Sustainable investing: the demanding journey towards “truly green”

The challenge is how, given the enormous cost of doing so. According to McKinsey, achieving global net zero CO2 emissions by 2050 will require $9.2 trillion of investment – a near-40% gap with the $5.7 trillion per year being invested today. Europe alone will need €390 billion a year this decade to meet its 2030 emissions targets and €130 billion for other environmental goals.

The first step in meeting this challenge is to put in place the right policy framework to make green activities most profitable, thereby encouraging ESG- and sustainability-driven investments to flow “naturally” into those sectors. Policymakers are already stepping up. The 2020 European Green Deal will mobilise at least €1 trillion in sustainable investments over the next decade. Meanwhile, this August’s Inflation Reduction Act, with $370 billion earmarked for clean energy incentives, is the most significant environmental legislation ever passed in the US. 
Supportive public policy is necessary but not sufficient. To achieve the goals set out above, private investors must make every dollar count.

More and more, our clients think beyond ESG risks, and challenge themselves to invest only in what “truly supports” the environmental transition, says Isabelle Millat, Head of Sustainability for Global Markets at Societe Generale. 

Defining and rethinking green investing

The time and controversy involved in the release of the EU Taxonomy of Green activities, and its gaps with taxonomies now emerging in other areas evidence it: reaching consensus on what is “truly” green is a daunting task.

Two other concepts are gaining long due attention: transition and adaptation. Not every industry can immediately and easily switch to low emitting energy sources and processes, as recognized by many sustainable development scenarios. “Sustainable investors are therefore gradually focusing on solutions that help these industries transition, or get “less brown” faster”, says Ms Millat. 

Whilst innovation is critical to reaching our common goal, we believe that the key to success lies in the massification of technologies that already exist. This can be achieved with a focus on energy efficient, low carbon mobility and electrification of the end use, says Pierre Abadie, Group Climate Director at Tikehau Capital, the global alternative asset manager.

It is also realistic to acknowledge that some global warming and environmental degradation are already locked in. To protect people and productive assets from the consequences, investments are needed in adaptation measures, such as protecting coasts, preserving forests, diversifying crops or building resilient infrastructure. 

Bearing all this in mind, what strategies should investors employ to make sure their every dollar is genuinely contributing to the environmental transition, while still producing an acceptable return?  

Aiming for greater, “greener” outcome

The first such strategy, says Ms Millat, is impact investing: where funds generate an intentional, measurable, but mostly additional impact. Traditionally mostly illiquid, this is a rapidly growing market now attracting institutional investors, helping it to top $1 trillion for the first time in 2021, according to the Global Impact Investing Network. “We continue to see significant and growing appetite from investors seeking access to alternative assets, for innovative and sustainable financing solutions, that combine the search for profitability with positive, measurable social and environmental impact”, adds Pierre Abadie.

In listed markets, investors increasingly seek to complement ESG risk mitigation strategies with products that focus on specific sustainability metrics and objectives. Popular themes include climate neutrality, biodiversity, circular economy and just transition, that reconciles the E an S in ESG. 

Besides products, institutional investors can aim for impact through engagement. Rather than screening out (or selling down) ‘uninvestable’ companies and industries, asset managers are increasingly engaging with companies to improve their ESG performance.

Naïm Abou-Jaoudé, CEO of Candriam, confirms the trend: More and more, investor dialogues aim to influence the practices of target issuers, and collaborative initiatives continue to grow in importance because of the leverage they provide to shareholders.

Beyond that, financial institutions play a strong influential part through education and awareness: to explain to their ultimate clients what environmental investment solutions are, what they can achieve – and also their limitations. Such transparency will generate trust, to lead to sustainable growth in these activities. "Investors’ knowledge gap on sustainable investing remains important. It favors interpretation and slows down the allocation of capital to truly transformative initiatives towards a more sustainable world, confirms Naïm Abou-Jaoudé. By funding academic research and education projects for the wider public, Candriam – like others – is taking an active part in the transformation of the sector."

One aspect of this educational effort should be to decipher the maze of product classifications and reporting initiatives. A bank like Societe Generale, says Ms Millat, also has a key role to help its clients to navigate this complicated landscape; to share with them benchmarks and best practices; and, eventually, to guide them towards solutions that deliver the right level of risk return, as well as environmental and societal outcomes.

To get insights and new inspirations on how to deliver sustainability ambitions, you can join Societe Generale’s Positive Impact Week, its flagship global client event on November 28-29-30th.