Navigating Sustainable Transitions

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As sustainable investing matures, asset owners and managers can choose from an increasingly diverse range of themes to generate attractive risk-adjusted returns and drive positive change around the world. From the energy transition to alternative proteins, through infrastructure and electrification, the true difficulty for investors has become how to navigate this ocean of sustainable opportunities.

To help our readers find true north, NordSIP gathered a panel of seasoned investors specialising in global and emerging market sustainable transitions to share their experiences during a webinar on November 30th. The participants included Marcus Svedberg, Investment Strategist at Swedish public pension fund AP4, Patricia Ribeiro, Senior Vice President, and Senior Portfolio Manager at American Century Investments, and William de Vries Director is Director of Impact Equities & Bonds at Triodos Investment Management. Aline Reichenberg Gustafsson, Editor in Chief of NordSIP, moderated the discussion.

Promotion

The panellists discussed their different thematic approaches to sustainable investments, the challenges and importance of measurability, the role of the SDGs, the potential trade-offs between environmental and social goals, common standards, exclusions and engagement, among other topics.

Sustainable Themes

All three participants are keen to emphasise the importance of thematic clarity as a guide for sustainable investments. For Triodos’ de Vries, there are seven transition themes at the heart responsible investing: sustainable food and agriculture, renewable resources, circular economy, sustainable mobility and infrastructure, innovation for sustainability, prosperous and healthy people, and social inclusion and empowerment. “We have a bottom-up approach. If we think that an investment is good and has the qualities that we want it to have, then we invest in it for the long term,” de Vries says discussing the fund he manages.

Ribeiro notes that the specific conditions on the ground, create a fertile ground for sustainable investors in emerging markets. “For us, [investments in] transitions happen very naturally. We don’t force them. There are always strong and good exposures,” she explains. As a result of governments’ underspending, education, healthcare, and infrastructure, such as water treatment and sewage, are natural themes in emerging markets, Ribeiro adds. “These are areas where there are still tremendous opportunities to get involved and influence the transition.”

“We are primarily working with themes that are related to the climate transition,” Svedberg says. Mapping themes like electrification, resource efficiency, and renewables is not very complicated, he explains. “The difficulty is when you start to break it down into what that value chain looks like.” According to Svedberg, understanding the value chain involves analysing its development, where on the S curve it is, and how scalable the business models are. However, this is not the only challenge. “It is also about investability,” he adds noting that whether financial instruments are available to realise the investment is also a crucial factor.

Measurability and the SDGs

On a practical level, the panellists agreed that measurability is crucial to guarantee that responsible investors keep track of their progress along their preferred themes. “Intentionality is very important when we consider investment opportunities,” Ribeiro says. However, asset managers need to have measures that they can use to report on the progress of their investments. “We need to be able to measure the transition, not just during the year of investment but also afterwards,” she explains. This is often easier said than done.

“The measurability of impact is always a difficult question,” de Vries agrees. “We use a bottom-up approach, so we have a story for every investment.” He notes that although carbon emissions measurements are becoming standardised, the same is not necessarily true for social considerations. “Nevertheless, we are trying to develop this further. We work together with other organisations. We look at what is available in databases. We look at what we can develop ourselves. We have been able to give overviews of how our investments do within all of the SDGs and we report on this to our clients.”

Although he agrees that the UN Sustainable Development Goals (SDGs) are a popular and useful tool for framing and understanding the wider sustainability challenge, Svedberg says AP4 does not use them for mapping and measuring the progress of specific investments. “We have looked into it but our conclusion was that it’s very complex and time-consuming,” he explains, noting that associating specific investments or specific companies to specific SDGs is a relatively uncertain process. “We are not intellectually opposed to it. We see that a lot of companies are doing it. It is a worthwhile exercise. But one also has to be cognisant of the net impacts. It’s possible to contribute positively to one goal and negatively to another.”

Engagements

One of the solutions to overcome the challenges presented by measurability is engagement. “As you can imagine, emerging markets tend to be a bit behind in terms of measurability and ESG,” Ribeiro says. This developmental hurdle requires continuous engagement with corporates. “If a company is not being proactive and giving us enough information to measure their transition, we need to engage with the corporates and do it in a similar way as we do on the financial side to try to capture as much information as we can.”

Ribeiro explains asset managers often need to educate the companies about what information is needed and to motivate them to look for and pro-actively disclose it. “Measurability is important. It needs to be there. If we understand their intention, but cannot measure it, that would not be an [investment] that we would be willing to add to the portfolio.”

Beyond the themes, the investment process focuses on a range of factors including the company’s profitability, its compatibility with the investor’s vision, and the economics of the company, de Vries says. However, the initial investment decision is only the beginning of the journey. “This is a continuous process,” he adds. Once a year, his team reassess the feasibility of their investments. Every three years, they also have to assess whether their companies still fulfil the fund’s minimum standards requirements. Thanks to what he describes as “a very concentrated global equity portfolio”, they are able to continuously engage with their investee companies to ensure that their investments remain aligned with Triodos’ vision.

For Svedberg, engagement should be tailored to the type of investment. “The engagement differs depending on the portfolio. For the actively managed portfolio, which is more concentrated, we can be very active, sit on the nomination committee, write letters, and meet with management. For more passive or larger portfolios, we may not be able to see them as often,” Svedberg says noting that it is on those occasions that international networks of responsible investors such as Climate 100+ or the TPI can provide the necessary leverage to organise sustainable efforts.