Meet the Institute Adam Gustafsson: Climate change represents massive investment opportunities

Al Gore’s 2006 documentary, “An Inconvenient Truth”, was my wake-up call. Since then, climate change has always been on my radar and remains my main focus. I worked in equity research as ESG metrics started to reach mainstream adoption. But nothing connected these metrics to valuation models. That made me curious as to why.

The truth was that these metrics were mostly disconnected from a business success—they had no price. Due to that, analysts largely viewed it as a waste of time. My perspective, however, was that climate change could have a huge impact on a company’s future. That’s why I specialize in how emissions affect corporate valuations and hence how to invest, based on decarbonization.

The concept of sustainability feels almost boundless, which can lead to lots of confusion and competing priorities. So, to get stuff done, we need focus.

Given my role as an equity investor, I follow companies. I believe investors have always grappled with sustainability, but more from a business perspective, i.e., how long a successful business can stay ahead of competitors and deliver excess returns.

I think of a company’s environmental and social footprint as frictions which, if not managed, could threaten their social license to operate and ultimately the viability of their business operations.

On the flip side, companies that deal well with these factors can be more resilient. Therefore, environmental and social sustainability should be viewed as critical drivers of future profitability.

It may sound a bit mercenary on my part, but this all boils down to profits. I believe in the power of markets, and if the rules and incentives are setup correctly the private sector will drive toward viable solutions.

On a more personal note, I think representing a firm like UBS is a privilege that comes with responsibilities. Perhaps naively, I believe that I can make a difference.

I believe we are acting too slowly to stay within 2°C global warming, so it might be more pragmatic to target 2 to 2.5°C at this point. However, I’m still convinced that we will be able to reach net zero eventually.

Either we need to deal with and clean up the mess we’ve made by letting global warming run too high, or we may be able to deliver a successful transition with companies gaining appreciation for the role they can play in the solution. Costs are likely to increase with higher temperatures, but these costs are business opportunities. And, if we avoid some of the worst outcomes, these resources can be used for other things.

Either way, I cannot see a scenario where climate does not become a massive business.

Together with my colleague, Ellis Eckland, I’m running an investment strategy that invests in emission-intense industries that are vital to society, e.g., materials and fertilizers. Together with our sustainability team, we engage with our investee companies to support an acceleration of their decarbonization effort.

We believe this strategy will deliver both attractive investment returns and have an impact on emissions.

This is a lengthy list, but I will focus on just a few dimensions. Besides new themes like the broader natural capital space, I believe we need to rework how we think about climate investing.

I’m a strong believer in engaging with rather than excluding large emitters in our strategies. However, regulatory frameworks, especially in Europe, are less supportive of this approach. To change this, we need to show that we can make a material difference by engaging. We can then educate clients and, when momentum starts to build, I believe more flexible regulation will follow.

One thing worth noting is that heavy carbon emitters constitute a tiny proportion of the market capitalization of today’s stock markets. I think this relatively small footprint offers an opportunity to better tailor climate oversight rules.

It doesn’t seem particularly helpful for regulators to make onerous compliance demands of investments in low emissions companies. Instead, I think we should deepen scrutiny of, and engagement with, the heaviest emitters and work out plans for them to adapt or wind down the dirtiest parts of their businesses. Those are some difficult conversations, but they need to be had.

I don’t believe in doomsday scenarios. We have the knowledge and resources to address the situation.*

Ultimately, it makes sense to solve the climate crisis on many levels, not least economically. The earlier we act the less costly and painful it will be.

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