Can investing in transitioning companies propel us towards a greener future?
For professional investors only.
Despite living in a multifaceted and nuanced world, we humans have the tendency to frame everything in black and white. We grow up with stories about heroes and villains, learn about what’s right and wrong, and later decide whether something was a success or failure.
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Being able to put things into two mutually exclusive categories satisfies our craving for clarity and certainty in a world that is anything but. And so, we willingly apply this mindset to many things, ignoring the fact that the world is full of all the shades in between.
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This kind of binary thinking has ruled over ESG investing for decades: a company was deemed either suitable for investment or not. And while this has generated many positive benefits for sustainability-focused investors and society at large, there were unintended consequences, too. Decarbonisation requires investment. Starving high-emitting companies or industries of capital could only hinder their ability to invest in more sustainable practices.
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For our European equities team, ‘transition’ is the next phase of ESG investing. It’s about identifying and working with the large emitters of today that are willing to evolve and meet the needs of a low-carbon economy. According to their analysis, encouraging heavy industries to decarbonise will have positive knock-on effects downstream.
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But a lot more needs to be done to truly decarbonise the planet. While switching to renewables as a source of energy will help us move closer to net zero, raw materials – such as coal and oil – aren’t solely used to produce energy. It’s simply not possible to create chemicals from wind or tarmac from solar energy, so alternative solutions are needed here.
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There are circular economy initiatives that can help us unearth treasures in the trash, but more innovation is needed going forward. Heavy industry players are often scrutinised for their carbon intensity today, but fund manager Steve Smith notes that some have actually built exciting positions in sustainable raw materials.
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To solve the sustainability challenges we face, we must look beyond the binary options presented by the past. The reality is that we need to pass through different shades of ‘brown’ before reaching the greener pasture of a low carbon society.
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