Sustainability-conscious investing remains resilient beyond the ‘vibes’

The case for sustainability-conscious investing – also known as ‘ESG’ – particularly in the energy transition, is less cyclical than it may seem.

While policy reversals in the US and regulatory dithering in Europe have grabbed the headlines, technologies like wind, solar, and BESS are quietly becoming the cheapest and fastest way to ramp up power supply for everything from households and transport to data centres and a rapidly growing number of industrial processes. Even – perhaps paradoxically – oil fields.

At the same time, our experience shows that investors’ implicit minimum hygiene level regarding human rights, as well as their interest in nature solutions, circularity, and the like, are stronger than what is necessarily reflected in broad product category flows or product labels. Also, a robust investment stewardship program has become a sine qua non and thus a determining factor in manager selection.

True, we are no longer in the heyday of 2020 and 2021, when almost any investment strategy labelled ‘ESG’ would attract large flows of money. The current groundswell of demand for sustainable solutions is quieter but also more demanding of asset managers, who must be able to demonstrate that what they propose is well-founded and aligned with investor expectations.

This maturation of ESG should therefore not be misunderstood as a retreat from sustainability ambitions, but rather as a sign that focus has moved beyond labels and inputs to what ultimately matters to long-term investors – namely, actual outputs in terms of real-world impact, reputational integrity, and financial risk and return.

Achieving real-world outcomes

This evolution of ESG and recent returns has increased the appetite for climate-focused strategies targeting real-world outcomes. While recent policy changes – particularly in the US – have created near-term uncertainty, decarbonisation remains a global megatrend set to persist over the coming decades, in part due to increasingly favourable economics. However, not all technological pathways are of equal merit, and markets continue to misprice the value of credible corporate transition strategies.

Utilities are firmly in the spotlight today as power generation undergoes a profound worldwide transformation. This is driven by the sharp rise in electricity demand from the general electrification of our economies and – at the margin – by the growth in data centres powering AI, cloud solutions, etc. Meeting these expanding energy requirements without catastrophic increases in GHG emissions will depend on and be driven by further decarbonisation, as many of the world’s largest technology companies remain committed to ambitious clean-power targets.

Among utilities, the German firm RWE is emerging as a key beneficiary of the energy transition and the drive for European energy independence, pairing a decisive coal phase-out with a significant build-out of renewables. Through sustained engagement, we have supported the company’s efforts to expand clean capacity and enhance the credibility of its science-based targets.

Importance of ‘systems stewardship’

Engagement with companies in high-emitting sectors, such as utilities, is essential to address emissions reduction – including the threat posed by methane, which is estimated to account for 30% of today’s global warming. While individual engagement can play a meaningful role in influencing company behaviour, systemic challenges like methane are particularly effective when addressed through coordinated investor action along the entirety of the relevant value chains.

This is why investor coalitions and collective engagement activities remain powerful tools for driving real-world change. Since 2022, we have spearheaded a collaborative engagement programme with numerous like-minded investors to facilitate material cuts in methane emissions across the energy, utilities and waste management industries.

In addition to engagement with individual corporates, this has required dialogue with policymakers to reiterate that the framework within which companies take their investment decisions should remain as supportive and predictable as possible. For example, a group of 44 leading investors representing more than €4.5trn in AUM recently called on the European Commission, European Parliament and EU Member States to uphold and swiftly implement the EU’s long-announced methane emissions regulation, and Nordea, collaborating with industry initiatives such as the IIGCC, has met directly with EU officials in support of this initiative.

Smoothing the path for tomorrow’s winners

Short-term regulatory volatility, as experienced by sustainability-conscious companies and investors in the current environment, is unhelpful because it creates noise and allows the proliferation of negative narratives that suggest sustainability and competitiveness are at odds.

As long-term investors, we know that there is no durable competitiveness without sustainability. That is what we, in tune with an overwhelming share of the asset owners we meet, do our best to impress upon both our investee companies, their clients and suppliers, and relevant policymakers.

Tomorrow’s winners will be the companies and investors who think ahead, maintain their overall strategic direction, and do not let themselves be distracted by ever-changing ‘vibes’.