Governments worldwide are enacting regulatory measures, such as carbon taxes, subsidies for electric vehicles (EVs), and plans for green infrastructure development.

Businesses are committing to net-zero emissions, setting science-based targets, and encouraging their supply chains to adopt more sustainable practices. Consumers are increasingly favouring sustainable products, altering their spending patterns accordingly.

Meanwhile, some investors are advocating for action, heightening their focus on climate-related risks and setting minimum climate standards which, in turn, influence portfolio allocations.

Although these transformations pose risks to asset prices, we recognise them as heralding a unique investment opportunity for our generation.

The problem with some strategies

We advocate for a climate strategy that seeks to yield both environmental and financial returns, moving beyond traditional approaches.

Generally, strategies focused solely on low emissions often rely on historical data without adequately accounting for shifts in business models or the tangible effects on the environment.

Similarly, while green bond strategies contribute to funding eco-friendly projects, a strategy exclusively centred on green bonds may suffer from limited diversification, lower yield return, and extended durations.

Such traditional methodologies do not sufficiently address the physical consequences of climate change, nor do they focus adequately on climate adaptation.

Current policies place us on a trajectory towards a 2.4° Celsius increase in global temperatures – a scenario corroborated by our climate analysis.

This warming path is likely to exacerbate weather volatility and temperature extremes, affecting both society at large and asset values.

Real world impact through a climate lens

At the heart of a favourable solution is the conviction that climate outcomes should prioritise real-world emissions reduction, support the transition to a low-carbon economy, and facilitate adaptation to the inevitable impacts of climate change.

Every investment decision should be made through a climate lens, necessitating a bespoke framework. This approach, coupled with a global opportunity set and a strategy focused on best ideas, is designed to yield compelling returns and income.

Beyond the developed world, climate transition in Asia will likely be critical to the outcomes that are achieved on a global level, considering the size of the population in the region, projected economic growth, its exposure to higher-emitting industries, and the opportunity to potentially leapfrog high-emitting technologies and adopt low-carbon solutions.

Asian companies are often national, regional or even global leaders in their respective industries, which could translate to a meaningful impact when they adopt more sustainable trajectories.

Covering the global investment universe, the strategy centres on identifying and investing in ambitious companies that are leading the charge in their respective industries.

These trailblazers are making significant strides in real-world decarbonisation, disrupting traditional business models, pioneering innovative technologies, and responding proactively to evolving consumer demands.

By aligning with such leaders, we can capitalise on the growth of the climate market and achieve superior performance.

We typically look for three types of companies:

By carefully selecting companies that align with these themes, we not only seek to seize a significant growth opportunity but also contribute meaningfully to efforts to manage climate change.

Investing with bonds

Fixed Income instruments, including green and municipal bonds, are pivotal in channelling funds towards projects aimed at enhancing climate resilience.

A comprehensive fixed income strategy should span across markets – covering investment-grade, high-yield, and emerging market segments – and support companies across various industries in their transition towards a more sustainable and climate-resilient future.

Specific to Asia, one additional nuance within the Asian bond universe is the presence of large state-owned enterprises that are focused on delivering policy objectives instead of profit alone, allowing bond investors the opportunity to lend to issuers involved in national infrastructure projects that are part of the government’s strategy to move towards a low-carbon economy.

We currently see opportunities in Asia coming from the renewable energy space, EVs and their corresponding value chain, as well as large corporates that are adopting more sustainable ways of manufacturing their products.

With rapid changes across Asia, and adoption of new technologies, the potential pipeline from the region will continue to grow. It could span a wide variety of opportunities, including low-carbon materials production and climate adaptation.

Active company selection

Selecting the right theme is merely the beginning. Active company selection becomes crucial in ensuring that investments genuinely enhance the portfolio's value.

For credit investors, the application of environmental, social, and governance (ESG) standards across all issuers requires careful consideration, especially given the disparities between high-yield and investment-grade issuers.

High-yield issuers, often smaller or newer companies, may not have the luxury of dedicated ESG teams, established green-bond frameworks, or the capacity to produce comprehensive sustainability reports.

Consequently, companies genuinely committed to sustainability might be overlooked due to their inability to demonstrate their ESG credentials prominently.

Investors adept at identifying firms with commendable ESG practices, albeit with limited disclosure, stand to gain by investing ahead of the curve, before enhanced transparency garners wider market recognition.

This approach to uncovering undervalued companies with strong but underpromoted ESG practices represents just one avenue through which we seek to generate alpha.

Promising Landscape

The future of climate-change investing looks bright, buoyed by the escalating global emphasis on environmental sustainability.

We maintain that the burgeoning demand for climate-related investments will not, on its own, lead to overvaluation. The arena of climate transition presents a vast and perpetually evolving landscape of opportunities, far from being exhausted by current interest levels.

Most importantly, we believe a climate-change investment strategy should have a dual objective – achieving meaningful climate impact alongside robust financial returns.

Furthermore, this investing transcends mere trend-following. It's about pinpointing and supporting innovative companies that lead the charge in industry transformation and real-world decarbonisation efforts.

It should emphasise the backing of ambitious companies across an array of sectors and geographies. This strategy opens the door to a wide spectrum of opportunities, enabling investors to engage with ventures that are not just promising in terms of returns but are also pivotal in the global transition to a more sustainable future.

To mitigate the risk of overvaluation, it is imperative to curate a well-balanced portfolio encompassing leaders in emissions reduction, innovators in technology, and contributors to climate adaptation.

This diversified strategy ensures resilience against potential overvaluation in any single region, sector or asset class by spreading exposure across the varied facets of climate opportunities.

Final thoughts

The domain of climate transition is characterised by its dynamic nature, fuelled by advances in technology, shifts in the regulatory landscape, and changes in consumer behaviour.

These elements collectively foster a continually refreshing pool of investment opportunities.

Consequently, we are confident that the field of climate-change investing will retain its vibrancy and potential for growth and innovation, making unlikely the prospect of overvaluation due solely to rising demand.

A version of this article was published in the Business Times Singapore.