CONTENT BLOCKS
INDUSTRY INTEL
Sustainable Returns
May 27, 2024
IN PARTNERSHIP WITH THE  
LEAD SPONSOR OF P&I's Sustainable Returns Conference 

Introduction

Institutional allocators continue to focus on long-term sustainable investing via the lens of environmental, social and governance factors. They seek to mitigate investment risks and find opportunities in the transition to a lower carbon future, among other themes. As lead sponsor of P&I’s Sustainable Returns: Alpha & Risk Mitigation Conference, to be held on June 11 and 12 in Chicago, Amundi US will share its strategic insights on sustainable investing for institutional allocators at the event. To give you a preview, Managing Director and Head of ESG Annie Chor Joyce talks about fundamental analysis in sustainable investing, the different strategies that allocators seek, and the range of investment themes and opportunities that they can pursue.

INVESTING FOR  
A CHANGING CLIMATE

The rapid global increase in extreme weather events, accelerating the frequency of weather hazards and wider stresses on food supply and water resources are compelling institutional allocators to pay close attention to their impacts on investment portfolios. Today there is “increased recognition that ESG factors have a material impact on financial performance,” said Annie Chor Joyce, managing director and head of ESG at Amundi US. “Sustainable investing has become more integral in terms of long-term risk management and opportunities in a rapidly evolving market.”

The environmental, social and governance approach comes back to fundamentals: “Supply-chain shocks, energy and food instability impact all of us,” she said. The core objective of fundamental analysis is to identify “companies that offer strong, long-term growth potential at a good price. The reality is that industries and the broader economy are rapidly evolving where material ESG factors are just another variable in that equation,” she said.

While the focus on returns remains central for all allocators, their sustainability strategy objectives can differ. Within the realm of ESG investing, some allocators integrate ESG factors that provide potentially new material risk information about their investments, while another group of allocators may want to apply a socially responsible screen to reflect their values. A third group may want to invest with an impact objective, Joyce said. “With impact investing strategies, there’s more of an intentionality on measurable positive environmental and social outcomes, plus financial returns. There’s a dual objective.”

The world increasingly recognizes the need for mitigation and adaptation of extreme weather events. There’s been a growth in solutions that support the transition to the low-carbon economy and an increase in green solutions.
Annie Chor Joyce
Managing Director and Head of ESG

Wide range of strategies

Addressing climate risk is a central investment theme of sustainable investing, she said. “The world increasingly recognizes the need for mitigation and adaptation of extreme weather events. There’s been a growth in solutions that support the transition to the low-carbon economy and an increase in green solutions.”

Beyond weather, investors are also interested in sustainable themes that tackle such risks as resource scarcity and natural capital, Joyce said. Sustainable agriculture is another broad theme, given the imperative to feed growing populations. “Companies focus on sustainable farming practices that can also reduce their environmental impact and make them well positioned for the long term.”

Within these broad and often interlinked themes, Joyce pointed to myriad specific investment opportunities. Among them, “a key one is infrastructure to support the energy transition.” For instance, “if you don’t have a strong grid system to power electric vehicles, then how do we expect this market to grow? That’s an overlooked area.”

Water scarcity is another key issue for investors. “Companies that are developing and investing in water-efficient solutions are ahead of the curve,” Joyce said. Areas of opportunity include ultra-pure water solutions for semiconductor manufacturing, as well as improvements in water-recycling solutions.

Amundi, with $2 trillion under management, offers a spectrum of responsible investment strategies to help meet investors’ varying priorities and objectives. The climate transition remains a core priority at the firm, which is actively engaged with constituents across several fronts. “We are committed to helping clients who choose to focus on climate or net-zero as part of their portfolios. From a stewardship perspective, Amundi has an ambition to engage an additional 1,000 companies on climate. We are doing more research on climate and natural capital to identify the right solutions when working with institutional investors.”

Read: Responsible Investment Views for 2024

Degrees of activation

Asset owners today can choose how much they want to “activate” their portfolio around the sustainable themes, Joyce said. “There is a spectrum of how transformative you aim to be in adjusting your portfolio.”

An allocator could choose to largely maintain their current portfolio asset allocation but make substitutions in individual holdings to be more climate aware. “This involves research into where the climate risks and opportunities are,” she said. Another preference could be a view on a greener energy supply. “One may take the approach of wanting to avoid certain fossil fuel suppliers, which is ultimately based on client preferences.”

“Then there are those who want to align to net-zero. Part of that involves finding solutions that contribute to the transition,” including sectors such as renewable or green infrastructure, Joyce said. Engagement can also be part of this more transformative approach: “Where relevant, you can engage companies in your portfolio to encourage them on the transition pathway to net-zero.”

Read: Institutional Investors’ approaches to responsible investing

Data and regulatory support

Underlying all these approaches are advances in sustainability data, with many more companies today taking the initiative to improve disclosures. An example is carbon-footprint analysis, which “assesses the carbon emissions of a company’s operations, supply chain and products.”

Advances in data have equipped asset managers to undertake more sophisticated scenario planning, Joyce said. “The scenario analysis allows you to evaluate how different environmental factors could impact financial performance. There’s enough granularity and data depth now to be able to start doing that.”

Regulatory support also continues to spur the ongoing development of ESG disclosures. Joyce pointed to the 2023 EU Corporate Sustainability Reporting Directive, or CSRD, which requires most large companies as well as listed companies to disclose environmental and social information and is expected to affect 50,000 entities. “With the mandatory sustainability disclosures, this directive will impact companies’ behaviors and how they report on sustainability over time.”

In the U.S., the Securities and Exchange Commission has paused its climate disclosure rules due to ongoing litigation in some states. However, California passed new climate disclosure laws in 2023 “that will create additional transparency,” Joyce said.

The political pushback on sustainable investing in the U.S., has led to calls for state pension funds to divest from asset managers deemed hostile to fossil fuels or purportedly less committed to investment returns. However, in Amundi’s ongoing conversations with allocators who are adopting sustainability strategies, “they see sustainability factors as fundamentals they should be taking into consideration,” she said.

Sustainable investing historically centered on social responsibility and primarily used an exclusionary strategy. That has shifted over time, with the ESG approach now integrated into fundamental analysis.

Investors need to take heed. “Whether we like it or not, the climate is changing,” Joyce noted. “Extreme weather patterns are impacting companies and people. With that impact, which we can’t control, we need to figure out ways to position ourselves and our portfolios to identify the opportunities, adapt to the changes and mitigate the risks.”

ABOUT THE CONFERENCE

P&I’s Sustainable Returns: Alpha & Risk Mitigation Conference leverages eight years of experience in producing ESG content for U.S. institutional allocators – and relaunches with a focus on sustainable investing for the long term. This conference will be suited to investors looking to establish or evolve a practice around sustainability, from the perspective of alpha generation and risk management.