The future of sustainable investing: Strategies, challenges and opportunities

The sustainable investing landscape has changed considerably over the last few years - what once was a niche, or a secondary, consideration has now become central to how many investors construct their portfolios. In particular we have seen a significant commitment from institutional investors, especially in Europe and Asia.

What’s more, they intend to increase their allocations to sustainable investments over the coming years. A recent study found that 86% of asset owners expected the proportion of sustainable investments in their portfolios to rise in the next two years, and they cited strong financial performance as one of the main reasons.¹ That’s a powerful endorsement.

Climate action remains the primary conviction of our clients, and we expect that to remain the case. The growth in socially focused strategies has been more gradual than expected, as the market remains heavily focused on the energy transition as well as broader environmental themes.

A spectrum of climate strategies

There’s no one-size-fits-all approach to climate investing. It’s a broad spectrum – different strategies suit different objectives and asset classes. 

There are two broad approaches investors could take – one focusing on decarbonisation, and one on climate solutions.

Decarbonisation strategies tend to consist of portfolios that are made up of companies which are still carbon intensive with higher emissions, and those that are enabling the transition. The intention is that the former move from brown, to olive, and eventually green. 

This decarbonisation approach can easily be incorporated into investment strategies across a range of asset classes, sectors and geographies, as well as different vehicles such as open-ended or exchange-traded funds.

Climate solution strategies invest in companies whose products or services address environmental challenges. On the fixed income side, green bonds are a common tool - these are bonds where the capital raised is dedicated to environmentally beneficial projects. 

One of their key benefits is their liquidity, making them very accessible for investors either as part of a dedicated sustainable bond fund or as an allocation as part of a broader fixed income portfolio. In addition, they are highly transparent with strict green bond frameworks that help provide investors reassurance on how their capital is being used. 

Listed equity portfolios, consisting of companies whose products and services are designed to help meet the world’s most pressing climate and environmental challenges, in our view are another strong investment opportunity.

AI and sustainability: An evolving relationship

With sustainability in mind, it is important to examine how innovations such as artificial intelligence can shape the long-term prospects of the companies we invest in. As AI grows in relevance across sectors and the wider economy, it is becoming more critical to incorporate the potential benefits that AI can bring, as well as the environmental and social challenges, into our investment considerations.

Large technology companies typically have high energy and water consumption needs, especially for the data centres that are powering AI development. Some have seen their emissions rise as they expand AI capabilities, but many are shifting toward renewable energy sources for their data centres, and some have even bought small renewable energy companies. The economic case can be compelling, as renewables are typically cheaper over time. 

We believe AI can be part of the solution to the environmental challenges that we are facing today. For example, it can analyse vast amounts of data to help predict weather patterns.² It is being used as a tool to design more efficient batteries³; optimise renewable energy grids⁴; help with building design and management to reduce energy consumption⁵; and analyse satellite images to detect methane leaks.⁶

Of course, AI also raises social concerns, including job displacement, but studies have suggested that potentially millions of new jobs will be created.⁷ 

A structural change

The uncertainty which followed the outbreak of the Ukraine war highlighted the importance of energy security, and the need to be far less reliant on fossil fuels. The Middle East conflict has created a renewed focus, which has only exacerbated the need to transition. 

While in the short term some governments may look to ensure an energy supply of any type, to meet their immediate needs, in the medium-to-long term we believe this crisis has created a renewed impetus for clean energy and the potential investment opportunities that come with it.

We see a broad spectrum of potential opportunities, no matter the approach, and believe that each can potentially allow investors to support a more sustainable future while pursuing financial returns.