The sustainable investor for a changing world

Solar Panels
Portfolio perspectives | Article - 2 Min

Adapting to a volatile energy transition

It has happened again. Since 2002, the IEA has consistently been under-forecasting the pace of solar power adoption. In 2023, solar power capacity additions are – you guessed it – again beating its predictions: they are 24% higher than the IEA said just six months ago and double what it expected in 2020. We believe this illustrates that the adoption of sustainable technologies such as solar energy continues to accelerate.  

We also believe that climate issues will get worse before they get better: we have been seeing forest fires in Scotland and the drought in Spain is already creating issues worse than it did last year for some farmers. The US broke 10 all-time heat records in June, all of which took place in Texas, according to the National Centers for Environmental Information. 

While this mix of rapid adoption and deepening climate change can be seen as appealing to investors with an eye for related opportunities, we should not gloss over recent (investment) issues. The sheer scale of the physical infrastructure that must be revamped, demolished or replaced is almost beyond comprehension.

Growth and climate challenges

Many sustainable solutions companies came to market with valuations that were too high. While potentially justifiable over time, for now, the equity market has shifted from a focus on revenue growth to balance sheet strength and a path to profitability. These are challenges for some.

Rising inflation and interest rates, as well as the regional US bank crisis, have dramatically changed the operating environment for small companies:   

  • It is harder to get capital raises done, with IPOs slowing, and discounts widening.
  • Some companies will go out of business and others will be acquired.
  • Some will become private again. Others will end up trapped in that no-man’s land where they are no longer private, but too small for most institutional investors, so they will have to fall back on retail investors who increasingly are pressured by rising living costs.
  • A number have exciting and impactful solutions that will now take more time to be deployed – but they can still succeed. 

Of course, every boom has its rush that necessitates many falling by the wayside. It was true in the time of the building of the railroads and later in the dot-com years. Companies need to adapt to the current new environment by cutting costs, focusing on the most critical development programmes and attracting larger partners. Managers can renew their focus on balance sheets and take a step up the quality curve.

Policy and investor support

That said, the long-term prospects for some of these companies are truly exciting and the social need is great. What can be done? 

  • First, we need details from governments about the implementation of recently announced policies such as the Inflation Reduction Act as soon as possible. We agree that energy security is key, but we could also use more policies for food security.
  • Second, it would be helpful for the institutional investment market to become more flexible. Many large allocators work with benchmark constraints. These limit the flow of funds into smaller, more volatile companies. If forced to follow a broad benchmark, as an investor, you are less able to concentrate on needed sub-sectors. Instead, allocations are spread across a wider set of industries, most not providing environmental solutions. 

Of course, not all investment funds need to deal with the environment, but if we want to accelerate the sustainable transition, it would help if large allocators such as pension funds raised the amount that does not require following broad benchmarks or that uses wider thresholds.

Given the current environment, it could also benefit everyone by picking up more cheap companies. 


Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.

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