It is clear to us that the transition to a sustainable economy is not an option but a necessity. The energy transition is a key component of this overhaul. The IIF ’s research highlights the many challenges that investors face from that disruption as well as the opportunities that may open up.
We agree there is more to be done to create the conditions to incentivise change in consumer and corporate behaviour. There are signs that this is happening in some industries and markets. But others have been slow to adapt, and the delay suggests their transition path will not be smooth. All of which means investors with sustainability goals need to take a more pragmatic approach.
To begin with, investors should recognise that building a sustainable economy will inevitably involve continued investment in many of today’s carbon-intensive sectors. Industrial firms, mining companies and utilities have large environmental footprints yet are essential to net zero. Excluding such companies from portfolios on principle means denying both their potential contribution to the transition and their capacity to reduce their own environmental impact.
There are, in our view, plenty of ‘brown’ companies whose transition away from unsustainable and carbon-intensive business models has, for one reason or another, gone unnoticed by financial markets. Such firms exhibit both the ability and willingness to adapt their products and services to meet the needs of a sustainable economy. There are many reasons to believe that many of today’s brown companies could be the green firms of tomorrow. And as that transition unfolds, financial markets will gradually recognise this improvement, creating value for shareholders.
What this research also highlights is that companies that appear to have impeccable green credentials might not always have the investment appeal to match. Experience tells us that when vast amounts of public and private investments are being made as part of one immense capital project, asset bubbles inevitably build and burst. The more investors gravitate towards what are already expensively priced green companies, the greater the potential for market instability.
Industrial firms, mining companies and utilities have large environmental footprints yet are essential to net zero. Excluding such companies from portfolios on principle means denying both their potential contribution to the transition and their capacity to reduce their own environmental impact..
This research also implicitly acknowledges the role investor engagement can play in accelerating corporate transitions. Through active ownership and engagement, we believe that investors can encourage and accelerate the transition to a sustainable future.
