CIO believes investors should take advantage of the rapid evolution of the sustainable investing universe. (ddp)

Heatwaves have been impacting many parts of the world, including temperatures above 95 Fahrenheit in China and in excess of 120 Fahrenheit in North Africa.

Such data points look set to spur decarbonization commitments from governments and companies, along with investments in green energy, in our view. We see various ways in which investors can help close the funding gap to support environmental goals while earning attractive risk-adjusted returns, in both public and private markets.

Seek out businesses that are ahead of their peers on ESG criteria and in the energy transition. So far this year, stocks of companies leading on environmental, social, and governance criteria have outperformed their global counterparts, most notably in the US and Europe. We expect this performance to continue, as these stocks often offer high dividend yields and quality characteristics, two investment styles that we currently like. In addition, the share of renewables is steadily rising in the US and Europe, climbing from 17% and 30% in 2017 to 21% and 39% in 2022, respectively. The US Inflation Reduction Act—which includes new spending and tax breaks for clean energy—has placed a powerful spotlight on the green transition, so we expect the near-term outlook to be strong.

The global focus on advancing social and environmental objectives creates opportunities for early-stage companies operating in private markets. Resource scarcity underpins the need for investment in the circular economy and in environmental infrastructure and technologies in the long run. We see opportunities in the thematic space beyond clean energy, including in the future of healthcare. Techniques like cell and gene therapy can now be used as the basis for innovation across viral and infectious diseases. The post-COVID world creates an opportunity for education-focused technology to enhance student outcomes, with private equity serving as a source of capital for innovation.

Some regions have more implementation options in alternatives. Implementing sustainable hedge fund exposure is now gathering traction in Europe, allowing investors to diversify more effectively as well as access additional sources of returns. Sustainability-focused hedge funds typically focus on green technologies, carbon certificates, and broader sustainable opportunities across themes and sectors. We anticipate sustainable hedge fund portfolios could deliver a comparable performance to that of traditional hedge funds, though likely in a more volatile fashion.

So, we believe investors should take advantage of the rapid evolution of the sustainable investing universe. Investors should still be aware of the risks that come with allocating to hedge funds and private markets, such as illiquidity. Meanwhile, in fixed income, sustainable bonds continue to allow investors to align their portfolios with their values, as well as offering attractive risk-adjusted returns.

Main contributors - Solita Marcelli, Mark Haefele, Christopher Swann, Jon Gordon, Matthew Carter

Content is a product of the Chief Investment Office (CIO).

Original report - Temperature record underlines opportunities in sustainable investment strategies, 5 July 2023.