Climate financing moves into the mainstream
A rapidly growing market
Green finance is a rapidly growing market. Almost US$400 billion of green, sustainability and social bonds were issued in 2019. The great majority were certified green bonds  – and sales were up by 53 per cent. Almost US$31 trillion of funds worldwide (encompassing a range of asset types) were held in sustainable or green investments  in 2018, up 34 per cent from 2016.
Early indications are that Covid-19 may further accelerate the shift towards green investment, via both equities and bonds. The pandemic has inflicted a huge shock to the global economy and forced companies and governments to rethink their strategies. Companies with proactive environmental, social and governance (ESG) strategies appear to have fared better during the crisis. Recent IPO success and higher valuations for firms such as Beyond Meat appear to reflect the market’s belief that these nascent industries will grow significantly. Many governments are adopting green recovery plans.
Fidelity’s sustainable investment approach is to integrate climate considerations across our franchise. But we have also developed specific thematic strategies that invest in the new technologies helping to reduce climate impact, as well as companies that are actively making the transition to lower-carbon activities. In fixed income, while we invest in certified green bonds, our primary focus is on companies that have a broader strategy of decarbonisation. Our approach is intrinsically long-term for both equities and bonds, reflecting the fact that carbon-reduction strategies have target dates of between 2030 and 2050.
We believe policy will continue to be an important driver of the climate finance market. This takes two forms. First, central banks and financial regulators are working on new rules and tools to help financial institutions understand and act upon the climate risks embedded in their balance sheets and investment portfolios. Second, more governments are committed to financing the greening of their economies. The EU, for example, is mobilising at least €1 trillion for sustainable investments over the next decade.
Investing across the value chain
Within equities, Fidelity is concentrating on technologies and companies that are (or are close to) making a positive contribution to carbon reduction. This can be due to supportive policy incentives, consumer interest or because these technologies are more economic than legacy ones. For example, the electric vehicle (EV) sector is growing thanks to subsidies across Europe and Asia, and growth should accelerate over the next decade as the full cost of ownership of a battery-powered vehicle approaches that of a petrol or diesel one.
We believe investment opportunities exist along the entire value chain of low-carbon technologies. In the case of EVs, this includes semiconductor manufacturers, battery material suppliers, battery manufacturers, charging infrastructure as well as car manufacturers. There are comparable opportunities within the value chains of renewable energy, industrial automation, construction materials such as insulation, alternative food products and recycling.
Taking a broader view
Within fixed income, there are significant opportunities in ordinary bonds issued by companies working to improve their environmental performance, in addition to those created by certified green bonds. Despite the growth in climate investing, only 6 per cent of investment-grade bonds issued in Europe are green. As a result, green bonds command a premium, reducing yield for investors.
We believe climate investors should take a broader view. Many businesses in carbon-intensive sectors such as oil and gas are now pursuing transformational carbon-reduction strategies. Climate investment needs to capture and support these transitions.
All sectors can contribute. For example, in the technology space, Microsoft announced not only that it would become carbon neutral by 2030 but that it would also aim to neutralise all of the company’s emissions since its founding in 1975, by 2050. We believe companies that demonstrate such game-changing ambition should be reflected in portfolios.
In 2020, corporate resilience has been severely tested, while ESG engagement has proved its value in the market as well as to society. The disruption unleashed by Covid-19 has highlighted how much worse the consequences of climate inaction could prove. Mind-sets across government, consumers and investors are changing and we expect climate finance, in its different forms, to move ever further into the mainstream.