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Sustainable Investment: The Challenge For Investors

Frédéric Rochat

11 October 2022

This news service is pleased to share these thoughts from Frédéric Rochat, managing partner at , on what clients need to know about sustainable investment. The whole sustainability/ESG agenda remains a large part of the wealth sector landscape, even if some of the choices that investors make aren’t as easy to execute as some might have hoped. 

The editors are pleased to add these comments to our conversation on this topic; the usual disclaimers apply. Jump into the debate! Email

Sustainable investment has become a key topic for private and institutional investors. However, the acronyms used (ESG, ITR, SFDR, etc.), the complexity and the rapid developments in this field leave many investors confused. The fundamental question we are often asked is: why should we, and how can we, integrate sustainability principles into portfolios? 

Today, powerful market forces are at work to encourage and facilitate an environmental transition that has become indispensable: consumer pressure, regulatory actions, business model transitions across industries and fair capital allocation by investors.

In such a context, integrating sustainability principles into the construction of portfolios supports a fundamental transition of our economic models. It will also allow for better preservation of invested assets, favouring companies that will benefit from future transitions while reducing exposure to future losers of the continuing revolution. 

Environmental stability for sustainable growth
It is undeniable that functional societies, sustainable economic growth and attractive long-term financial returns rely on environmental stability.

Scientific research has now quantified several global limits that must not be exceeded in order to safeguard this, with measures concerning CO2 emissions, water quality, biodiversity and more. While the situation is alarming, since we have already crossed the alert thresholds for most of them, the science is clear on how to restore or limit the damage caused to our ecosystems. 

The environmental transition will be built around four major axes:

Electrification. Electricity is becoming the dominant energy vector. From around 20 per cent of the world's energy demand in 2020, it will rise to over 70 per cent in 2050. To produce electricity, we will have to switch from fossil fuels to cleaner energies (water, wind, solar and possibly nuclear).

Agriculture and nature preservation. Between now and 2050, we will need to feed an additional two billion people while restoring large areas of arable land for reforestation and biodiversity projects. We will have to rethink our production and consumption methods.

Materials. We will have to decouple the trajectory of economic growth from the extraction of raw materials. The "take, make, waste" model must be replaced by "reduce, re-use, recycle." Building materials must be rethought; cars will be shared and their components recycled.

Carbon. The market economy model must be expanded to include all its externalities. Carbon emissions must become increasingly expensive, creating the incentive mechanisms needed for industrial actors to adopt real transition strategies.

Sustainability, a source of value creation
A transformation of our economic models towards a more sustainable economy is underway and represents a real revolution. New players with major growth potential will emerge, while others will disappear. The fear of some investors that investing sustainably means sacrificing performance is unfounded.

Recent geopolitical events and the resulting tensions will only add to the urgency of the transition. The concept of energy independence, for example, has never been more relevant. 

Integrating sustainability into investor portfolios
In recent years, investors have integrated sustainability criteria according to their preferences. Many have chosen ESG as the scoring tool, which allows us to compare the current practices of different companies across a range of environmental, social and governance criteria. 

Looking ahead
Today, we must look further ahead. The ongoing transition promises to affect all economic sectors, across all geographies. Just as the technological advances of the last 50 years have disrupted all business models, this sustainability transition will impact all of our investment universes, inviting us to rethink the way we invest.

More than ever, sustainable investing must become a matter of conviction, highlighting the importance of scientific research to allow us to better understand the transition trajectories of companies, sector by sector. The analysis must be forward looking and will require a wide range of skills: climatologists, scientists, engineers and analysts.

With the sustainability revolution firmly underway, increasingly accelerated by geopolitical pressures, we believe that building portfolios aligned with sustainability principles is the most effective way to support this transition. This will ensure the best preservation of invested assets over the long term, favouring companies that stand to benefit from the current transition while limiting exposure to future losers.