Recent Buzz from the editor

(https://www.morganstanley.com/ideas/sustainable-funds-performance-2023-full-year)

Morgan Stanley: Sustainable Funds Outperformed Peers in 2023 

Sustainable funds outperformed their traditional peers across all major asset classes and regions in 2023, according to a new “Sustainable Reality” report from the Morgan Stanley Institute for Sustainable Investing. Overall, sustainable funds generated median returns of 12.6%, almost 50% ahead of the 8.6% returns of traditional funds, with outperformance coming mostly in the first half of the year. Investor demand also remained strong with assets under management up 15% from 2022 levels, reaching $3.4 trillion; sustainable funds now account for 7.2% of total global AUM.

“2023 saw sustainable funds return to their long-term trend of outperforming their traditional peers,” says Jessica Alsford, Morgan Stanley’s Chief Sustainability Officer and CEO of the Institute for Sustainable Investing. “This comes on the heels of our survey of individual investors, which found that a majority look for both competitive financial returns and sustainability in their investment strategies. Our new analysis shows this can be possible.” 

Institute analysis of Morningstar data found that investing a hypothetical $100 into a sustainable fund in December 2018 would be up 35% if it had achieved the median return for each of the past five years. For traditional funds, that investment would be up 25%. 

(https://www.morganstanley.com/ideas/sustainable-investing-on-the-rise)

Individual investor interest in sustainability is on the rise, according to survey findings in a new “Sustainable Signals” report by the Morgan Stanley Institute for Sustainable Investing and Morgan Stanley Wealth Management.

More than three quarters (77%) of individual investors globally say they are interested in investing in companies or funds that aim to achieve market-rate financial returns while also considering positive social and/or environmental impact. In addition, more than half (57%) say their interest has increased in the last two years, while 54% say they anticipate boosting allocations to sustainable investments in the next year.

Investors cited that their growing interest in sustainable investing is due to factors including new climate science findings (53%) and the financial performance of sustainable investments (52%). A majority of investors also believe that companies should address environmental and social issues.

“Nearly 80% of individual investors believe that it is possible to balance market rate financial returns with a focus on sustainability,” says Jessica Alsford, Morgan Stanley’s Chief Sustainability Officer and CEO of the Institute for Sustainable Investing. “These investors express a desire for their investments to advance positive environmental and social impact, creating opportunities for finance professionals to meet these needs.”

When asked to pick their top sustainable investing theme, investors prioritized climate action with 15% ranking it first, followed by healthcare (13%), water solutions (11%) and circular economy (11%).

(https://www.allianzgi.com/en/insights/outlook-and-commentary/scaling-up-stewardship-the-chinese-way)

China has a distinctive corporate landscape. Most of the A-shares market by value is made up of state-owned enterprises and companies with a large single shareholder are common. Does this mean engaging with Chinese companies requires a customised approach?

Key takeaways
  • The Chinese regulatory environment for stewardship is generally supportive and as sustainable investments increase in China we expect more policy-level clarity to encourage further progress.
  • A customised stewardship approach combining engagement and proxy voting can enable minority shareholders to influence sustainability agendas typically dominated by management and significant shareholders.
  • Shareholder activism on sustainability proposals could gain traction in the future but requires collective efforts from both domestic and global institutional investors.

(https://documents.nuveen.com/Documents/global/Default.aspx?uniqueId=e6da6b45-3013-4aff-b07b-aa696f515c8a)

Significant growth in electrification is required in the United States to meet decarbonization goals.

According to the Department of Energy, the capacity of the existing U.S. grid will need to increase 57% by 2035.1 To support this additional electrification, annual capacity additions of 58–115 GW of clean energy generation (enough to power 43–86 million homes) will be required through 2050,2 underscoring the tremendous need for investment in electrification and associated supporting infrastructure, which is estimated to be $200B–$500B annually in the U.S. alone.

In a recent white paper, Don Dimitrievich examines the significant transformation the U.S. energy ecosystem is undergoing, and why credit can be an attractive strategy to capitalize on today’s infrastructure opportunity.

(https://www.ceres.org/resources/reports/exploring-nature-impacts-and-dependencies-field-guide-eight-key-sectors)

This report equips investors with the insights they need to work with companies on managing the escalating risks of nature they face and on creating long-term value in a changing climate.  

This field guide gives an overview of how businesses across eight sectors, from chemicals to food, impact and depend on nature. 

  • Ceres developed Exploring Nature Impacts and Dependencies: A Field Guide to Eight Key Sectors on behalf of Nature Action 100, the first global investor engagement initiative to address the urgent crisis of nature and biodiversity loss around the world.  
  • The field guide includes eight individual factsheets on each sector.  
  • The factsheets explain the main industry activities associated with the sector and how each sectors’ activities depend on and impact nature.  

Since direct engagement with Nature Action 100 companies kicked off last year, more than 200 investors representing over $28.6 trillion in assets under management or advice, are engaging 100 market-leading companies to drive urgent and necessary actions on nature. 

(https://www.goldmansachs.com/intelligence/pages/obesity-drugs-are-among-breakthroughs-forecast-GDP.html)

Goldman Sachs: Obesity drugs are among health breakthroughs forecast to boost GDP 

A wave of healthcare innovation may significantly boost the potential of the US economy, according to Goldman Sachs Research.

The emergence of weight-loss medications, AI-powered drug discovery, genomic and regenerative medicine techniques such as gene and cell therapy, and advances in diagnostics for the detection of diseases such as Alzheimer’s amount to a “remarkable pace of healthcare innovation that could significantly improve health outcomes,” Goldman Sachs Research economists Joseph Briggs and Devesh Kodnani write in the team’s report. These developments could enable people to live better and longer lives.

While a healthier population is far and away the most important outcome of healthcare innovation, breakthroughs can also add up to big gains for the economy. On their own, new anti-obesity drugs could raise US GDP levels by 0.4% or more in the coming years, according to the report. More broadly speaking, the latest healthcare breakthroughs could lift GDP by 1.3%, equivalent to about $360 billion per year in today’s dollars.

Interest in healthcare innovation has soared in recent years. Venture capital fundraising in US healthcare concerns has more than doubled since 2019. That level of interest has been matched by corporate leaders in the healthcare industry, as evidenced by the 60% surge in innovation-related keywords on company calls during the most recent earnings season. Our equity analysts project that investment across the entire healthcare sector could increase by 34% in 2024 to nearly $900 billion.

(https://www.alliancebernstein.com/corporate/en/insights/investment-insights/investing-with-impact-how-municipal-bonds-are-leading-the-way.html)

Issues like water scarcity are felt most intensely at the local level. That makes it incumbent on municipal bond issuers to lead the response.

Municipal bond issuers are responsible for building and supporting the physical infrastructure and the public goods and services that enable citizens to participate more in an inclusive economy. That makes the roughly $4 trillion US municipal bond market fertile ground for impact investing. Challenges like supplying clean water and improving access to quality healthcare can both be tackled through environmentally, socially, and financially productive investments in communities and institutions.

Leading When Water Is Lacking

As we’ve seen over the past few years, access to water can’t be taken for granted. The country faces historic drought conditions in the West and other regions. For instance, the Rio Grande, a river that countless Southwestern US communities depend on, faces persistent drought and increased water demand.

These challenges disproportionately impact low-income communities. In one study, 14% of respondents said a $12 monthly increase in water bills would lead them to cut back spending on groceries and basic medical care.1 Long-term investments in projects that diversify water sources, combined with water conservation strategies, can go a long way toward improving drought resiliency and reducing the financial burden communities face.

Take El Paso Water, which provides water, wastewater, reclaimed water and drainage services to more than 678,000 residents of El Paso, Texas, and surrounding areas. El Paso’s median household income is 76% of the state’s median; its 18% poverty rate is 29% higher than the statewide rate.

(https://www.allianzgi.com/en/insights/outlook-and-commentary/addressing-groundwater-overuse)

Key takeaways
  • Every year since 1993, the United Nations (UN) has marked World Water Day on 22 March, bringing the significance of freshwater to the centre of public attention.
  • This year’s World Water Day theme “Leveraging Water for Peace”1 puts a dedicated focus on how scarce or polluted water, or unequal and limited access to this precious liquid, can spark conflict and how cooperating on water can create a positive ripple effect.
  • Safeguarding freshwater resources as a lifeline of our planet also implies preventing groundwater and aquifers from running dry.
  • Here, investments in sustainable solutions that focus on managing and restore natural water storage capabilities can help addressing actual and future water-related challenges.

 

(https://www.ice.com/insights/impact-bond-report-2023)

A shift in issuance from Europe to the Asia Pacific continues

Highlights

  • Annual impact bond1 issuance of US$811 billion was 2% lower than 2022, with slower activity toward year-end driven by ongoing challenging macroeconomic and geopolitical conditions
  • Europe and North America saw a 1% and 28% fall in issuance respectively, while Asia Pacific saw 7% growth year on year. This reflects a subtle shift of issuance activities from Europe to Asia Pacific over the past few years
  • In terms of use of proceeds, biodiversity projects are gaining popularity, with afforestation and forest management receiving particular attention

(https://www.man.com/maninstitute/long-story-short-sustainability-systematic-investing)

Man Institute: Long Story Short: Sustainability and Systematic Investing

For too long, sustainability has been focused on equities alone. In this episode of Long Story Short, the Man AHL team take a look at how sustainability can be integrated across commodities, government bonds and more.

How can sustainability be integrated into a modern, multi-asset portfolio? In this episode of Long Story Short, Otto van Hemert, Harry Moore and Ed Hoyle take a look at how sustainability can be integrated across commodities, government bonds and more.

Listen to podcast or read transcript here

(https://www.gmo.com/globalassets/articles/viewpoints/2024/gmo_sustainability-or-bust_3-24.pdf)

Workforces decline for the foreseeable future, resources get scarcer, climate damage escalates, and the squeezed environment becomes toxic to life...

Co-founder and Chief Investment Strategist Jeremy Grantham explores the current state of sustainability and natural limits, with reference to resource limitations, waste and toxicity, agricultural problems, population, and growth.

(https://reports.shell.com/sustainability-report/2023/_assets/downloads/shell-sustainability-report-2023.pdf)

Shell: Sustainability Report 2023 

Shell's latest report covers details of their sustainability activities including:

  • Achieving net-zero emissions 
  • Respecting nature 
  • Powering lives 
  • Sustainability in oil and gas activities 
  • Performance data

(https://www.henkel.com/resource/blob/1935232/ae7bc192da78ab3ea1be5c12f764d63d/data/2023-sustainability-report.pdf)

Henkel's latest report details their recent sustainability focused activities, including:

  • 2023 highlights at a glance 
  • Strategy - implementation and management 
  • Regenerative planet - climate, circular economy and natural resources 
  • Thriving communities - equity, education and wellbeing

(https://www.nestle.com/sites/default/files/2024-02/creating-shared-value-sustainability-report-2023-en.pdf)

Nestle's latest sustainability report covers key areas of their sustainability focused activities, these include:

  • Stakeholder engagement 
  • Water stewardship & responsible sourcing 
  • Advancing human rights 
  • Packaging and circularity
  • TCFD Index

(https://klementoninvesting.substack.com/p/pricing-climate-risk?utm_source=post-email-title&publication_id=10802&post_id=140956712&utm_campaign=email-post-title&isFreemail=true&r=2u2apu&triedRedirect=true&utm_medium=email)

"I have been writing about the outperformance of ‘green’ stocks vs. ‘brown’ stocks a long time ago and by now this green-minus-brown return difference has become widely accepted and is being used by major asset managers. What is interesting, though, is that the focus of this return premium seems to have shifted from regulatory risks to physical risks in the past decade.

Thomas Dangl and his collaborators did something interesting. They used large language models to measure the news reports and company-specific exposure to climate change related events. Crucially, the language processing allowed them to differentiate between actual physical risks like hurricanes, wildfires, floods, etc., and the risks from regulatory changes and possible climate action as a result of the COP meetings, etc."