Four Promising Sustainable Investment Themes to be aware of in 2024

2023 saw many sustainable and ESG investment funds recover after weathering tough market conditions in 2022. With the possibility of lower interest rates in 2024, which tend to be favourable to green assets, there is once again much to be optimistic about in sustainable investing markets.

In this article we explore 4 promising emergent themes in sustainable investing for 2024. However, if you are looking to arm yourself with the most up to date findings in sustainable investing and how to best advise your clients on sustainable investing topics, you can find details on our upcoming wealth management professionals course below.

 

Andrew Douglas, CFA
Institutional Programs Manager, University of Zurich,
Dept. for Banking and Finance, CSP

 

Theme 1: ESG improver funds 

The vast majority of ESG funds seek out sustainability leaders in their respective industries either through a best-in-class approach or through integrating an ESG lens into the investment process. However, many of these funds may miss out on the sustainability leaders of tomorrow by only focusing on companies that are already currently leading in sustainability.

An alternate strategy to the ESG leaders’ approach is to look for companies with positive ESG score momentum and credibility in their ESG strategy and roadmap. If companies can execute this successfully, it can increase brand value, enhance customer and employee loyalty, reduce costs, and create competitive advantages relative to their peers. In recent years, ESG improver funds, such as the Rockefeller Global Equity ESG improver fund, have emerged to take advantage of the potential alpha such a strategy may offer. These funds can also offer attractive diversification to sustainable portfolios by enabling underlying positions in browner companies while keeping in line with a strong sustainability objective.

 

Theme 2: Sustainable thematic funds

While sustainable thematic investments are nothing new, their popularity has surged, with the highest increase in volumes (+86%) of any sustainable investment approach in Switzerland, according to the most recent 2023 Swiss Sustainable Finance Market Study.

However, the performance of many of these funds was lacklustre in 2023, with sectors such as water and clean energy lagging the overall market recovery and struggling under high-interest rate conditions. Thematic Indices, such as the S&P Global Clean Energy Index, decreased by over 50% since January 2021. However, while valuations might be down there is no reason for global demand for clean energy to decrease as countries and companies look to reach net-zero targets. Therefore, there is a high potential for clients to profit from the latent recovery of select themes, such as clean energy, particularly in a loosening interest-rate environment.

 

Theme 3: Brown to green private real estate funds

The IPCC estimates that the building sector contributes to 21% of global greenhouse emissions, 57% of which are indirect CO2 emissions from offsite electricity and heat. While many sustainable real estate funds focus on constructing new sustainable buildings, there are plenty of inroads to be made retrofitting existing building stock with the latest sustainable innovations. 

In August 2023 Fidelity International launched a European Real Estate Climate Impact Fund, intending to invest in Western European commercial assets that can be refurbished into sustainable workspace. An example investment from the fund is an 88,000-square-foot office building in central London which they plan to refurbish in line with net zero targets according to several internationally recognized sustainable construction standards. Fidelity also sees this as an attractive investment opportunity given the undersupply of net-zero buildings relative to occupier demand and an ongoing premium for green buildings in the medium term.

 

Theme 4: Transition bonds are a new twist on “use of proceeds bonds”

“Use of proceeds” bonds are linked to specific projects that have positive environmental, social and or other positive SDG outcomes. While green bond issuances have rapidly increased since their initial arrival in 2008, with the world bank’s first issuance of a green bond, many other forms, such as social bonds, blue bonds and sustainability linked bonds have emerged and are rapidly growing in terms of their sustainable debt market share.

One form of innovative sustainable debt financing is transition bonds. While only 0.4% of the overall sustainable debt market, these instruments can often have more impact than green bonds. Transition bonds are used to fund projects that specifically enable companies to reduce their carbon footprint. For example, a company's replacement of an old fleet of diesel vehicles with electric vehicles. While this company may not be investable from a traditional sustainability perspective, the potential to directly target high emitters in their transition make these attractive from an impact perspective for sustainable investors.

Sustainable debt financing continues to grow, and innovative structuring of debt instruments is enabling investors to directly target a myriad of SDG interests.

 

 

Biography

Andrew Douglas, CFA is the Institutional Programs Manager at the Center for Sustainable Finance and Private Wealth at the University of Zurich. Andrew is responsible for CSP's educational programs and projects for financial institutions training their staff and clients on sustainable finance and impact investing topics.