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Thematic approach to climate change

Despite strong momentum behind the energy transition theme, much more investment is needed in targeted areas to achieve climate goals, according to BNP Paribas Asset Management (BNPP AM).

Paul Milon, BNP Paribas Asset Management

Investors should act now to ensure they benefit from exposure to various sectors involved in the energy transition – from electric vehicles to batteries to hydrogen, and more.

For example, power generation in Asia accounts for almost quarter of all global greenhouse gas emissions. “To replace this as part of the move towards net zero shows the opportunities it can create for the overall renewables sector, as well as for the infrastructure that supports it,” Paul Milon, head of stewardship for BNPP AM in Asia Pacific, told FSA.

There is little doubt that the energy transition will shape economies going forward. Investor appetite is evidence of this, with the trend towards ESG solutions riding on growing environmental awareness that has been accelerated by the pandemic.

This is supported by observable changes around the world. A recent survey by Boston Consulting Group, for instance, found 70% of respondents were more interested in environmental challenges and are more committed to changing their own behaviour to advance sustainability.

In line with this, investment in ESG funds hit an all-time high in 2020, with $347bn of inflows and 700 new funds launched globally. Asia is catching up, now with $37bn in assets under management in sustainable funds, a rise from $20bn six months ago.

Yet, this still falls way short of the required estimated investments of $3trn-plus to achieve global climate goals. “The growth has been strong, but from a low base, so there is still a lot of room for more growth,” said Milon. “It is necessary to mobilise more resources to achieve the goals.”

Educating investors

With more and more flows into sustainable funds, there is greater focus on understanding ESG funds, in terms of how green or sustainable they really are.

This is being addressed in Europe with the Sustainable Finance Disclosure Regulation (SFDR), but regulators in Asia are also starting to look into certain classifications. “We will see more and more of a focus on product labelling to protect investors from green washing,” added Milon.

This shift is seen in the form of regulatory developments over how companies should be run, such as setting ESG disclosure rules, and in stewardship codes and guidelines.

In addition, investors such as BNPP AM are taking part in initiatives such as Singapore’s Green Finance Industry Taskforce and Hong Kong’s Technical Experts Group, as investors and regulators increasingly collaborate to make progress in this area.

To avoid the danger of being consumed by marketing hype, investors need to understand how funds get classified as being “green” or “sustainable”.

According to Milon, investors should look for investments in companies that have a growing focus on energy transition solutions, explaining that thematic funds have more specific criteria about the exposure of the fund.

It is important that funds which integrate ESG and target sustainability characteristics should be able to demonstrate more favourable ESG characteristics than the benchmark being invested against, he added.

There is also a growing need for more training to help relationship managers and other individuals when selling ESG funds to end-clients.

Debunking ESG myths

Sacrificing returns is one of the main misperceptions among some investors when they consider ESG funds, said Milon.

The first challenge is to provide clarity by helping investors understand the different approaches and objectives in relation to sustainable investing.

Exclusion is a common approach for many sustainable strategies, but only plays a small part overall in the investment universe.

A more popular approach, he said, is ESG integration combined with stewardship or active ownership.

Thematic and impact investing funds, meanwhile, invest in a narrower part of the market. This limits the diversification, but increases exposure to high growth areas, which can potentially result in higher-than-expected risk-adjusted returns.

Another notable theme that would also benefit from better understanding is biodiversity. Milon said around 50% of the world’s global GDP is at medium- or high-risk from biodiversity loss. “This might ruin the progress we are making in energy transition.”

For example, he explained, any climate objective is more difficult to achieve if there is no attention paid to the impact of deforestation.