There has been an explosion of interest in sustainable strategies from institutional investors over the past year despite challenging conditions in 2023.
This is according to Jean Ryan, SVP of business development and client services for KBI Global Investors, under the Amundi Group.
She told FSA: “There has been an explosion of interest in climate action-oriented net zero and energy transition strategies.”
She said that last year saw the strongest inflows into KBI’s sustainable strategy since it was launched in 2007.
In the earlier years, Ryan noted that most of the investors were distribution clients, but this has evolved in more recent times.
“What has been happening in the last couple of years has been the institutionalisation of this theme,” she said.
“Many sovereign wealth funds, government pension funds, foundations and endowments want to take some affirmative action in terms of climate issues.”
“They want to capitalise on the alpha opportunity in the theme, and in some cases are coming under pressure from their stakeholders to do so.”
As such, she said there has been several global tenders and global searches in the institutional space for strategies with a sustainable tilt but with a track record of delivering alpha.
A difficult backdrop created an entry point
Last year’s challenging period of performance that sustainable strategies faced due to high interest rates, provided an entry point for some investors, Ryan said.
“But what’s really going on in terms of the motivation for many of the large funds is that many of them are making commitments to net zero and being questioned about the sustainable impact of their portfolios.”
The pressure from stakeholders is part of why there were so many new entrants to the ESG space over the past few years.
However, some fund managers jumping on the ESG bandwagon more recently have been caught offside by rising interest rates and the boom-and-bust cycle in certain sectors associated with sustainable investing.
Ryan said one-way investors can avoid pitfalls while investing in sustainable strategies is to be mindful of policy and regulation.
For example, she noted how the US government has been prioritising reshoring of manufacturing back to the country, which may include many parts of the renewable energy supply chain.
For investors with a home bias, Ryan said that Asian opportunities in the energy transition will be dominated by the renewable energy module and equipment manufacturers.
She pointed to how around 80% of solar module production is done in China, and how Asian companies are market leaders in battery technology.
“Optimization of batteries is a really important component of the whole energy transition solution,” she said. “Asian companies dominate in that area.”
“A challenge might be further restrictions on imports or the imposition of import duties or constraints into the US particularly in the event of a Trump presidency,” she warned.
