#1 Talking Transformation
Cutting through the noise: don’t miss structural shifts
April 7, 2024
When it comes to change, we are often distracted by “white noise”: trends that are not long-lasting but are loud or politically polarized. The problem is that this noise often stops us from seeing the underlying structural shifts.
So, welcome to Talking Transformation, a fortnightly selection of my team′s views on recent developments in sustainable transformation and financial markets – and their long-term implications. Please note that these views represent my team’s personal opinions and are not necessarily reflective of Deutsche Bank’s official stance.
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Under debate: banks and energy forecasts, Indian renewables
How should banks adjust to changing energy forecasts? Some recent climate scenarios have thrown a curveball – a forecast resurgence of some hydrocarbon use. According to the IEA, for example, we should expect a 32% surge in coal demand by 2030, compared to 2021 levels, in part due to heavy continued Chinese usage.
Such reassessment has multiple implications, not least for banks. If the global economy now accepts that hydrocarbon use will not peak for several years, should they continue to eschew investments in high carbon-emitting sectors (like oil and coal) on the basis of earlier different forecasts and net-zero commitments? My view is that any reassessment, if justified, needs to be done transparently, so to keep bank decarbonisation strategies credible and retain investor trust.
India’s hydropower output down sharply. India experienced a 16.3% drop in hydroelectricity generation during the last 12 months as of March 31, the steepest decline in at least 38 years. Erratic rainfall led to increased reliance on coal-fired power. Currently, renewables account for around 11% of India’s power output, down from 13% the previous year, but this is likely a blip, not a trend: India remains a key country for global renewables implementation.
The lesson is that environmental projects, not just in India, will always be vulnerable to external pressures. Unpredictable weather patterns are only one source of disruption. Continuous adaptation and achieving resilience must stay a focus of energy production.
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Investor perspective: sustainability ratings
Don’t expect perfect sustainability rating standardisation. Sustainability ratings play an increasingly important role in the valuation of companies. However, comparing the sustainability metrics of corporations is still difficult, due to the number of rating agencies as well as a lack of methodological standardisation. We are working closely with rating agencies as they increasingly incorporate nature and biodiversity metrics in the assessment process, but it remains important to remember that ratings are a signalling tool and cannot always be a one-size-fits-all solution for sustainability assessments. Like a traffic light, they provide an essential tool for managing traffic, but individuals still need to be capable of driving.
What does this imply for the investor? Choosing appropriate ratings doesn’t just need regulation but also a critical evaluation of the underlying rating methodologies and where the data is coming from. As the rating landscape evolves, investors will need to think carefully about how best to focus on companies that demonstrably address environmental and social issues, especially around nature and biodiversity, and properly disclose this information.
ESG indices: the importance of macro expectations. The performance picture for the major ESG indices is currently mixed but with the positive generally outweighing the negative. However, the main negative outlier is in the clean energy sector, with low double digit negative YTD performances from some related ESG indices. This should remind us of the continuing importance of overall, rather than ESG-specific, macro expectations as well as the company-specific issues affecting the sector. One problem for clean energy is that the extent of interest rate cuts in 2024 priced in by market participants has fallen from -168 basis points at the beginning of the year to less than -75 basis points now (Fed Funds Futures). Alternative energy companies are particularly sensitive to such changes in interest rate expectations due to high debt levels in general and because their earnings tend to be far in the future, they must be discounted more heavily if interest rate expectations rise relative to previously expected levels.
The importance of macro expectations is demonstrated at the other end of the performance scale too. Japan-focused ESG indices have benefited from strong gains in the overall Japanese equity market, fuelled by Japanese economic hopes as well as corporate governance improvements.
Our view: focus on solutions, not semantics
Recent developments highlight that there remain major obstacles on the way towards achieving a sustainable world. We need to make sure these aren’t self-inflicted. My worry is that focusing on words only can trap us in semantic debates, obscuring the urgency of finding solutions.
“Purpose” is the keyword here. Consider the key areas of regulation, metrics, and litigation. At a time of regulatory ambiguity, we need an adaptive regulatory framework focused on purpose, not perfection. Similarly, we shouldn’t chase ever-increasing volumes of metrics: what really matters is how we use them, and how we communicate why they matter. Litigation can have a sometimes underappreciated purpose in fostering a risk management system related to nature-related and other risks. Words are important here, as is information, but actions always speak loudest of all. Ultimately, it's not about labelling the problem; it's about solving it.
Did you know:
Match the number to the issue: USD4.5 trillion.
Answer: annual clean energy investment to limit global warming to 1.5°C, according to the IEA.
Further reading: Some interesting ideas about how businesses can gain from becoming more sustainable: “The Responsibility Revolution: How the Next Generation of Businesses Will Win” - by Jeffrey Hollender and Bill Breen.
Also, why not take a look at our latest CIO Presentation on the atmosphere? This completes our trilogy of deep-dive presentations into the relevance and state of each of the three Life Pillars: Land, Ocean, and Atmosphere. The presentation can be found here: Atmosphere: Shield of the earth | Investing Themes
I’ve also recently published an article exploring and contrasting positive current investor attitudes to artificial intelligence (AI) to investor skepticism about ESG. Will this change? See AI and ESG: two sides of the same policy coin? | Global Policy Journal
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Founder and CEO at 4iAfrica - Insight | Innovation | Implementation | Impact. Leading the World's Largest and Most Sustainable Nature Based Climate Action Solution and other Innovative Products and Projects
6 个月finding solutions. Indeed ... “Purpose” is the keyword here. As an established Innovation Solutions provider, we align ourselves to your statements with a couple of comments: 1. regulatory frameworks - everyone has their own and even then, the signals are mixed. so if we are having a global crises, are local frameworks relevant? 2. Leadership - where is it? The penny seems to have dropped - climate change is not coming...its already here. Plans about plans seem to be caught off guard and the essence of the increasing number of requests we get is "What is the solution?" Climate Change 101 - Nature Based and Climate Tech are whats on the table. As one of the world's largest and most sustainable nature based climate action solutions, our deep dive showed that there is actually only one solution: Nature Based solutions yesterday, today and tomorrow, Climate Tech via Direct Air Capture, etc tomorrow or whenever its moves out of its nascent stage. So its not either or. Its both and the train has already left the station and we are at the front with a handful of others. Solutions are out there but seems that the "start" button got lost underneath all the plans...
Author The Ergodic Investor and Entrepreneur; Rebuild: the Economy, Leadership, and You | Builder of net positive business ecosystems using ergodic finance, FairShares Commons incorporation + DDO + Sociocracy | Speaker
6 个月Words are often the best we have to communicate - and work well so long as we are always aware that a word can only point at meaning, it doesn't have meaning itself. You and I may use the same word to point at different meanings, or different words to point at the same meaning. One of the most useful things I learnt as a manager, in my first weeks, was to validate my understanding of what someone was pointing at before responding ...
Director, Head of Discretionary Portfolio Management Italy at Deutsche Bank
6 个月Great initiative! Insightful and timely.
Creative Consultant and Guest Lecturer at New Flight Books
7 个月I appreciate the inherent flexibility in your thinking and advising, Markus. A volatile world rocked by the volatility of its climate indicates we can indulge no less. Emphasis on problem solving over semantic debate offers a grounding principle in maintaining focus and forward momentum, while a selection of vested perspectives rebroadens fleeting but no less consequential discussion. Going forward (how ever far that may be) I hope to see financial institutions embrace a shift beyond short term thinking and valuation on everything from indicators to performance. These are closely tied to metrics and ratings... these tied to investment. Like Nature, when these codependent factors are seen, regarded, valued and tended within only a short term, highly fluid field of view and engagement, little will change. Sustainable change requires conditions, overall or overtime, to find footing and fruit. The more complex the system, the more integrated must be the reactive balance, or the greater capacity to absorb failed efforts. Evolution doesn't happen in a day. Even in this thin margin of time, humanity is ferociously expending the wealth accrued from a billions-of-years old fund. I love where you're heading...
My World is the Ocean : Discovery-Observation-Understanding-DigitalTwins-Sustainability | Professor Physical Oceanography | Explorers Club Fellow | FAGU FTOS FAMS FISC FEurASc
7 个月We need both bold and at times visionary thoughts about the direction towards sustainable futures (plural) and concrete actions to move in these directions now!