SRI is in a paradoxical situation and may experience relative and temporary inefficiencies.
The current conflict is reviving the debate on alienation and involvement. However, it is very unlikely that the so-called ESG investment will reverse the arms outage. But in addition to financial performance, sustainability skills and values are equally important.
Delocalization and democracy
Europe has moved strategic areas such as semiconductors or telecommunications to Asian countries and now depends on countries with conflicting democratic standards. While ESG research continues to focus on climate, the pandemic has also brought social issues to the fore. Today the issues of governance, respect for political rights and civil liberties are covered.
Sustainable investment is generally not funded by countries that do not meet minimum democratic standards or are subject to embargoes. However, like most traditional market indices, most sustainable investments in sovereign bonds remain open to countries such as Russia or China, which calls into question the credibility of a responsible and sustainable approach.
Countries against companies
Sustainable investment in general distinguishes a country (and investing in government bonds) from companies located there. Thus, investment in Russian public debt and investment in a company located in Russia should be studied separately. However, if they are different, the boundary is not always clear. The close connection between state-owned companies such as Gazprom and the ruling dictatorship worries the most responsible investors.
The situation is rarely resolved. Thus, several examples of investments in Chinese privatized companies have demonstrated their involvement in human rights disputes over government policy. The case of the American microprocessor manufacturer Intel, which was forced to apologize publicly after the negative reaction to his letter calling not to buy products or labor from the Chinese region of Xinjiang, is a developer in this regard. Therefore, the situation is difficult and the relocation of key activities is at the center of the debate. In addition to the concern for sustainable strategies, attention should also be paid to the relocation of key European industries to the West.
The European taxonomy is the only relatively effective tool to achieve this goal, even if there are still weaknesses in terms of investment opportunities.
Rising energy prices
Rising energy prices are detrimental to the relative efficiency of sustainable investments and may lead to a shift to more “classic” investments with a greater impact on the energy sector.
However, this fear of reversal is limited. On the contrary, the energy crisis and the geopolitical situation may accelerate the energy transition that underpins the goals of sustainable investment.
The IPCC’s latest report is unequivocal: climate change is a proven threat to human well-being. As a result, several countries, such as the United Kingdom and Germany, have stepped up their renewable energy policies and projects.
6and The IPCC climate change assessment report notes a 14% increase in greenhouse gas emissions since the signing of the Paris Agreement in 2015. Although the signatories have pledged to cut emissions by 45% by 2030, last year was a record year. To have a chance to limit global warming to 1.5% by 2100, greenhouse gas emissions must peak by 2025.
Without discussing reliable universal carbon pricing and possible taxes, this implies aggressive decarbonisation and real financing of the energy transition, ie redirection of financial flows towards the latter.
Today, the European taxonomy is the only relatively effective tool for achieving this goal, even if there are weaknesses in terms of investment opportunities. However, the extension to the other 4 environmental objectives should make it possible to partially remedy this situation.
The paradox of sustainable investment
Sustainable investment today is in a paradoxical situation. On the one hand, the war in Ukraine reminds us of the importance of such key values as democracy, security and freedom, values that must underpin a sustainable approach to investment, qualified as an SRI.
On the other hand, the almost general exclusion of the defense and armaments sectors, as well as the strong and generalized underestimation of the energy sector, may work against this type of investment. We could observe a relative and temporary low efficiency of sustainable investments. It is important to remember that financial results are just as important as confidence in the long-term value of these investments. First and foremost, they aim to drive governments and companies towards inclusive growth and sustainability in the medium and long term.
European standards, in particular the SFDR, clearly state this issue: Article 9 products set the goal of sustainable development before any other goal, financial or otherwise. The European Commission’s action plan for sustainable financing, ie financing for a sustainable and inclusive energy transition, remains the guiding principle. Scientific data also reminds that the pursuit of “short-term” profits will not be useful and it is important to constantly question the fundamental values that companies and states promote or neglect. In the end, it all depends on the impact and compliance with our values.