In our view, managers need to be thinking holistically about ESG in today’s environment. The effects of climate change are significant and we see them in the news near daily, with ever-growing wildfires in Western North America, hurricanes that retain their intensity long after landfall, and the shrinking Arctic Circle, just to name a few. As governments around the world seek to pass legislation and regulatory change to limit greenhouse gas emissions, their actions have implications across industries. At the same time, a growing number of clients want to know their capital investments are supporting their values and change they want to see in the world. As managers, we understand that integrating ESG considerations into our investment process is an important aspect of identifying investment opportunities and reflecting what many clients expect of us.
Investment-Driven Innovations Driving Opportunities
We see opportunities across many different industries when it comes to investment-driven innovations. Synthetic biology, green hydrogen, water-saving technologies and renewable energy are just a few examples with long-term growth prospects levered to a more sustainable environment. Green energy has been one area of focus. As we see a shift away from carbon heavy energy to more renewables, significant change is occurring in the transportation industry. One area we’ve focused on is the electric vehicle (EV) space, not just for individual use, but at a larger scale in applications like municipal buses, transit and shuttle operations.
The development of these vehicles also contributes to growth in new infrastructure, as solar and alternative energy sources can be harnessed for use in vehicle charging stations, for example. We are excited about the innovations taking place. Speaking from an equity perspective, we see capital gravitating toward those companies demonstrating commitment to ESG initiatives across multiple fronts. These initiatives can include investing in human capital via talent and diversity programs, focusing on reducing carbon emissions from core businesses, and consideration of voting rights and board composition. Conversely, companies which aren’t addressing these concerns may see a reduction in interest from the investing community.
As active managers, we can play a role by engaging with company management teams regarding ESG metrics. In our view, compelling investment opportunities can be uncovered by identifying companies which are seeking to improve their ESG profiles, creating a virtuous cycle to draw capital from a wider investor base.
Allocating Capital Toward Solutions
In the short term, the market implications of climate change events may be focused more locally; for example, supply chain disruptions related to hurricane damage or businesses considering where to place their operations based on the likelihood of severe weather events. However, as we see events grow in number, size, or severity, there could very well be a multiplier effect which contributes to market volatility as investors grapple with the increased uncertainty of weather-related events. In the intermediate to longer term, we believe there are market implications driven by the allocation of investor capital toward companies which seek to address the issues at hand and in turn allocate their capital towards investments that provide solutions through new innovative products or cleaner, more efficient manufacturing, for example.
What Are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values-based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating. Investments in fast-growing industries, including the technology and health care sectors (which have historically been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments. Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies.
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