Where are we now?

There are ongoing conversations around the green transition and reaching net zero, but these often overlook the practical steps required to actually meet the targets that have been set. It is great news that progress has been made— for example, the UK having made a 45% reduction in greenhouse gas emissions since 1990 – however current efforts are insufficient to meet the UK’s net-zero targets. This slow progress raises concerns about the physical and transition risks associated with investments.

Heavy emitting industries

In recent years, asset owners have excluded steel companies from their portfolios in order to meet their required emission targets. However, as they are a key component of the green transition, they should not be excluded from portfolios but included as key engagement portfolio companies.

For asset owners who have specific portfolio emissions targets, the heaviest emitting industries have often been seen as easier to exclude to reach those targets rather than pursuing engagement or integration targets with these investments. A key example of this is the steel industry, which faces the dual challenge of growing demand and the necessity to achieve net-zero emissions, and accounts for around 10% of global greenhouse gas emissions. In recent years, asset owners have excluded steel companies from their portfolios in order to meet their required emission targets. However, as they are a key component of the green transition, they should not be excluded from portfolios but included as key engagement portfolio companies.

Due to the critical role of high-emission industries in the green transition, there is now a growing recognition that simply divesting from these industries is not enough, and there is a need to invest to assist with decarbonising the economy. Having engaged asset owners invested in these companies and using their influence to improve their credentials will ensure there is a focus on continuing innovation and required capital expenditure. This approach aligns with the broader societal goal of achieving a sustainable future through proactive and impactful investments.

This scenario requires a complete reconfiguration of the global supply chain and substantial investment in new technologies, such as hydrogen production. Given the large expenditure and innovation required, the board and financial leaders of companies are primarily driven by the economic impact of sustainability initiatives. In the steel industry, this connection is relatively straightforward due to the direct cost implications of carbon emissions. As jurisdictions impose stricter carbon taxes, the financial bottom line is significantly affected, making the sustainability agenda an economic imperative.

Pictured L-R: Emily Forsyth-Davies, Marian D’Auria, Ray Dhirani and Dr Matt Prescott

Oceans and nature considerations

An area gaining traction with both investors and regulators is the focus on nature and biodiversity, particularly the marine environment, with more than 3 billion people relying on seafood for at least a fifth of their daily protein intake. Oceans, which absorb 90% of planetary heating, play a critical role in climate regulation. The degradation of marine ecosystems, through phenomena like marine heatwaves and coral reef destruction, represent severe tipping points with far-reaching consequences. This is an area where accelerated action is required to avoid crossing these irreversible tipping points.

Societal considerations

Pictured L-R: Emily Forsyth-Davies, Marian D’Auria and Dr Matt Prescott

The social implications of environmental degradation are equally important. For example, as mentioned above, many communities rely heavily on marine resources for their livelihoods and daily sustenance. The degradation of these resources threatens not only environmental stability but also social and economic well-being, highlighting the interconnected nature of these challenges.

Despite having had the necessary information for decades, society has thus far failed to develop the social infrastructure and mindset to address these long-term threats. The extreme complexity and scale of the situation creates significant difficulty in mobilising profit-driven entities to tackle society-wide issues.

What could the future look like?

Future of capitalism

The successful future of capitalism seems likely to involve the convergence of scientific and financial information, leading to more rigorous evaluations of corporate practices. As time continues, asset owners, especially large institutional investors, will increasingly demand answers about how companies are genuinely preparing for the future. This shift will require companies to provide empirical data and metrics that reveal the true state of their operations, rather than relying on flattering but superficial reports.

Future of ESG

The link between managing ESG-related financial risks and seizing opportunities to generate returns is now clearer than ever.

The issue with current ESG practices and reporting is that many companies report favourable metrics, while omitting the hard truths about their operations. This tendency can be traced back to the origins of ESG in corporate social responsibility and marketing, rather than as an integral part of investors’ investment decision making. While a focus on ESG considerations has succeeded in bringing sustainability metrics into the mainstream, there is a growing need for investors to become more discerning and demanding about the impact of their portfolios. An important example of this is Thames Water, where after many years of the company growing its debt pile, while funding particularly high dividends. When Investors started to face financial losses they began to demand more transparency and accountability from the company.

The link between managing ESG-related financial risks and seizing opportunities to generate returns is now clearer than ever. This has now been incorporated to the extent that making financial decisions without considering ESG factors is increasingly viewed as failing to fulfil fiduciary duties. This perspective reflects a broader, more strategic approach to risk management and opportunity identification in investment decision-making.

The impact of this is that sustainability issues have been rising dramatically up the agenda of large asset owners. This shift marks a departure from the previous ambiguity surrounding the prioritisation of ESG considerations, balancing against the need to fulfil other duties such as pay pensions to members or generate returns for shareholders.

The growing expertise and focus within the finance sector are encouraging, as they align with the increasing complexity of sustainability challenges. The mutual benefits of this evolution are better-informed investors lead to more robust and resilient investment strategies, ultimately contributing to a more sustainable and financially secure future.

Future of aquaculture as an investment opportunity

Aquaculture is the breeding, rearing, and harvesting of fish, shellfish, algae, and other organisms in all types of water environments. Over the past two decades, aquaculture has experienced notable growth. When executed responsibly, with the involvement of local communities who derive their livelihoods from it, aquaculture presents a sustainable solution to the global protein challenge. This is especially pertinent in regions where populations live near water sources and heavily depend on aquaculture for their protein intake.

Pictured L-R: Marian D’Auria, Ray Dhirani and Dr Matt Prescott

However, the sector is not without its challenges. There have been instances of aquaculture practices that are harmful, such as the use of pollutants and the exclusion of local communities. Ensuring that aquaculture operations adhere to high standards is crucial for their success and sustainability. This necessity becomes more apparent as wild fish stocks deplete, making aquaculture an essential component of future food systems. Aquaculture is emerging as a significant opportunity within the alternative investment landscape, attracting interest from venture capital, private equity, and impact investors.

How do we get where we need to be?

Sustainable transition and systems thinking

The green transition requires a whole systems thinking approach. As per all similar challenges, the first step in creating effective solutions is to deconstruct larger problems into manageable components. This approach informs the importance of beginning the journey, despite uncertainties and debates about the necessity of such initiatives.

This approach is especially important due to the inherent governance challenges balancing short-term financial objectives against long-term sustainability goals. In democracies and market economies, navigating these trade-offs requires mature, informed conversations. These discussions, much like negotiations within a family, demand a collective effort to reconcile differing interests and priorities. This is particularly pertinent when making the significant capital expenditure required for a company to innovate and improve their sustainability approach and credentials. The integration of ESG principles into mainstream business practices marks a significant shift, one that is gradually gaining momentum and acceptance.

Energy transition

The key to unlocking sustainable practices across multiple sectors, lies in addressing the fundamental need for energy. The reliance on coal and oil, which results in significant greenhouse gas emissions, stems from the necessity for industrial heat and transportation. The pivotal challenge for the green transition is to generate the required volume of renewable energy to replace fossil fuels.

The scale of renewable energy needed is staggering, raising questions about feasibility and implementation. This means that the complexity of the green transition necessitates moving beyond siloed efforts to embrace diverse perspectives and skills. Unusual partnerships and cross-sector collaborations can drive innovation and provide comprehensive solutions.

Co-ordinated response and the future

This need for rapid transformation necessitates a coordinated global response to address the diverse requirements and interests in transitioning various sectors. This will require an application of a whole system thinking approach, with a particular focus on the heavy emitting industries.

Over the past three decades there has been a growing focus on addressing climate change. From an era marked by doubt, confusion, and denial, the world has gradually awakened to the realities and challenges posed by climate change. Today’s young generation, in particular, have reached a heightened level of consciousness regarding these issues, inherently inclined towards responsible and sustainable practices. This generational shift is promising, as it signifies a future where sustainability is ingrained in daily life and professional endeavours.

However, despite this progress, the current responses to climate change are not yet proportionate to the scale of the problem. The complexity of this issue has perplexed even the most brilliant minds and the wealthiest institutions, indicating that conventional approaches may not suffice.

Against this backdrop it’s important to remember the future of sustainability in alternative asset management hinges on the ability to shift from an approach of incremental changes to one of transformative actions. By addressing the challenges and embracing the opportunities identified, the industry can play a pivotal role in addressing both environmental and social tipping points for a more sustainable and equitable future.

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