How to surf the green transition wave in uncertain times

The environmental and energy transition is clearly underway, and there is no way back. Only a few months ago, the Copernicus Climate Change Service indicated that the past seven years had been the warmest on record, while carbon dioxide (CO2) and methane levels in the Earth's atmosphere increased substantially. Immediate action must be taken if we are to meet the Paris Agreement's goal of limiting global warming to 2 degrees Celsius.

Moreover, the war in Ukraine is posing new challenges for this trend and threatens to take us backwards. European governments are back to discussing whether to increase the military spending, whereas precisely the amount of military expenses of each country is among the criteria to assess ESG sovereign rating.

Markets have been impacted by the rise of the energy prices. The oil price temporarily reached euro 122 per barrel, and the gas price peaked at euro 252 per megawatt-hour. The likely persisting high degree of isolation of Russia from global energy and raw material markets has the potential to not only increase price pressure but to also induce more volatility.

What can we do?

Besides, the war has also raised awareness of the need to increase the energy independence of European countries. This will require an acceleration of investments, to develop renewable energies and to improve energy efficiency. As a consequence, in the event of an economic slowdown, “green” companies that support the transition may have plenty of space to outgrow their peers.

Sycomore AM , that is part of Generali Investments ecosystem of asset management firms, is deeply involved in this process. As a matter of fact, green investments are growing more and more attractive – the bigger their appeal among public opinion and governments’ resolutions, the more solid the expected returns.

Let’s take the example of the Next Generation EU programme. The European commission has confirmed that the Green Deal is one of the pillars of the European Union’s new growth strategy and the proceeds of the European Union’s recovery fund will be used to finance the acceleration of the green transition.

This results in a winning investment strategy which Sycomore AM pursues through its Sycomore Europe Eco Solutions fund. Launched in 2015, the fund aims at delivering sustainable returns through exposure to pure green transition investment themes and a selection of companies with a proven positive environmental contribution.??

Where do the opportunities lie?

The range of sectors to invest in for a better quality of life and a better planet is wide. Sycomore Europe Eco Solutions favors environmental issues such as renewable energy, energy efficiency and sustainable mobility. For example, it focuses on the railway sector or other green modes of transport such as the bicycle industry and electric vehicles, as well as on manufacturers of components that can help lighten vehicles. Investments are also directed to sustainable construction, choosing companies that improve the insulation of buildings or that address the issue of natural resources.

The fund managers focus on climate change, but also biodiversity, waste, water, air quality and natural resources, addressing the entire environmental ecosystem. We were shocked by the change in the "overshoot date", says Alban Préaubert, portfolio manager. (I.e. the day in each year when resource consumption exceeds the Earth's capacity to regenerate them in the same year, which is reached earlier and earlier.)

"When we launched the fund in 2015 this day was in the middle of August, whereas in 2021 it was at the end of July. This year, it will probably fall even sooner"

How to do it?

In order to correctly evaluate the volume and scale of the green transition, Sycomore AM co-developed a solid methodology: the NEC (Net Environmental Contribution) metric, now accessible in opensource, measures the environmental contribution of a company, activity by activity, on a scale ranging from -100%, for activities that destroy natural capital, to +100%, for those with a positive contribution. It gives a good idea of the ecological impact of a company.

It is indeed very useful to define a common language and standardized definitions to avoid greenwashing. In this respect, the European taxonomy is a tool that makes sense. The framework still needs to be fine-tuned and completed in order to integrate all 6 environmental objectives, since today only 2 of these objectives have been detailed.

What’s next?

Today, the energy crisis is reminiscent of the 1970s -?except that it is about gas and not oil. It was back then that the culture of energy saving and efficiency was born, and soon it became a formidable stimulus to the search for alternative sources. Above all, it was the moment when we all realized that we would need to make a more conscious use of the energy available, because it was scarce, points out Préaubert.

"The big difference is that fifty years ago, there was no talk of transition or even of greenhouse gas emissions. Today we are much more aware of the reality of climate change itself and of the need to include environmental impact assessment in the economic development process"

Investing in this direction is then a win-win opportunity: for investors, as well as for our own way of living.?