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Positioning portfolios for a shift to sustainable capitalism

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Investors have embarked on a paradigm shift, argues Sustainable Investing: A Path to a New Horizon – and that is the transition to a more sustainable financial and corporate system.

Published tomorrow by Routledge, with a foreword by former Bank of England and Bank of Canada governor and current UN special envoy on climate action and finance Mark Carney, the book sets out to help people build sustainable investment skills, and seeks to change outdated mindsets and economic theories that have blocked financial market participants from embracing sustainability.

Given the need to create a climate-resilient financial system that finances net zero carbon by 2050, Carney writes: “A more sustainable financial system is being built. But the task is large, the window of opportunity is short, and the risks are existential.

“Firms that align their business models with the transition will be rewarded handsomely. Those that fail will cease to exist.”

Comprising contributions from numerous leading sustainable professionals from the corporate and investment worlds, the book is written and edited by Herman Bril, director of the office of investment management at the United Nations Joint Staff Pension Fund; Georg Kell, founder and former executive director of the United Nations Global Compact and chairman of Arabesque; and Andreas Rasche, professor of business in society at the Centre for Corporate Sustainability at Copenhagen Business School.

Kell explains to Expert Investor that responsible business and sustainable investing are now converging, adding: “We thought it was time to write a new book that postulates this systemic change.”

The books seeks to help decision-makers to find confidence in modernising and transforming and not stick to the old dogmas, he explains.

Balancing short and long term

Sustainable Investing offers answers on how to simultaneously manage the short and the long term while considering evolving environmental, social and governance (ESG) factors.

Short-term incentives, such as fossil fuel subsidies, pose barriers to companies and investors who set out on a path to sustainable, long-term change. Balancing such short-term incentives while securing long-term profitability and positive investment returns is key.

Kell highlights the risk of stranded assets that investors are facing in the transition. “It’s basically the risk of being stranded with an old model, with assets that are depreciating rapidly,” he says.

“The combination of climate imperatives, carbon pricing and consumer preferences make such technology shifts [from environmental and social imperatives] much faster. If you’re not ready and well-positioned for the future, you may end up with the wrong technology and then you are locked in the wrong pathway.”

‘Future-fit mindsets’

To avoid being overthrown by the shift, believes Kell, investors must open their minds to change.

“We still are vested in the old way of thinking and much of our training and education is based on that – the efficient market hypothesis, price signals, everything.

“What is needed, however, is a big transformation from industrial-era mindsets to future-fit ones. Basically, change management has become very important – along with the willingness to embrace change,” he says.

According to Sustainable Investing, there is growing evidence that companies which invest for the longer term outperform those that focus on the short term – yet not every company is able to set out on a path to a sustainable transition.

“Unfortunately, in the real world, for very large corporations that have an established brand, it’s very hard to reinvent themselves,” says Kell.

“They need a shock. They need a crisis or they need really outstanding leadership that has the courage and the support of the shareholders to reinvent themselves.”

As an example, he cites Volkswagen’s Diesel crisis, which led to an investment of more than €30bn in e-mobility. “Out of the Diesel crisis, they were willing to change the fundamentals. They committed to major investments in e-mobility because of the crisis,” he continues.

While still catching up with Tesla, VW is now well-positioned in the e-mobility race, he says.

Sustainable shift

Investors place a premium on companies with “future-proof investment strategies”, Kell argues.

He points out that one reason for why Tesla has the highest valuation in the automotive industry is that investors have bought into its strategy of electricity-powered transportation.

“It’s a totally radical shift for a very important industry,” he says. “And we can now see that shift happening across all sectors.”

On the subject of sustainable investment strategies, Kell says he favours a ‘soft’ divestment approach, which overweights winners in strategies and enables the real economy to adapt.

“We cannot just write off entire sectors,” he explains. “It would cause unemployment and social upheaval. We need socially acceptable transition pathways.”

While the direction of the sustainability journey looks clear, however, the end-destination is less so. “Maybe there will never be an end-destination,” says Kell.

“Maybe it will be a case of permanent change management – that’s my feeling. There are so many more disruptions ahead of us – climate disruptions, civil unrest, mass migration, humanitarian crisis situations – we had better get prepared.”

Sustainable Investing – A Path to a New Horizon (Routledge, £29.99 in paperback) will be published on 25 September 2020. You can find out more information here

Elena Johansson

Senior Reporter

Part of the Bonhill Group.