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Financial and environmental returns – the key to climate action in the finance sector?

Photo by Scott Graham on Unsplash
Photo by Scott Graham on Unsplash

Historic returns on investments are rarely a good predictor of future returns. This is especially true in the case of environmental investments where the innovations needed are both new and on an unprecedented scale. At Söderberg & Partners Wealth Management in Sweden (“S&P WM AB”), we have designed a new portfolio that seeks to contribute to improvements within several environmental themes while producing sound returns on investments. Investments in these solutions can help to create an economy that restores the planet instead of breaking it down.
The whistle has been blown, marking that we are at half-time. We are severely behind. If we win the game, our children and grandchildren could experience the same quality of life as many in the Western world today. If we lose, we leave them in the limbo of worry, at the mercy of extreme heat mixed with other natural disasters, and continued conflict caused by lack of resources and global inequity. We are starting the second half and there are whispers of a strategy to help us win. One key component of this strategy is environmental investments – let us tell you more about how they work.

Off track at half-time

2023 marks the halfway point between the 2016 Paris Agreement and the year 2030, when all 17 Sustainable Development Goals (SDGs) are supposed to be fulfilled. Despite this, a newly published UN report warns that “many of the SDGs are moderately to severely off track”. Earlier this year, the United Nations Secretary General, Antonio Guterres, expressed his worry: "Unless we act now, the 2030 Agenda will become an epitaph for a world that might have been."
The report, named Progress towards the Sustainable Development Goals: Towards a Rescue Plan for People and Planet, contains recommendations for actions that can be taken to change the trajectory and speed up the transition needed to reach the SDGs. Continued and increasing climate finance is one of these actions.

European Central Bank: The way forward is clear

The more developed countries of the world have committed to mobilizing $100 billion in climate financing every year between 2020 and 2025. To make this happen, the European Union wants to include the financial market in the game to steer investments towards green projects.
“The path forward is clear: we must forge ahead with a global transition to ensure our economies are future-proof,” said Christine Lagarde, President of the European Central Bank.
To support this ambition, a wave of sustainability frameworks meant to accelerate the contribution from the finance sector have either been launched or are on their way. For example, the European Union has introduced a Taxonomy to give investors more information on how different companies contribute to the environmental goals most important to the European Union. The taxonomy features six goals that investments should contribute towards to be considered “green”.

Thematic diversification creates a more stable portfolio

To strengthen our ecological balance sheet, we have created a portfolio that supports these six environmental themes. To begin with, the portfolio consists of seven actively managed equity funds which we have analyzed from both a sustainability and a financial perspective and where we combine thematic funds with broader global funds. The idea is to use strategies that complement each other so as to create diversification within the portfolio. Two global funds that are broader in scope are included in the portfolio to reduce the risk that is typically associated with thematic investments. The more broadly focused funds do for example include larger and more established companies in the portfolio while maintaining a strong focus on environmentally sustainable investments.
The funds in the portfolio also differ in terms of their geographical and sector exposures as well as their investment styles. This diversification creates a robust portfolio. The result is an actively managed portfolio that stands out from the global stock index and includes investment themes relevant in the long term from an investment and environmental perspective.
Learn more about the six environmental goals below and read more about the strategy in our strategy report (in Swedish):


Six themes for environmentally sound investing

Climate change mitigation. As a growing population’s quality of life is improved, the energy usage of the world continues to increase. We need investments in renewable energy, energy storage, smart grids, and other infrastructure, as well as semiconductors and other energy-efficient technologies. Climate change adaptation. Damages from natural disasters have increased by 5% annually over the past 50 years. Creating a resilient society requires innovations in urban planning, property construction, and energy system design.
Protection and restoration of biodiversity and ecosystems. Investments in climate solutions can’t solve everything. Our land and sea ecosystems combined absorb over 50 percent of humanity’s carbon footprint, and approximately half of global GDP depends on biodiversity. Investments in nature-based solutions that protect and restore our biodiversity and our ecosystems have recently garnered more attention and are sometimes referred to as the “new black” in sustainable finance.
Sustainable use of water and marine resources. Water, oceans, and marine resources are the foundation of what is referred to as the blue economy. Our health, food supply, and millions of jobs across the world depend on healthy oceans. Furthermore, freshwater is a limited resource that can run out and leave us without access to clean water. Investments in a circular water system allow us to continue to make use of the Earth’s resources for generations to come.
Pollution prevention and control. To prevent our production and waste management processes from polluting the environment, investments are needed in innovative production methods and infrastructure that enable the transition to a circular economy built on reparation, reuse, and recycling. Transition to a circular economy. Environmental challenges are connected. Loss of biodiversity is driven by climate change, land use, pollution, and exploitation of nature. Reduced resource use is therefore just as important as climate solutions. This can take the form of circular business models that prolong the lifetime of products, make use of recycled materials, or manage water, emissions, and waste.
  • Elliot Sam Moyo

    20 w

    Positive environmental change begins with individuals urgency. I believe change agents can be achieved in our neighborhoods. The idea of small gardens in our homes can bring the nesesary impact if done in a collaborative stratergy within communities.

    5
    • George Kariuki

      20 w

      The approach of creating a portfolio contributes to environmental improvements aligns with the urgency of addressing climate change and achieving SDGs.

      2
      • Princess

        20 w

        It will be interesting to observe the impact and effectiveness of such investments in fostering positive environmental change.

        6
        • Adam Wallin

          20 w

          Making it clear for investors where to put their money to make a positive impact for the environment is a great climate action. Way to go S&P!

          4
          • Munene Mugambi

            20 w

            With huge investments in climate it is only a matter of time before they turn to profit while also benefitting the planet. Can't wait

            7
            Welcome, let's solve the climate crisis together
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