Environmental impact strategy

Sparked perhaps by Greta Thunberg and other well-known public figures, we see the Millennial generation and Gen Z as driving forces behind this shift, and they are spurring others into action. These two generational cohorts, which claim more vegetarians and vegans than any other in the modern age, are vocally committed to environmental and social issues, and their voice is empowered by the mobile phone and the broad global reach of the social media channels.

Businesses, investors, governments and regulators are all playing catch-up in this changing landscape. Investors are learning fast to appreciate the importance of sustainability in society and the business world, and therefore the need to adopt an ESG (environmental, social and governance) framework in their investment decisions.

From avoiding losses to solving problems

There are a number of different approaches to integrate ESG and sustainability into an investment decision process. The aim of ESG integration, the most important and commonly used ESG approach, is to integrate material ESG factors across the investment process – from research and security valuation through to portfolio construction and monitoring – in order to make better-informed investment decisions.

Best-in-class strategies typically limit the investable universe of companies to those with above-average ESG ratings in their industry. Other strategies simply avoid potentially problematic areas such as sectors with extremely high energy intensity, or which use rare earth metals or other limited natural resources. Other strategies emphasize their active engagement with company managements to encourage better business practices to improve ESG issues.

Clients who would like their investments to have exposure to firms that offer solutions in the environmental or social area can choose strategies that focus on investment themes aligned with the UN Sustainable Development Goals (SDG). Investing, for example, in companies that develop clean energy technologies or recycling or climate change mitigation solutions.

The purity of a fund’s exposure to its theme is clearly a critical issue, which clients need to monitor closely. Some funds that claim to offer a theme focused on environmental solutions may in fact have very little direct exposure to the advertised climate change solutions. Caveat emptor. The greater the purity to the theme, the greater the exposure to firms with a positive contribution to the SDG.

ESG integration in China

Some more tactical ESG strategies focus on evaluating a company’s ability to raise their game and improve their ESG credentials from a low starting point. This is particularly pertinent in emerging markets, and in the case of China, where ESG considerations are still generally lower down the list of management priorities. However, this is rapidly changing. According to a study by the United Nations (UNEP FI/PRI)¹, in 2009 only 43% of the largest 300 companies on the Shanghai stock exchange (the CSI 300 Index) voluntarily disclosed ESG data.

By 2018 this proportion had risen to 82%. In addition to reporting more ESG statistics, the country is also moving with the times, and adopting more sustainable energy solutions. China’s solar energy installation footprint is slated to rise by 50% before the end of 2025 – an incredible achievement with a meaningful impact on rolling back the effects of climate change.

Sustainable investing not only helps the environment and society but is also starting to prove to be a positive factor in investment performance. Perhaps this is a self-realizing “virtuous circle.” As the popular momentum behind sustainability increases and more investors adopt ESG integration processes, companies that score well on this front are likely to perform better than those that score poorly.

This surely is free market capitalism at its best: allocating capital responsibly, to improve sustainability and deliver investment performance, and by the same token punishing companies that show little regard for raising their ESG ratings, or to the economic externalities they create.

In the long run

Environmental, social, and governance (ESG) criteria dictate investor behavior around the world. Their priorities and preferences can shift very dynamically. Long-term principles for decision-making and well-founded investment solutions are more important than ever.

Our planet is at a tipping point. It’s more important today than ever before to take action. With some of the world’s largest countries and conglomerates stepping up to the plate, what can investors do to effect positive change, particularly in the public equities space?

Carly Brewster: Public equity markets are excellent platforms for channeling large capital flows into sustainable initiatives. By allocating funds to companies developing and producing the technologies to help solve environmental challenges like climate change, investors can make a real difference. They provide companies with the capital required to develop these solutions, and they give a clear signal to the market that these technologies are becoming more and more relevant.

What kind of companies are these? What kind of technologies are they delivering and how exactly do they create impact?

The Environmental Impact Strategy invests in companies that deliver environmental innovations enabling others to reduce their ecological footprint. These include companies developing solutions for energy-efficient buildings and transportation, technologies that enable heavy industry to use less material and produce less waste, smart recycling solutions for industry, and clean energy production. What’s more, engaged investors can play an active role via proxy voting and by entering into direct dialogue with the companies they invest in.

Is there a yardstick for assessing impact? What do investors usually look for in these companies when thinking about making a difference?

They select companies offering products and services that ultimately help others to pursue sustainability goals. This generally has the greatest impact by helping corporations and communities reduce their carbon emissions, use less energy, materials and natural resources, dispose of waste more responsibly and increase the amount they recycle. In addition to looking for companies that make a significant impact through the technologies and services they provide to the market, investors should also consider how these companies contribute to the Sustainable Development Goals.

Is this impact significant? Are you able to measure the level of impact your portfolio companies are having?

Experienced investors can measure the impact that companies make, but it requires a thorough analysis. Deep-diving into companies’ annual reports and sustainability publications is just as important as direct engagement with the companies’ senior management. These activities enable investors to determine the degree of impact and report on measures such as megawatt-hours of electricity saved, CO2 emissions avoided, cubic meters of wastewater treated, and tons of recycled plastic kept out of our waterways.

¹ UNEP FI, PRI and SynTao Green Finance, ESG data in China: Recommendations for primary ESG indicators, 2019.

This material has been prepared by Credit Suisse Group AG and/or its affiliates (“Credit Suisse”).

It is provided for informational and illustrative purposes only, does not constitute an advertisement, appraisal, investment research, research recommendations, investment recommendations or information recommending or suggesting an investment strategy, and it does not contain financial analysis. Moreover it does not constitute an invitation or an offer to the public or on a private basis to subscribe for or purchase products or services. Benchmarks, to the extent mentioned, are used solely for purposes of comparison. The information contained in this document has been provided as a general commentary only and does not constitute any form of personal recommendation, investment advice, legal, tax, accounting or other advice or recommendation or any other financial service. It does not take into account the investment objectives, financial situation or needs, or knowledge and experience of any persons. The information provided is not intended to constitute any kind of basis on which to make an investment, divestment or retention decision. Credit Suisse recommends that any person potentially interested in the elements described in this document shall seek to obtain relevant information and advice (including but not limited to risks) prior to taking any investment decision.

The information contained herein was provided as at the date of writing, and may no longer be up to date on the date on which the reader may receive or access the information. It may change at any time without notice and with no obligation to update.

To the extent that this material contains statements about future performance, such statements are forward looking and subject to a number of risks and uncertainties. It should be noted that historical returns, past performance and financial market scenarios are no reliable indicator of future performance. Significant losses are always possible.

This material is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or is located in, any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation, or which would subject Credit Suisse to any registration or licensing requirement within such jurisdiction.

The recipient is informed that a possible business connection may exist between a legal entity referenced in the present document and an entity part of Credit Suisse and that it may not be excluded that potential conflict of interests may result from such connection.

This document has been prepared from sources Credit Suisse believes to be reliable but does not guarantee its accuracy or completeness.

Credit Suisse may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to any company or issuer mentioned.

This document may provide the addresses of, or contain hyperlinks to, websites. Credit Suisse has not reviewed the linked site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to Credit Suisse’s own website material) is provided solely for your convenience and information and the content of the linked site does not in any way form part of this document. Accessing such website or following such link through this document or Credit Suisse’s website shall be at your own risk.

This document is intended only for the person to whom it is issued by Credit Suisse. It may not be reproduced either in whole, or in part, without Credit Suisse’s prior written permission.