Will 2022 be the year when sustainable investment, after being driven by collective awareness in recent years, is caught up by the reality on the ground? Will it mark a return to Old World market practices in which only returns are important? Jennifer Wu does not think so. And while she acknowledges that the combination of the war in Ukraine, the energy crisis and rising interest rates in an inflationary environment has impacted the entire market, including sustainable assets and funds, and put fossil fuels back in the saddle, she does not believe that either the sustainability agenda or investor appetite for sustainable investments is threatened.

"Sustainable investment is an unstoppable trend,” Wu told her audience. “That said, there are a number of headwinds that could potentially dampen investor appetite in the coming years." 

Investors and COP 27

The first of these will come from Egypt. COP 27, to be held in Sharm el-Sheikh from 6 to 18 November 2022, "will be an opportunity to assess the progress made by governments on the transition to a low-carbon economy". The commitments to zero emissions, deforestation and financing the transition to a low-carbon economy are there, Wu said. Implementing them, however, "requires a Copernican shift in all sectors and in all countries. And this presents opportunities and risks, risks such as stranded assets--that is, technologies or assets that will no longer be viable in the new economy--and opportunities such as innovative green solutions that can increase a country's competitiveness.”

COP 27 is the "first reality check. Investors will need to pay attention to the pace of policy implementation to ensure that in recalibrating their portfolio allocations, they are keeping pace with the transition to a low-carbon economy," Wu says. And above all, not to abandon a long-term vision despite the short-term volatility inherent to this transition. "The pace of policy implementation will impact the risk/return profile of our investments," she warns.

Climate change and portfolios

The second headwind is a storm. "As climate change continues unabated, investors will become even more wary of the limited resilience we have to natural disasters. Climate adaptation and the need for investment is here and now. This is an area that investors need to start focusing on now." Wu reckons investors need to focus on three broad investment categories: cities and towns, the natural ecosystem, and human health and well-being. "Investors should really look at their current exposure to assets that are not able to adapt, but also, at the same time, proactively allocate capital to new technologies that can help build resilience in critical infrastructure, in the natural ecosystem and in the health sector."

The Language Pitfall

The third headwind relates to the current greater appreciation and understanding of what ESG is and what it is not.

For Wu, ESG investing should not be seen as the solution to complex global problems. "Rather, it is about finding well-run companies with a sustainable business model that can outperform financially. ESG investing is not philanthropy or impact investing. And these terms should not be confused. There is definitely a place for investment that goes beyond simply generating a risk-adjusted return. And it is also on a spectrum, from exclusionary investment to impact investment, and to impact investment because of its dual purpose. There is a potential trade-off between financial return and sustainable or environmental outcome, which again is not the same as ESG investing. We have to be very careful about the language we use."

This story was first published in French on Paperjam. It has been translated and edited for Delano.