If recent developments spell the end of early, overly-simplistic approaches to ESG investing, their end should not be mourned for too long; rather, they should be replaced with more sophisticated approaches, writes Thomas Hohne-Sparborth. 

 

On January 20, President Trump’s inauguration coincides with the start of the 2025 edition of the World Economic Forum some 4,000 miles away in Davos, Switzerland. 

 

Both events follow quickly on a tumultuous start to the year in sustainable investing, kicked off by a directional pivot by the Glasgow Financial Alliance for Net Zero (GFANZ) only weeks before, the withdrawal of BlackRock from the Net Zero Asset Managers (NZAM) initiative, and the initiative’s subsequent suspension of its own activities. 

 

We believe that if developments spell the end of early, overly-simplistic approaches to ESG investing, their end should not be mourned for too long. Rather, they should be replaced with more sophisticated approaches that aim to reconcile views on system changes in the global economy, with questions as to which business models will achieve long-term success.

 

Five convictions that remain unaltered

While much has changed in January, root tenets that form the foundation of more durable ways forward have not. 

• Physical changes to our planetary system remain as firmly rooted as ever. At least seven out of nine planetary boundaries have been crossed, global temperatures exceeded 1.5°C in 2024, and a delay in concerted, bold action only increases the likelihood of stronger action in the future.

 

• Financial industries understand the reality of the challenge better than most. The latest scenarios of the Network for Greening the Financial System (NGFS), reconfirm once again the economic superiority of concerted action and early transition, in terms of impact on GDP, inflation, and damage reduction.  

 

• The end-state of the transition remains as clear as ever. Any climate scenario – whether targeting 1.5°C, 2°C or 3°C – that aims to avoid ever-increasing climate impact, must eventually gravitate towards net zero. This will allow for temperature stabilisation and a nature-positive outcome, with nature a key a factor of production.

 

• Economic transformations are ultimately driven by cost, efficiency and innovation. As evidenced by the flurry of bankruptcies of coal power companies during the last Trump administration, transitions to a renewable, electrified economy will remain relentless - because levelised costs of fossil energy cannot compete with the still-falling cost of solar and flexible power systems.

 

• The economic transition is not about doing the same things in a greener way. Taking the example of mobility, the transition includes electrification but also  shifts in profit pools from oil and gas, heavy industrials and insurance, to technology, power systems and fleet platforms. Sustainability is not merely about corporate responsibility, but is about strategic positioning as new economic systems outcompete existing ones. 

 

Five convictions where the world has changed

The enduring convictions above should give investors comfort, but adjustments are necessary.

• We must learn the difference between real-world and paper decarbonisation. When the economy at large is slow to transition, portfolios cannot decarbonise without making themselves irrelevant. Pouring all of the $130 trillion in capital affiliated with GFANZ into the handful of companies that are on credible, 1.5°C-aligned pathways is neither possible nor desirable if it ignores the problem in the rest of the economy. 

 

• Heavily-caveated commitments need a fundamental rethink. Well-intended commitments to decarbonise, caveated against progress being made around policy, technology, cost of capital and market maturity, may merely distract from those elements where asset managers do have agency – i.e. around engagement, product innovation and the integration of sustainability into financial analysis. 

 

• The role of broad coalitions may lie less in target-setting than in thoughtful communication. NZAM’s search to reinvent itself may prove timely. The finance industry should be a natural ally of the environmental movement, but difficult conversations must be had on how to drive investment where it is needed most,  the role of fossil fuels in a slower-than-intended transition, and how to handle the uneven cost of climate damage.

 

• Sustainability can no longer be about cleantech or the environment alone. Investors must cast their net wide for the most attractive opportunities. The new Trump administration may not be a fan of wind turbines, but it may well prove supportive of more preventative healthcare systems, action on dietary guidelines and ultra-processed foods, autonomous driving, reshoring industries, and digital enablement.

 

• Multi-thematic portfolios offer more diversified exposure to broad system changes across our economy. Narrowly-defined thematics are not for the faint of heart, as most of the action was taking place in a different portion of the market. Multi-thematic approaches offer a means to navigate and allocate capital more fluidly, as the attractiveness of underlying themes evolves.

 

Forecast: warmer weather with a chance of hail 

As Davos and the new Trump administration get underway, investors are waking up to the reality that the path to transition is unlikely to resemble the smooth shape that overly-stylised transition models may foretell. 

 

At Lombard Odier, our mantra has long been to “rethink everything”. In 2025, we believe that should include approaches to sustainable investing, which should remain as central to forward-looking investors as ever before. The end-state of the economy is one that we believe will be net zero, nature positive, socially constructive and digitally enabled. The opportunities are as varied as ever. 

* Thomas Hohne-Sparborth is Head of Sustainability Research at Lombard Odier Investment Managers 

 

-TradeArabia News Service