

The global water investment universe is deep and diverse.

Investment opportunities are open along the entire water value chain, from companies providing pipeline and network facilities to cost-efficient desalination technologies.

Many are in fact innovative and fast-growing companies that offer solutions relying on advanced technologies, for example, real-time leak detection and meter reading, smart irrigation systems using GPS data and UV-disinfection water treatment.

Energy transition is likewise an area full of opportunities due to increasing energy demand, a changing energy mix and the need for energy efficient solutions to address climate change.

To prevent global average temperatures from rising more than 2°C as stipulated by the Paris Agreement, energy-related emissions must be cut by as much as 70% in 35 years.

This requires a massive shift in capital and policy change to diversify the energy mix and increase efficiency. US$29tril worth of investment is expected to support this cause between 2020 and 2050.3

“The economics of green and renewable energy solutions have been improving rapidly and could represent an opportunity to direct economic stimulus to enhance the transition towards low or no-carbon alternatives, such as solar and wind energy. In that regard, it is encouraging to note that the European Union’s recovery plan earmarked 30% of the package for climate protection, with the requirement for all allocated funds to contribute to the EU’s emissions-cutting goals,” says Ambachtsheer.

Selecting from a large investment universe of 1,200 companies, BNPP AM’s energy transition strategy seeks to invest in three key areas: decarbonising, digitalising and decentralising of the global energy system.

The diverse opportunities in energy transition and water provide investors with exposure to companies typically not found in a traditional equities portfolio.

With BNPP AM’s sustainable thematic strategies, investors can focus on specific areas of sustainable action while enjoying the structural growth in areas such as energy transition and water, fuelled by the expertise of fund managers who are knowledgeable in environmental markets investing and are able to identify mispriced opportunities to uncover innovative companies.

Committed to sustainable investing

While sustainable investing has become more popular in recent years, the industry still faces a key challenge around the availability, comparability and quality of ESG data and how it can add insights to the ESG performance of issuers.

To tackle this challenge, BNPP AM developed its own proprietary ESG scoring methodology that focuses on a selection of material and quality ESG metrics for each sector.

Commendable progress has been made in terms of ESG transparency and disclosure as well.

“Beginning from the fourth quarter of 2020, we will be disclosing our portfolios’ weighted average ESG scores and carbon footprint versus the benchmark on our fund factsheets in order for investors to have the data and confidence to make better-informed investment decisions,” shares Ambachtsheer.

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1. MSCI, MSCI ESG Indexes during the coronavirus crisis, April 2020

2. Morningstar, Sustainable Stock Funds Held Their Own in Second-Quarter Rally, July 2020

3. Source: Perspectives for the Energy Transition, Investment needs for a Low-Carbon Energy System, March 2017. Net energy transition add up to US$54trn with avoided investments on fossil fuels, nuclear electricity generation and upstream E&P sector adding up to US$25trn, hence resulting in net investments of US$29trn between 2015-50

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