Created in the United States in 1971, “Pax World” was the first publicly accessible diversified investment fund to integrate social considerations into its financial analysis. Opposed to U.S. involvement in the Vietnam War, its founders, Luther Tyson and Jack Corbett, opted for an exclusionary approach to ensure that their fund would steer clear of companies likely to profit from the conflict.
Pax World was the first fund of its kind, but it was nevertheless part of a long tradition. For over two centuries, socially responsible investment has been used to put pressure on governments and companies to drive change. As early as 1841, Lombard Odier supported an initiative to eliminate investments in companies profiting from the transatlantic slave trade. More recently, an international divestment movement, initiated by activists and then taken up by governments, played a key role in the abolition of apartheid in South Africa.
Sustainable investment, which aims to outperform the market while building a socially and environmentally sustainable business model, is the latest trend in this tradition of harnessing the almighty power of finance to tackle the greatest challenges of our time. Yet, even as global temperatures reach new record levels1 and unprecedented biodiversity loss threatens to set off a chain reaction that could make matters worse2, sustainable investment is being called into question. A variety of forces, from politics to macroeconomics, are demanding that investors make a choice: has sustainable investment had its day, or are the recent upheavals merely temporary setbacks in the face of a long-term trend towards a “net-zero”, inclusive, nature-friendly economy?
“Green-lash”: the revolt against environmental policies
In January 2021, one of new President Joe Biden’s first acts was to sign the United States back into the Paris Agreement. Shortly afterwards, he proposed what would become the Inflation Reduction Act (IRA), a gigantic package of tax incentives, grants and loans including nearly USD 400 billion earmarked for clean energy projects3.
At the same time, the European Union adopted the Green Pact for Europe, a wide-ranging set of measures aimed at achieving carbon neutrality in all the bloc’s countries by 2050. Ursula von der Leyen, President of the European Commission, describes it as “the European equivalent of the first man on the moon “4.
Today, however, the political landscape has changed. If Donald Trump were to return to the White House, the United States could once again withdraw from the Paris Agreement, and the days of the IRA would then be numbered5. In Europe, opposition to sustainability policies (dubbed “green-lash”) prompted the EU to withdraw a proposal to halve pesticide use6 and remove the requirement for the agricultural sector to cut non-CO2 emissions by 30%27.
Market conditions and macroeconomic factors
At the same time, market conditions and macroeconomic factors have penalized renewable energy projects, which are often flagship investments in sustainable investing. High inflation and interest rates, coupled with supply chain bottlenecks, have driven up the cost of new renewable energy projects, exposing developers to losses. Over the past three years, the S&P Global Clean Energy Index, which reflects the performance of the renewable energy sector, has fallen by around 16%8.
Fears of greenwashing have heightened investor nervousness. Last year, DWS, Germany’s largest asset manager, agreed a USD 25 million out-of-court settlement to end an investigation into its misleading claims about the sustainability of its investments9.
Some of the world’s largest asset managers have scaled back their sustainability commitments. In 2023, Vanguard left the Net Zero Asset Managers10 initiative. Earlier in the year, J.P. Morgan Asset Management and State Street Global Advisors both withdrew from the Climate Action 100+11 initiative. Against a backdrop of growing excitement, the most stringent category of sustainable investment funds – those subject to Article 9 of the European Regulation on Sustainability Reporting in the Financial Services Sector (SFDR) – has seen fund outflows for three consecutive quarters12.
General table
For investors, these concerns are understandable. However, it’s important to take a step back from the excitement and not lose sight of the bigger picture. In our energy systems, for example, every year, renewable energy capacity increases more than ever before, driven by the international community, and has been doing so for over 20 years. Last year, despite high inflation in the sector, almost 510 GW of new renewable energy capacity was commissioned, representing a 50% increase on the 2022 forecast.
While this rapid growth is now market-driven, with drastically reduced costs and economies of scale boosting adoption rates, this investment scenario is not a one-way street. Despite unprecedented demand continuing to grow, many solar panel manufacturers are struggling to maintain profitability,13 as oversupply and fierce competition (especially from Chinese companies benefiting from strong central government support measures14) have eroded profit margins.
The moral of the story? As adoption rates rise, sustainability-driven technologies become a product like any other. It’s not possible to generate returns with a generic approach applied indiscriminately. Instead, we need to understand the profound systemic changes underway in our economy, as well as the multitude of opportunities arising from them – such as the vast roll-out of grid infrastructure alongside the commissioning of new wind and solar installations. Recent obstacles have obscured the bigger picture, but the energy transition is gathering pace, and neither macroeconomic fluctuations nor short-term political posturing will be able to reverse the trend.
Investing in nature
While electrification is underpinned by technological innovation and economies of scale, the rise of nature-based investment is directly motivated, at least in part, by the threat of climate change. Around the world, rising temperatures and the increasing risk of droughts and floods are putting unprecedented pressure on key agricultural products.
From the oranges grown in Brazil to staple consumer goods such as soybeans, rice and potatoes, climate change is affecting yields and threatening to introduce annual inflation of over 3% among food products15. Earlier this year, the drought in West Africa pushed cocoa prices to record levels16. Coffee could lose more than 50% of its total area under cultivation by 205017.
The total value of the tea, coffee, cocoa, rice and soybean markets is USD 1,200 billion18. According to Morten Rossé, Head of Nature and Climate at Lombard Odier Investment Managers, given the scale of the food commodity sectors, investors are likely to see a marked shift in financial flows as food producers move away from traditional monocultures towards nature-based models that are more resilient to climate change.
“We’ve created a system in which much of our production takes place outside nature, outside the forests,” he explains. “We propose to reintegrate nature into our production systems, which will then be better able to adapt to climate change. By investing in nature, we will be able to increase the value of products and become aware of the value of land over time.”
Some of the world’s biggest food producers are already moving in this direction. Paul Bulcke, Chairman of multinational Nestlé, which promises that 50% of its main ingredients will come from regenerative agriculture by 2030, says: “We know that regenerative agriculture plays a crucial role in improving soil health, restoring water cycles and enhancing biodiversity over the long term. These are the foundations of sustainable food production.”
Regulation and geopolitics
While short-term rhetoric seems to have turned its back on ecology in some regions, the overall situation and longer-term trend remain unchanged: for pragmatic and ethical reasons, politicians remain committed to the transition to sustainability.
In Brazil, for example, a new “Plan for Ecological Transformation” plans to use payments for environmental services to promote the restoration and preservation of nature, with the aim of stimulating economic growth and creating jobs19. In EU countries, the REPowerEU plan mobilizes EUR 300 billion to guarantee energy security within European countries, by accelerating the deployment of wind and solar power generation20. In addition, from 2025, the bloc will require palm oil, soya, cattle, coffee, cocoa, timber and rubber, as well as all their by-products, to be certified as “zero deforestation “21.
The trajectory is equally clear for businesses. In Europe and the UK, to ensure transparency with investors and regulators, all public and large private companies are now required to disclose their climate impact and the business risks and opportunities created by climate change. In the United States, the SEC has proposed similar legislation. Starting this year, European legislation will also require companies to disclose their impact on biodiversity.
A long-term structural transformation
According to Michael Urban, Chief Sustainability Strategist at Lombard Odier Investment Managers, sustainable investment is now essential for managing risk and outperforming the market: “Sustainability is changing the risk/return profile of investments in the financial markets. For investors, it means gaining exposure to the economy of tomorrow.
However, he explains, “green investment is not always synonymous with green returns”. The key, he believes, is to understand the profound systemic changes driving the transition. “Fundamentally, it’s about a complete overhaul of economic activity, involving absolutely every sector, without exception.”
“Above all, transition is not cyclical. It is a long-term structural transformation of the way we conduct economic activity and generate growth. It began at least 20 years ago and will continue for decades to come. Can it be stopped in its tracks? It’s undeniable that it goes through phases of acceleration and slowdown, but in the long term, its momentum is such that it’s now unstoppable.”
