Deep Dive: Global ESG equities

With COP27 fast approaching and with most countries yet to announce the promised strengthening of national targets, the unexpected passing of a major climate bill in the US has driven a surge of interest in green energy stocks.

The Inflation Reduction Act, a $700bn sweeping health care, tax and climate bill signed into law by President Joe Biden in August, contains a host of clean energy and health initiatives, paid for by higher corporate taxes and stricter enforcement of the tax code.

Opportunities to capitalize on the rapidly evolving energy transition

Anna Moss, senior sustainability analyst at abrdn Research Institute, said: “Within 24 hours of the deal’s announcement there was a rapid repricing of stocks that were likely to benefit most from a faster transition.

“This provided an important, clear signal of how the structural shifts related to the energy transition are likely to deliver strong returns to investing in companies providing solutions to climate change.”

Tilt towards ‘sustainable outcomes’

For Mike Fox, head of sustainable investments at Royal London Asset Management, the most interesting sectors sit “on the edge of acceptability”, with energy being one example.

“On the positive side, cheap and plentiful energy has been the fundamental building block to much of the last century’s social and economic development as it has broken the link between manual labor and output, as well as allowing a more comfortable lifestyle,” he said. .

“More negatively, however, the carbon intensity of the current energy complex, and its dependence on dangerous regimes, undermine its role in society. It is therefore critical that, overtime, we evolve to plentiful, cheap renewable sources of energy.”

Fink: recent global events could ‘accelerate’ energy transition over the long-term

For Sunil Krishnan, head of multi-asset at Aviva Investors, there are huge investment opportunities being created both by newer companies whose solutions are powering change, and by older companies who are leading their industries into the necessary transitions.

“We allocate a portion of our equities specifically to global funds, which pursue specific sustainable outcomes in climate, natural capital and social transition,” he said.

“These strategies do tend to have more concentrated exposures – so a commodities boom tends to benefit other companies with weaker ESG profiles – but the blend of solution and transition theses has allowed them to manage this year’s volatility much better than fashionable green-tech funds. “

A forward-looking ESG approach

The new US climate bill has highlighted the importance of strong climate policy signals to drive both short and long term investment decisions, Moss noted, as well as to attract the investment needed to help drive the energy transition at the magnitude and pace required.

However, given the uncertainty regarding how policies and technologies will unfold, she said that climate scenario analysis can provide the “forward-looking, quantitative assessment of the potential impacts that is needed to help inform our investment decisions”.

Moss added that asset managers must also challenge the credibility of company transition plans, be transparent about the real world impact that their own ‘sustainable’ products can achieve and ensure that their ESG knowledge is not just “sitting in a sustainability silo but reaching across the entire business”.

The future of inflation has a green hue

Aviva Investors’ Krishnan said that ESG represents an increasing risk to the sustainability of a company, therefore it expects all of its active stock pickers to demonstrate monitoring of ESG risks, as well as engagement, for “all equities, not just some”.

“We believe that some of the most important ESG factors facing a company cannot easily be captured in data – for example, if management needs to be challenged on its treatment of workers. It is therefore important that managers can demonstrate adequate resourcing of ESG research and engagement, and a willingness to reallocate if engagements are not successful,” he said.

Global ESG equity fund picks

For investors looking to tap into the net-zero transition theme, Juliet Schooling Latter, research director at FundCalibre, suggested Ninety One’s Global Environment fund, which only invests in companies that are contributing to the decarbonisation of the world economy.

Schooling Latter recommended the CT Responsible Global Equity fund, managed by Jamie Jenkins and Nick Henderson, for those interested in a long-term approach of sustainable investment and a focus on engagement and voting to encourage best practice management of ESG issues.

Morningstar figures reveal drop in recently rebranded ESG funds flows

She also highlighted the Artemis Positive Future fund, a global equity fund which seeks to take advantage of the disruption and transformation in the likes of the healthcare, technology and climate space through a sustainability lens.

Finally, Schooling Latter pointed to the LF Montanaro Better World fund for those investors interested in the mid and small-cap alternative. It has a global scope, and in addition to the usual requirements it is looking for businesses whose products or services are making a positive impact on the world.

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