Technology investors talk about the ‘hype’ cycle. This is the idea that when successful products go through an initial period where sales don’t match the hype – the Metaverse is an example – and investors are left disillusioned. The magic starts to happen when the market expands and you move from the innovators and early adopter phases to those in the ‘majority’, the people who buy the products much later in the cycle. My mother recently bought a pair of airpods, for example.
There is a fear around sustainable investing that we might be in the wrong place in this cycle. And much of this is exacerbated by the polarising political discussion around sustainability. A few years ago, everyone broadly agreed that investing in things such as cleaner air was a universal good. But now, the climate is much more of a political discussion and lots of survey data suggests attitudes to sustainability challenges align more closely with political persuasion than they did a few years ago.
Similarly, we are seeing sustainability debates become wedge issues used by politicians as weapons in the ‘culture war’. The three major structural drivers of sustainability as a megatrend are: government policy, investor preference and consumer appetite, so it is really important for us investors to understand if and why the narrative has become more negative.
Are governments backsliding on sustainability?
The answer here is complicated and there is a marked difference between the US and everywhere else. On one level the US seems to be being dragged reluctantly into global commitments to reduce emissions. On the other hand, policies such as the Inflation Reduction Act and the CHIPS Act make investing in environmental technologies at home a key part of US industrial strategy.
So the US is effectively decarbonising via the back door – in other words, it’s ‘green hushing’ which is the opposite of ‘greenwashing’. And given the politicisation of environmental issues in the US, this is probably smart politics, even if it creates a vacuum of global leadership on sustainability issues.
Ultimately, a large part of the US economy revenue is focused on drilling, refining and selling hydrocarbons, and in states such as North Carolina, the environment feels like an existential issue, when there are livelihoods in the balance. These oil producing states worry that their fate could be like the Rust Belt, where manufacturing jobs disappeared offshore and state economies collapsed.
This must be one of the reasons why a lot of investment in renewables and batteries is taking place in these states. A kid glove approach is needed to make these states comfortable with the idea that the green economy is good for these traditionally Republican states. Of course, the spectre of another Trump presidency is an added complication – he plays on these fears. While it would be difficult for him to reverse policies that have benefitted Republican states, he might try to relax rules around emissions more broadly.
See also: – Sierra Club files lawsuit against SEC over final climate risk disclosure rule
Less toxic in Europe
In Europe, the political climate is less toxic, although governments are probably achieving less. While the RePower EU Act will provide incentives for countries to invest in green technology, the sums just don’t stack up to those in the US. Plus the European picture is complicated by the war in the Ukraine, which has created fossil fuel shortages and made it more difficult to wean Europe off oil and gas. This creates a catch 22 scenario where countries’ stances on the environment vary according to: their geographical proximity to Russia (the closer they are, the more worried they are about being invaded), how reliant they are on Russian imports or how self-sufficient they are. This makes it hard to have a unified European strategy towards decarbonising.
The inflation point
The added factor making policy tricky is inflation and the cost-of-living crisis. Ultimately, there is a perception that being green is expensive. We see elements of this related to farmers’ protests in Holland and ULEZ (ultra-low emission zone) protests in the UK.
Countries where the politics are not really colliding with the drive to decarbonise tend to be either very rich (Norway) or very authoritarian (China). They can prioritise investments in green technology with less of a public backlash and it is no coincidence these are the biggest EV (electric vehicle) markets.
What about companies?
This is where things are more hopeful and the direction of travel is clearer. Companies have to disclose more around their climate impact and net zero plans. This is increasingly happening in sectors with quite a low environmental footprint (like tech and healthcare) and sectors that are crucial to energy transition (industrials, utilities). Regulation is a key reason behind this impetus, but a lot of the intention is tied up with longer term corporate strategy too.
It’s a fact that climate risk will affect most companies and shareholders are pressurising boards to plan for this. There has been a more marked shift away from investor driven activism, evidenced by fund groups leaving the Climate Action 100+. But this isn’t as bad as it might seem. Where companies are concerned, it is better if they actually get stuff done rather than making political gestures.
Investor preferences are changing
The ‘ESG tourism’ phase, where lots of investors jumped on the bandwagon during Covid, proved a lot of investors chase performance only because they jumped off again when oil prices shot up at the start of the Ukraine war. But there are lots who are in it for the right reasons and want to invest in viable ESG assets (hello to FCA labelling). And the sustainable investment space has seen some good innovation around strategies that meet investment and sustainability goals.
Some of these strategies are over 10 years old (Impax Environmental Markets, WHEB Sustainability etc) and are well resourced to cope with challenging investment backdrops. And there are some promising five-year-old strategies, where sustainability goals have clearly been achieved alongside investment returns (think Baillie Gifford Positive Change, Montanaro Better World, 91 Global Environment etc). ESG has had a challenging five years, with only one year being a ‘normal’ market environment, but these funds have shown their mettle and developed resilience that will entice investors in the future.
Sustainable investing has had some deserved criticism around performance and marketing. Too many strategies promised the earth and promised to save it. This greenwashing trend unfortunately coincided with a cost-of-living crisis and politicians electioneering. But the bigger picture around ESG is much more positive – we do have a planet in crisis and it has to be saved – and we think investors should brace themselves for doing the right thing. It’s the direction of travel and something we all need to embrace.
