The great transition to sustainable investing is well underway, with global sustainable fund assets reaching a record $2.3 trillion in 2021. Fueling this transition is a large and growing set of industries, sectors, and companies that are doing and making what’s needed to support the transformation. We believe this represents an unprecedented opportunity for asset owners to invest early on and make a meaningful contribution to a sustainable future. But getting exposure to these opportunities can be a challenge - especially if asset owners take too narrow an investment approach. That is why we recommend Canadian DB plan sponsors focused on ESG integration take a very close look at the approach they’re using and understand what kinds of exposures they are - and aren’t - getting.
A side by side comparison of sector exposure in the MSCI and MSCI ESG indices (focused primarily on companies with positive ESG behaviours) shows the two are barely distinguishable from one another (Figure 1). Contrast that to the sector exposure of our Global Environmental Equity fund and FTSE Environmental Opportunities – where industrials and utilities are leading the way, two sectors in which companies are actually doing the work needed to transition to new forms of energy (Figure 2).
We see the same story when we look at the top five holdings of the MSCI and the MSCI ESG indices: both include Apple, Microsoft, Amazon, and Alphabet. No difference, no diversification (Figure 3). While these companies should be commended for providing leadership and working to lower their carbon footprints, they provide little direct exposure to the drivers of the energy transition and backing them, at the expense of thematic allocations, won’t help us avoid a climate disaster.
Focusing only on ESG integrated strategies can limit investors’ potential to benefit from the growth that is going to come with the energy transition. On the other hand, we believe companies that make the “stuff” for the low carbon, sustainable economy represent a massive opportunity for investors, provided they start looking in the right place.
Find out more about how to gain exposure to the energy transition opportunity.