Four themes set to shape sustainable investing in 2023

2-8 October 2023 is Good Money Week. Now in its 19^th year, it brings together different sectors of the financial services industry to consider how it can help people make better choices with their pensions, savings, and investments, and better understand the positive impact they can have on the environment and wider society when it comes to their financial decisions. 

So, it’s the perfect opportunity for us at FundCalibre to take a closer look at sustainable investments!

When it comes to sustainable investment themes, there are plenty on offer, as highlighted by Jennifer Wu, investment specialist at JP Morgan. Among those she has identified, four come through strongly for 2023 and beyond:

1. Bonds are back

After a good 15 years of so in the doldrums, bonds are now paying a decent level of income and, with inflation now falling and interest rates seemingly at or near their peak, there is also the prospect for capital returns. And green, social, and sustainable bonds are no exception. 

Jennifer points out that not only has issuance in these types of bonds rebounded, but sustainable fixed income is gaining traction globally. “While Europe leads, with EUR-denominated issuance at least twice that of USD-denominated, demand in the US remains resilient,” she said. “Political and regulatory developments such as the comprehensive package of climate policies under the US Inflation Reduction Act (IRA) could also revitalise the market. The Asia Pacific region has also seen significant recent growth with green bond issuance, with China growing 35% last year to reach a high of USD 155 billion*.”

Bryn Jones, manager of the Rathbone Ethical Bond fund, tells us more about how the ethical bond market has grown in recent years in this video interview.

2. Hitting the UN’s Sustainable Development Goal targets

The UN’s 2023 Global Sustainable Development Report – an annual stocktake of progress towards achieving the 17 Sustainable Development Goals (SDGs) – made for sobering reading. It confirmed what many feared: the world is nowhere near on track to reach its 2030 SDG targets. 

“It will take a concerted effort – and a substantial increase in financing – to change course,” said Jennifer.  “It has been estimated that achieving the SDGs could require additional annual investments of up to USD 4.2 trillion. This is a large figure, but it is equivalent to just 1.1% of the USD 379 trillion in total financial assets held by banks, institutional investors and asset managers,3 showing that it is certainly not out of reach.”

Jennifer points out that, with COP28 approaching in November, there is particular scrutiny on the fact that the USD 100 billion target for annual climate finance to developing countries has never been met since it was first agreed at COP15 in 2009. But, she says, private finance can play a role in filling this gap, while also enabling investors to benefit from the opportunities that climate and SDG finance present. 

You can read our complete guide to the UN’s sustainable development goals here.  

3. Using artificial intelligence to advance ESG research and decarbonisation 

Artificial Intelligence has generated a lot of excitement over the past year. Technology’s shiny new toy had it’s ‘iPhone moment’ in November 2022 and is just at the beginning of journey. While it’s carbon footprint is a concern – one estimate is that Google’s AI alone burns the same amount of electricity each year as all the homes in a city the size of Atlanta – its potential is undeniable. 

“At J.P. Morgan Asset Management, we have long taken the view that AI could be a game-changer for ESG research,” said Jennifer. “Already, we’ve seen in practice how large language models and natural language processing can help sift through huge amounts of alternative data to rapidly narrow the investment universe and offer a more precise opportunity set, as well as provide deeper insights into less transparent areas of company performance.”

“Another major application of AI could be in the area of climate adaptation,” continued Jennifer. “In this case, it can be used for hazard forecasting and improving early warning systems using satellite imagery, as well as supporting practical adaptation solutions like precision agriculture.”

Francesco Conte and Sara Bellenda, co-managers of the new Elite Radar JPM Climate Change Solutions fund, tell us more about how they use AI in this recent podcast interview:

4. Extreme heat poses ever more of a risk to health and the economy

As we’ve seen in recent months, extreme heat is becoming more of a problem around the world and the World Meteorological Organisation believes 2023 is now more likely than not to be the hottest year since records began**.

The consequences of extreme heat are relevant for investors “and should be factored into decision-making as part of physical climate risk assessments,” says Jennifer.

As well as the complete devastation it can cause environmentally and to local economies, Jennifer points out that transport infrastructure can buckle under extreme temperatures, bringing significant disruption to logistics and movement of people, and that surging demand for power for cooling can create grid reliability problems that heighten costs and reduce output.

“On a more long-term view, higher temperatures threaten crops and livestock, resulting in lower yields, reduced food supply and increased food prices,” she said.

Another fund looking to tackle the threat of global warming is Ninety One Global Environment fund. It has the unique approach of only investing in companies that are contributing to the decarbonisation of the world economy. The proprietary screen that is used to build the fund’s investable universe is impressively comprehensive and dynamic to ensure the futureproofing of the strategy in the event of considerable technological enhancement. It means that the fund is set to benefit from the massive tailwind of the some $2.4 trillion of annual spend required to meet global temperature goals.

You can find out more about this fund and other Elite Rated responsible and sustainable investment funds, here.

*Source: JP Morgan and Climate Bonds Initiative, China Sustainable Debt: State of the market report 2022 (May 2023)

**Source: JP Morgan and Carbon Brief, State of the climate: 2023 now likely hottest year on record after extreme summer (July 2023)

_{Image by Skyoverse from Pixabay}