ESG Investing: the Smarter Sustainable Choice
Updated: Feb 15, 2022
At a time when world leaders are meeting at the Climate Conference 2021 in Glasgow to discuss their commitments to climate change, some of the largest fund managers have already laid out their plans. The Glasgow Financial Alliance for Net Zero (GFANZ), led by former Bank of England governor Mark Carney, has more than 450 companies across 45 countries including Banks, insurers, pension funds, money managers and other finance firms with USD130 trillion in assets (40% of global banking assets) that have committed to meeting the goals set out in the 2015 Paris climate agreement.
As a small investor, why should this really affect me? While our entire way of life will be affected by the regulations stemming out of these commitments, there are certain sectors for which funding is directly going to get affected, like fossil fuels – oil & gas and coal. As large investors reduce their exposure to these sectors, companies are going to see bulk investor outflow, which will cap the returns in the long run. Companies like Power Generators with bulk of their assets being coal-powered or automobile companies overtly dependent on fossil-fuel driven vehicles might not be great investments in the long run, as they might not be able to survive regulatory and consumer expectations.
At the same time, companies providing services to the Renewable Energy sector would likely do well as big investors increase their allocation within the energy basket. Companies dealing with renewable energy in terms of engineering, services, generation, products are all going to see big returns. Signs of these are already there like Tesla becoming a USD1 trillion company on the promise of cleaner cars. Companies with ancillary products like greener batteries and tyres are likely to do well alongside.
Another sector getting gradually but surely impacted is Retail. The global supply chain has been impacted by changing climate patterns affecting agricultural practices and increased extreme weather events are causing adjustments to sourcing arrangements. Also, increased customer expectations on sustainable fashion – raw material sourcing, production process, packaging, disposal etc. are affecting the fortunes of companies not perceived to be doing enough to reduce their climate impact. So as an investor, tracking the commitments of brands to ESG practices and follow-up on the relevant metrics would determine how successful these investments are going to be in the long run.
A third sector that is going to be affected is Commodities. Frequent & wide fluctuation in prices due to increasing supply-demand mismatch due to higher consumption, frequent crop failures and reduced productivity brought about by climate change is going to become the norm and only players with strong risk management practices would be able to survive in the long run. Players with deep financial pockets, production in multiple geographies and access to distribution infrastructure would be robustly positioned and should be backed for long-term investing success.
Commitment by Governments Financial Institutions, International bodies to climate change targets are bound to bring transformation to the way almost every business sector operates, and these represent only a handful. As an investor, keeping abreast and tracking developments on this subject, would help in graduating to become a Sustainable Investor in the long run.
About the Author
I am a Finance professional with comprehensive Private Equity experience across growth capital and buyout transactions followed by effective engagement with early stage companies charting their entrepreneurial trajectory across a career spanning 20+ yrs.
Currently, I am a consultant at 1Bridge and an advisor to Eko India Financial Services. My previous experience includes working with firms like Sylvant Advisors, Paras Capital, Avigo Captial, Actis and DSP Merrill Lynch.
I have done my MBA in Financial Management from S.P.Jain Institute of Management & Research, Mumbai pursuant to B.A(Hons) Economics from Lady Shri Ram College, New Delhi.