The energy transition offers a once-in-a-generation investment opportunity that can help investors address the climate crisis and generate attractive returns. Our investment philosophy is based on e three-pillar framework – Leaders, Adaptors and Solutions.

Analyses show that sustainable portfolios can generate consistent returns while mitigating risks and contributing to positive change. Responsible investments are a growth industry in Switzerland. Sustainable funds now have a record total volume of CHF 799.5 billion (as of June 2022). Investors currently have more opportunities than ever to make a difference. Bond investors play a crucial role in this field.

As capital providers, bondholders have an important say. The transition to the emission-free world of the future will only succeed with unprecedented changes in industries of all kinds – from transport to energy to manufacturing. The energy transition will require investment especially in industries in need of modernisation and renewal. Investors who want to make an impact on energy transition do not necessarily have to invest in “green” bonds. There are numerous bonds from non “green” issuers that contribute to climate change mitigation. As an example, a company producing high emissions but wanting to switch to renewable energy can reduce important CO2 outputs compared to a company that hardly produces any emissions. These types of companies can become market leaders, changemakers, adaptation facilitators or solution providers.

Market leaders include companies such as a Portuguese multinational energy company leading the transition to renewable energy, as well as an American based technology computer manufacturer, which has set and is pursuing ambitious targets for reducing energy consumption, transitioning to renewable energy and mitigating emissions within the supply chain. A supplier of aluminium packaging to the beverage industry and a manufacturer of personal care and household products, is also a market leader. The company is aggressively seeking to reduce its carbon footprint and offers aluminium products that can be recycled infinitely – the current recycling rate is very high. The company sees more growth opportunities in switching from plastic packaging to sustainable aluminium.

Adaptation facilitators include sovereign green bond issuers such as Chile and the Netherlands, which use the proceeds from bond issues to finance practical adaptation measures, such as protection against flooding due to climate change. Other examples include a manufacturer of drainage pipes that support and facilitate the management of water flows in drought- and flood-prone areas of the world. Around 60% of the company’s piping is made from recycled plastic, and the company recycles 250,000 tonnes of plastic per year.

Solution providers include companies such as Brazil’s largest railway operator. Rail transport is five times less carbon intensive than road transport. In addition, the company invests in engines that consume less diesel. Around 85% of total sales are considered green sales, as they are generated by transporting goods with automated, energy-efficient locomotives.

When thinking of buying bonds, the in-depth analysis of companies is crucial. Projects that can be convincing from a climate protection point of view must not be at the expense of other environmental goals, for example, dams that generate electricity from hydropower must not endanger biodiversity and access to water. There is no doubt that investors in credit securities play a crucial role in the transition to a more sustainable economy.

 

This guest contribution was written by Thomas Leys, Investment Director at abrdn.

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