With markets focused on the back-and-forth in US-China trade negotiations it’s easy to forget that, behind the headlines, there are other longer-term challenges that we face as a society. Four years ago, governments around the world committed to ambitious targets outlined in the UN Sustainable Development Goals (SDG). Yet the sheer scale of capital investment required to meet these targets makes them close to impossible to achieve using public finances alone: the UN-sponsored Principles for Responsible Investment (PRI) estimates that annual SDG investment needs hover near USD 5-7trn.
Still the drive toward finance focusing on issues around sustainability has only increased over the past four years. The Federal Reserve now considers climate change in its risk assessments. And regulations on climate change are increasing around the globe. In June, for example, the UK became the first major economy to pass a law committing to a zero net greenhouse gas emissions target by 2050.
We believe the mismatch in funding combined with consumer and political pressure is creating an opportunity for private investors to reallocate capital toward sustainable growth opportunities. This opportunity looks that much better when we consider that the global stock of negative yielding bonds currently stands at around double the money required to meet the SDGs: USD 12trn.
But the deployment of private capital into sustainable opportunities has been hindered by confusion over sustainable investing terminology. This challenge was discussed in the January 2019 UBS White Paper for the World Economic Forum: Awareness, Simplification, Contribution.
To address this challenge, last week the Institute of International Finance (IIF) released a set of recommendations to simplify sustainable investing terminology, for the benefit of investors. According to Dr. Axel Weber, IIF Chairman and UBS Chairman, “Simplification and standardization of sustainable investment terminology is a crucial part of the plumbing needed to grow sustainable finance.”
We believe increased clarity will better help investors understand how their capital is being managed to support both their own personal financial goals and the UN Sustainable Development Goals.
For investors who aim to integrate sustainable investing criteria into investment decision making, we have a number of long-term themes that we believe both have strong long-term growth potential and support achievement of the SDGs:
• Reducing pollution levels. Pollution levels in Delhi reached a three-year high at the start of November, prompting authorities in the Indian capital to instigate emergency measures, including closing schools and restricting private car use on the city’s roads. Our Clean air and carbon reduction investment theme should benefit from increased governmental focus on addressing climate change, reducing greenhouse gas emissions, and improving air quality. The International Energy Agency (IEA) estimates that just to keep CO2 emissions stable, accumulated investments of around USD 36trn will be needed in clean air technologies, energy efficiency and renewables between 2015 and 2030. We think the clean air and carbon-reduction theme will see mid-to high single-digit earnings growth rates over the next two decades, with solution providers offering technologies and new innovations to reduce emissions benefiting the most. This theme is aligned with SDG13 “Take urgent action to combat climate change and its impacts.”
- Progress on gene editing. In October, research scientists from MIT and Harvard announced they have developed a more precise gene editing technique, which they call “prime editing,” that they estimate could help correct nearly 90% of genetic diseases. While this blue-sky scenario is not yet a reality, genetic therapies represent a paradigm shift in medicine that has the potential to revolutionize healthcare delivery. The initial market opportunity based on approved treatments and the current late stage pipeline exceeds USD 20bn, but is just 2% of global biopharma sales. If clinical trials and commercial rollouts meet our expectations, we see the chance for marked capital appreciation. As ever in drug development, not all companies will succeed and idiosyncratic risk is high, so we recommend investing in the genetic therapies theme through a diversified portfolio of firms to manage the risks associated with clinical failure. Our Genetic therapies theme aligns with SDG3 “Good Health and Well- Being” due to its aim to cure diseases by addressing their underlying cause rather than reactively treating symptoms.
- Shifting to electric. Last week, Volkswagen started production of its ID.3 electric car at its Zwickau factory, which is being converted from the manufacture of conventional vehicles. German Chancellor Angela Merkel attended the opening ceremony and said that to meet the government’s aim to have 10 million electric vehicles on the road by 2030, 1 million charging stations would be required, and has promised to invest EUR 3.5bn into providing them. We estimate that by 2025 around 25% of new vehicles sold globally will be electrified. And supportive regulation, falling costs, and technical innovation should prompt the broader electric, autonomous, and car-sharing market to grow to USD 400bn by 2025, or 8-9 times today’s size. We recommend exposure through a broadly diversified stock selection to minimize company- and technologyspecific risks. Our Smart mobility theme is aligned with a number of the UN goals: SDG 3 “Good Health and Well- Being,”SDG11 “Sustainable cities and communities,” and SDG 13 “Take urgent action to combat climate change and its impacts.”
Each of these themes offer investors the opportunity to generate returns while contributing to achieving the UN’s SDGs. Investing over the long term also has the benefit of filtering out the noise from the day-to-day headlines. Read more on these and our other long-term investment themes here.
Four years ago, governments around the world committed to ambitious targets outlined in the UN Sustainable Development Goals (SDGs). Meeting them will require private as well as public capital. But the deployment of private capital into sustainable opportunities has been hindered by confusion over sustainable investing (SI) terminology. Last week, the Institute of International Finance (IIF) made recommendations to simplify that terminology. For investors who aim to integrate SI criteria into investment decision-making, we suggest a number of long-term themes that we believe offer strong long-term growth potential and support achievement of the SDGs.