Net Zero: New Investment Opportunities

Original content: AXA IM

Q: AXA IM has long argued that decarbonisation is a huge opportunity for investors and that lower carbon means more growth. What does this mean for the global economy?

Hans Stoter (HS): It is clear that if we do not decarbonise, there will be significant damage to the global economy. But on an absolute basis, we believe the energy transition can deliver additional economic growth. It will mean new technologies and jobs – and new potential investment opportunities. For example, new areas like hydrogen energy, carbon capture and storage, sustainable agriculture and food production will generate growth for the future. We believe the energy transition can be as transformative as the digital revolution has been over recent decades – and it will have significant implications for asset allocation.

Nigel Topping (NT): Decarbonisation will change the entire physical nature of the economy, for example going from burning coal to make steel, to using green hydrogen, which needs a big capital injection. Countries like Chile, which is massively focusing on renewables and green hydrogen, are already attracting a lot of inward investment. I believe those that make the transition earlier will win relative to their neighbours.

HS: We should be focusing on longer-term sustainable profitability and a financial community that rewards good behaviour rather than short-term gains. If we embrace the idea that nobody can be successful in a world that fails, we need to ensure the planet has a long-term future and that we create an economic environment which can deliver that long-term future.

Q: What impact will moving to net zero have on labour markets?

Johann Plé (JP): There will winners and losers but overall, I think the transition will deliver higher long-term sustainable growth which will also be supportive of employment. As governments and companies introduce net zero targets, this means a lot of investment in renewable energy and energy efficiency solutions – and a lot of jobs will be created. Some jobs will disappear, but many can be adapted or transformed – companies need to reorient the jobs that are at risk and enable training with support from the government to ensure that every role can be properly supported.

Q: What are the most exciting technologies that you see out there?

HS:  Innovations around energy generation and storage will be exciting to be part of. Fossil fuels have enormous efficiency in storing energy and releasing it when you need it, and we need something like that for renewables. Can you imagine a world where integrated oil companies will use their network of distribution capabilities through gas stations to supply hydrogen? If they can make that switch, we will have a very exciting future in front of us. The winners so far, in my opinion, have included electric vehicles, clean energy, waste processing, healthcare and sustainable food production. The laggards have included integrated oil firms, as while they are making the right statements, as a percentage of their revenue clean energy is still minimal.

NT: The percentage of their capital expenditure directed towards the energy transition is in some cases also minimal, which is worrying. This is hardly evidence of a commitment to the transition, so the short-term action needs to be deployment of capital.

Q: Will consumer behaviour drive changes such as through buying electric vehicles or will it be governments and public policy that push us towards it?

JP: I think it will be a combination of both – policy is often influenced by a shift in public opinion, and there is a growing awareness among the public of needing to change our habits.

NT: There is an interchange between public policy and industry, for example electric vehicles are still more expensive to purchase even though they are cheaper to run, and the industry needs a few more years of fiscal support until the product gets cheaper – and also needs support in terms of the charging infrastructure.

Q: How has this transformation towards a net zero economy been reflected in the increased issuance of green bonds?

JP:  The growth of the green bond market reflects the momentum we have towards investment in the energy transition, from a market worth $50bn five years ago to almost a $1trn market now. There has been almost as much issuance this year as we had over the whole of 2020 and we expect in 2021 as a whole to see double the amount of issuance we had last year.

Many governments are pledging and implementing net zero targets, which is translating into strong growth of sovereign issuance of green bonds. On the corporate side, more and more corporates are issuing green bonds across an increasing number of sectors, not just utilities but also real estate, automotive, chemicals and more. The energy and metals and mining sectors are not as active in the green bond market, but it does not mean these sectors do not have an important role to play in the transition to a sustainable and low carbon economy.

Q: How much of an issue is greenwashing, where projects or products are portrayed as green when some aspects are not?

HS: The focus on greenwashing is a sign of well-working self-regulation through regulatory oversight and media shaming. Companies want to avoid greenwashing as they do not want to be associated with the topic. But I would say to asset owners and investors, do not let the fear of greenwashing restrain you from investing in green strategies.

It is still better to invest in something that is 80% green and 20% greenwashed than something that is 100% not green. The focus on avoiding greenwashing almost seems to be more important than seeking green investment and I think that is the wrong balance.

JP: Green bonds are conventional bonds with the benefit of additional transparency as the issuer identifies specific environment-friendly projects and commits to report with dedicated key performance indicators on these projects. So, to assess if a green bond is truly green, investors should not only look at projects and reporting but also assess the credibility of the issuer’s sustainable strategy and how it is aligned with the projects to be financed.

Q: We have seen huge inflows into sustainable investment recently. With so much momentum behind this, is it more than just a momentum trade?

HS: There is clear momentum, but I don’t think it’s a short-term fad, I think it’s a structural trend that can run for many years. We have reached a tipping point where investors would rather invest in something that has a positive societal or environmental impact and are not just focused on the investment returns in the short term.

If there is demand for ESG strategies then the price of well-scoring ESG companies will likely go up, so it’s a self-propelling strategy. But I do think the structural demand for greener investments will remain.

Q: How vocal do we expect investors to be when it comes to businesses adapting their carbon footprint?

HS: I expect more of these topics to be address at company annual meetings, but for us as a large asset manager it is much more effective to use our influence to have a one-on-one dialogue with management teams or team up with other large investors and approach them together. We believe strongly in engagement, and when engagement becomes challenging, a public vocal presence is important, but dialogue often needs to happen behind closed doors to yield the best results.

Q: What tangible outcomes do you hope for from COP26?

NT: I hope that every asset manager joins the Net Zero Asset Managers Initiative and the Glasgow Financial Alliance for Net Zero and uses their advocacy to push for the end of coal, the end of the combustion engine and the end of deforestation. I would like to see them all build into their investment approach and engagement to end those three polluting technologies that have been driving climate change for so long.

Read a summary of Nigel’s keynote speech to clients in AXA IM's webinar here, where he shares his thoughts on the role of the finance sector in the path to net zero, and what needs to be done to make COP26 a success.

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