Sustainable investing thrives on innovation, yet separating genuine opportunity from hype is critical to delivering lasting impact and returns. Charlie Thomas, Chief Investment Officer and Manager of the EdenTree Green Impact Equity fund discuss this further.
Innovation has long been at the heart of sustainable investment, disrupting old industries and creating new systems in the search for long-term solutions to environmental and social challenges.
It is also one of the sector’s most exciting narratives. A certain part of us all wants to believe that one groundbreaking technology might be the solution to all the world’s problems, and if we can just identify that new technology at an early stage, the opportunity could be boundless.
But public markets are not always well-suited to moonshot investing.
While the excitement around breakthrough technologies can be compelling, the accompanying risk-adjusted returns can be significantly less attractive. Separating the hype from the reality can be challenging. But when done properly, investment in innovation can drive lasting change and significant opportunity.
Selecting companies that can endure change
Looking ahead, I believe we could well be in the early stages of a new innovation supercycle.
The pressing need for energy security and the rapid development of artificial intelligence, with the accompanying infrastructure demand, are creating a new wave of investment opportunities, as industrial, digital and energy systems are rebuilt for an energy-hungry but climate-exposed world.
Over the course of my career, I’ve seen a wealth of new innovation-focused technologies that promise the earth (or the salvation of it) but these often disappoint investor expectations.
This does not mean that as investors we should avoid innovation, but it does call for a disciplined approach. Not every exciting new technology is a good investment, and not every good investment is exciting.
The question for investors cannot simply be whether a company is exposed to a powerful theme, it must be whether it can stand up to the pace of change around it.
Evolving opportunities in AI, climate and infrastructure
Against a turbulent geopolitical backdrop, energy security and supply chain control are of vital importance.
At the same time, the climate investment case is evolving. In a world moving closer to a 2°C pathway than 1.5°C, climate adaptation themes, in particular water infrastructure, cooling technologies and grid resilience, are set to be a significant driving force behind the next investment cycle.
The rapid growth of artificial intelligence adds another layer of complexity to this scenario, significantly impacting demand patterns in power, water and infrastructure. At EdenTree, we recognise sustainable investors cannot ignore AI.
It does of course bring sustainability risks that need to be carefully addressed, but we believe there are opportunities to invest in the companies enabling sustainable growth to happen more efficiently, particularly in areas such as energy use, water resource management, cooling and grid infrastructure.
As we move through the second half of the year, we see significant opportunity in the next phase of this innovation supercycle, but also a real need for discipline and selectivity.
In our view, the winners of this next phase will be companies with resilient business models, proven technologies, strong management teams and the ability to generate returns throughout the cycle, whatever new developments it may bring.
Main image: thought, ESG, sustainable, noah-buscher-0WFUP_y4tds-unsplash
