Snow in Texas and extreme flooding in Sydney: the start of 2021 has been volatile from a climate perspective.
ESG assets have also experienced some volatility during the first quarter as global equity trends shifted from growth to value.
In particular, our position in Pictet clean energy (illustrated below) came off January highs falling as much as 7.90% before recovering to finish the quarter flat (-0.10%). Whilst the momentum stalled this quarter, the 1-year returns for Pictet clean energy over 12 months remain impressive at 69.24%.
Paradoxically, the Texas snow phenomenon had a negative impact on clean energy companies with wind turbine manufacturers such as Vestas taking the heat as turbines froze; however, it should be abundantly clear that the fact it’s snowing in Texas is telling us the climate crisis is accelerating and that the shift to renewables is imperative.
ESG in Politics
The long-term tailwinds for clean energy continue to strengthen from a political perspective, with President Biden announcing a raft of plans to ‘jumpstart wind energy projects to Create jobs’. This includes a new wind energy area in the New York Blight and a goal to generate 30 Gigawatts of offshore wind by 2030.
In the UK, we have seen similar commitments to accelerate offshore wind infrastructure spending, with £75m earmarked for the Able Marine Energy Park on the south bank of the Humber Estuary, part of ambitious plans to be generating 40 Gigawatts of offshore wind by 2030.
However, both the US and the UK lag behind Europe in terms of existing capacity and experience, with European companies like Iberdrola and Orsted established leaders in the renewables sector. In January we saw a record breaking £8.8bn auction for offshore wind rights in the UK, with major oil companies BP and Total pushing out the sustainable energy companies mentioned above.
The debate on whether BP, Total et al should now be considered ‘clean’ energy companies will continue. From an ESG investing perspective, they still generate the majority of their revenues from fossil fuels and carry significant historic and on-going risks to biodiversity whilst they deliver their newly stated ambitions for carbon neutrality in the next 10, 20 or 30 years.
The broader subject of ESG scoring has come into focus this quarter. The prominence of climate change within investment decision making continues to increase and we are seeing a vast disparity in how companies are being classified. Most noticeably (or shockingly) ESG ratings agency Refinitiv ranked British American Tobacco and Glencore as the 3rd and 4th highest ESG scorers across the FTSE100. This highlights the importance of not being over reliant on external scoring and is why our 'Conscious Capital' approach to investing takes a holistic view of a companies’ ESG credentials. Whilst British American Tobacco may have improved their ESG score; they are literally responsible for slowly killing people. Likewise, Glencore may have invested heavily in a suitability report promising change; however, good intentions lack credibility until their environmental and human rights records are properly evidenced as being addressed.
Balancing Growth and Value
Whilst the long-term investment thesis for renewables is clear and the array of investment opportunities in clean technology are expanding rapidly, the sector will inevitably experience periods of volatility as the majority of clean energy companies are by their nature growth orientated.
There is however more to ESG investing than clean energy…
We wrote last year about the importance of biodiversity from an economic perspective. We are starting to see the emergence of global leaders in precision farming, agricultural technology, yield improvement and nutrition. These companies are revolutionising global farming practices and supply chains. In our view, this is an underinvested sector with strong long-term growth prospects, as many of the companies appear undervalued compared to their clean energy ESG counterparts.
The wider realisation that agricultural practices need to change in order to protect biodiversity is gradually starting to be embraced by governments. Any new (or experienced) ESG investors who have seen the recent Netflix documentary ‘Seaspiracy’ may be starting to realise that “sustainable” labels can obscure the actual impact our fishing practices have on marine biodiversity.
We will explore in a subsequent article the biodiversity impact of offshore wind, as this is another sensitive area of debate that will become increasingly prominent in ESG investors’ minds.
As illustrated below our existing thematic Sustainable Agriculture exposure through Pictet Nutrition finished the quarter with gains of 2.07% with a 1-year return of 39.11%.
Whilst we are pleased with this performance, we will be expanding our overall exposure to Sustainable Agriculture as a counterbalance to our clean energy theme. This will serve as a value play and an inflationary hedge, given the increasing longer-term risks posed by seemingly limitless stimulus and support packages being pumped into markets and consumers.
In our Q2 ESG Review, we will focus on our water and healthy living themes that are equally important from an asset allocation and ESG perspective. In fact, on 30th March, the Biden Administration published their ‘American Jobs Plan’ that includes significant commitments to water infrastructure.
For now though we would like to thank our Fusion ESG investors for their support. We will continue to actively manage a 100% ESG strategy designed and developed to provide clients with an investment portfolio that generates sustainable growth whilst addressing the twin challenges of climate change and biodiversity loss.
For more information about our ESG investment services, please visit our Fusion ESG page.
To learn more about Capital International Group's ethical approach to business, please visit our Conscious Capital page.
We also welcome any feedback on our website and these quarterly updates.