What have been the major recent developments in sustainable investing?
I'd like to highlight three key themes and trends over the last quarter. These relate to nature, climate policy and the transition or progress against the transition to net zero. So firstly, on nature, we're continuing to see the rise in prominence of this issue for investors with the launch of The Taskforce on Nature-related Financial Disclosures (TNFD) in September. These provide very much like Task Force on Climate-Related Financial Disclosures (TCFD) did for climate change, a structured set of recommendations for companies, for corporates and for investors to start understanding both the risks opportunities but also impacts of biodiversity. As with climate, we know stewardship is going to play a key role in supporting the transition to a nature positive future, to enable us to also manage those risks and opportunities. And to that end, we saw the launch of Nature Action 100, again modelled on Climate Action 100 plus, this collaborative engagement initiative signed up to by 190 investors, including GAM, focuses on the 100 most systemic listed companies on nature. And the objective here is really to ensure that the discussions around nature really are part of the strategy and the investment case for corporates going forward. We should also recall that at the end of Q2, we finally saw the adoption of the last four objectives of the EU taxonomy, one of which includes the restoration of biodiversity. So with this, we're starting to see a tool set whereby investors can really integrate biodiversity in nature risks and opportunities. Understand those impacts and also start using those to allocate capital.
The second area is really on climate policy. So here, despite another summer of extreme weather events, we may be starting to see some divergence of certainly the pace of climate policy. So despite the fact that we marked the one year anniversary of the US Inflation Reduction Act with the communiqué from the white House indicating that the act had already triggered a 170,000 additional clean energy jobs, over 100 billion of clean energy investment from corporates. In the UK, we saw the Prime Minister announce a different or updated approach to net zero, which very much in terms of signalling, seemed to be sort of weaker on the on the policy signals. Now, the question is the extent to which that is actually going to slow down progress on investment itself. And certainly, for investors, an area to watch much more closely is, at the national level, how policies are going to be supported of the net zero transition whether we're going to see that continue on a consistent basis, or whether we're going to see some of these changes coming up to make that landscape even more complex.
And the last area is the updated International Energy Agency (IEA) report on their 2015 net zero scenario. So this received a lot less attention than the first report published two years ago. But actually, in some ways I think a lot more interesting. So the initial report and indeed this report is very much a conceptual document, starting with the end point of net zero and working out what might theoretically be possible. But with the updated scenarios and assumptions, what we've seen in the most recent IEA report is where we've seen a sort of upgrade in expectations for certain technologies, some of those driven by supportive policy mechanisms, and also where we've seen a revision downwards of those expectations.
So in terms of the upward, there's been very strong progress on solar, on battery, a lot of that also supported by policy and expanded manufacturing. But the downward revision has also been on the role of gas as a transition fuel. And we've also seen, potentially look at a prolonged role of coal, which clearly has impacts for how soon and how we're going to transit to net zero.
So obviously, there still continues to be a lot of opportunities. One of the areas that was updated was the rapid development of innovation around clean energy technology, but also highlighting a lot of the dependencies, whether that's on the critical minerals required, the grid infrastructure, and a lot of those replanning and permitting around that to enable us to deliver on the transition.
What’s your outlook for the rest of the year?
So in Q4, we have the 2023 United Nations Climate Change Conference (COP 28) climate talks in the United Arab Emirates (UAE) starting at the beginning of December. Some of the key topics on the agenda there are the Global Stocktake. Also, the global adaptation goal and the thorny issue of financing, including operationalising the Loss and Damage Fund that was much discussed at the last The Conference of the Parties (COP) negotiations.
Now, in terms of the Global Stocktake, I think it's pretty evident that we will be behind in terms of progress. So the real challenge will be whether the current COP presidency can crawl the parties into a sort of stronger communiqué on really strengthening that ambition, and that could then lead to stronger Nationally Determined Contributions (NDCs). So nationally determined contributions and targets essentially put forward at the beginning of 2025. And clearly this also provides sort of backdrop around the extent to which we will also see that national policy, which I referenced earlier.
Private sector continues to provide and play a really key role in the transition, and scrutiny continues to be put on transition plans. So moving from the targets to actually how corporates and financial institutions are going to ensure their companies, that their strategies are fit for the net zero transition, but also recognising the increasing physical risks that are coming from a increasing temperature that we're already experiencing.
So at the beginning of October, we saw the Transition Plan Taskforce reveal what it considers to be the gold standard for transition plans. This will provide and build on TCFD, but provides a good structure for how we should be expecting to see some of those more detailed disclosures and to be able to evaluate essentially what a credible transition plan looks like. Now, this is voluntary, but there are sort of glimmers of a bit more alignment. It is certainly, deliberately being put together to draw on and be aligned with the Roundtable on Sustainable Biomaterials (RSB) standards. And the Financial Conduct Authority (FCA) in the UK has already indicated that it will be drawing on those recommendations in terms of its enhanced or further expectations around climate related reporting. And that's certainly something we expect to happen in other jurisdictions as well. Transition plans are, for example, also referenced in the EU Corporate Sustainability Reporting Directive as well. So certainly an area of focus in Q4 and beyond into next year.
Finally, on the labelling of sustainability funds, the use of sustainability related terms. So we saw the European Commission launch quite a wide-ranging consultation on assessing the implementation of the Sustainable Finance Disclosures Regulation (SFDR). Today, one of the areas that is consulting on is whether there should be an additional sort of categorisation of financial products linked to SFDR. To recap, SFDR is very much intended as a disclosure regime, but clearly there are concerns that it has been used more as a product labelling regime. We should be expecting the FCA sustainability disclosure Regime guidance on labelling and fund names. It certainly looks like other jurisdictions are also looking to see where that lands when determining and issuing further guidance in their own jurisdictions, and we should be hearing more from EU in Q4 as well. So that's certainly one to watch.
Is there one chart that’s currently catching your eye?
So this year, in fact, September marked the midway point of the Sustainable Development Goals. So progress update on the 17 Sustainable Development Goals (SDGs) and the 169 targets underpinning that. Progress is not a rosy picture. Only 15% of those targets seem to be on track to meet those objectives by 2030, and almost half of those targets are behind schedule in terms of delivering on the targets and goals that are there. Of note, as we go into the climate talks and the increasing focus on nature is that the individual targets focused on, on climate policy and biodiversity loss are still showing stagnation or in fact, going backwards in terms of progress in those areas. So that provides a real sort of reality check on where we are, how much further we need to go, and also how much change we can really expect to see going forward.
Andrea Quapp highlights the fact both stocks and bonds are currently attractively rated, which is presenting her with asset allocation opportunities. She also mentions the importance of innovations such as artificial intelligence and, specifically for Switzerland, the appeal of the Swiss real estate market.
Christian Munafo of Liberty Street Advisors notes an improvement in market conditions for investors in late-stage private companies; many of these companies are similar to what public market investors used to seek in small to mid-cap growth stocks. He also stresses that many of them are not just high growth, they are also at or approaching profitability.
Goro Takahashi describes the key factors that influenced the Japanese market over the third quarter, particularly the main stock exchange’s ongoing initiative to improve listed companies’ financial indicators, and the areas he thinks investors should focus on into the turn of the year.
Julian Howard reflects on the combination of stretched valuation and a tight equity risk premium that has made equities less attractive in the short term. However, it does not undermine the very long-term case for equities, in his view. He also notes the long-term structural case for China.
GAM Systematic’s Dr Chris Longworth and Guglielmo Mazzola highlight bond sell offs and a commodities rally as significant market events, and note that systematic investment approaches can help provide investors with much-needed diversification for their portfolios.
Atlanti’s Gregoire Mivelaz highlights the three major events of Q3 that impacted his investment universe: earnings, bond call dates and the reopening of primary markets. He believes given we are now in a late credit cycle, credit quality matters for investors. And he notes that market mispricing is continuing to lead to opportunities.
Jian Shi Cortesi notes that weak sentiment in China is keeping Chinese equities at very low valuations, due to the soft economic growth, real estate drag and the ongoing China-US rivalry. However, she is optimistic about long-term prospects, with the conviction that in the long term earnings growth will drive stock prices.
Niall Gallagher shares his views on the implications of rising real bond yields and why he thinks central banks will continue to have to fight inflation rather than deflation. Niall also discusses the sheer scale of capital required to enable the energy transition, and some of the companies he believes stand to capitalise.
COP28 concluded in early December. Was any tangible progress made this time? Stephanie Maier, Chief Sustainability Officer at GAM Investments, looks at what came out of it and what the implications are for the energy transition, biodiversity and the future.
Stephanie Maier, Chief Sustainability Officer at GAM Investments, considers the vast array of potential opportunities that artificial intelligence (AI) could enable in the sustainable investing space, as well as some of the risks that will need to be mitigated.