'The market has turned decisively in favour of ESG'

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'The market has turned decisively in favour of ESG'

Environmental, social and governance investing, as the name suggests, covers a wide array of issues, though often the E emerges as the most popular aspect for investors. 

And according to Nitesh Shah, head of commodities and macroeconomic research at Wisdom Tree Europe, with governance and social reporting standards having improved in the past decade, there is now an increasing focus on improving environmental reporting.

Shah tells FTAdviser In Focus about the latest trends in ESG investing, how Wisdom Tree decides which strategies are future-proof, and why decarbonisation will speed up after Russia's attack on Ukraine.

FTA: ESG is more than solar and wind, which strategies are emerging as the winners?

NS: ESG has many dimensions. Each investor will weigh the three components in different ways.

The information gap on the environmental side is so large at the moment, investors are very eager to gain exposure to strategies that provide solutions to environmental concerns.

Nitesh Shah is head of commodities & macroeconomic research at WisdomTree

 

We think investors should think dynamically and focus on the aspects of the ESG spectrum that matter to them the most.

 

 

That is not limited to wind and solar. There is an entire ecosystem of technologies that support renewable energy deployment.

For example, lithium-ion batteries are utilised for the storage of electricity produced through renewable sources and are used in vehicles powered by renewable sources.

These technologies require a charging infrastructure, distribution and transmission cabling and a viable recycling market. Through a wider lens ESG incorporates all of these.

FTA: Which strategies are you most excited about and what is Wisdom Tree doing to be a part of the energy transition story?

NS: We are excited about holistic strategies that look at the full value chain of technologies. For example, when it comes to batteries, we like strategies that give exposure to the extractors of metals and minerals used to make batteries, manufacturers of batteries, emerging applications of batteries, and the infrastructure that supports the use of batteries such as charging and recycling.  

We believe the energy transition mega-trend could be metals-positive, and companies operating in the battery and renewables space may benefit. The Wisdom Tree Battery Solutions Index is an example of an index aiming to give exposure to this mega-trend through equities.

Narrowly focusing on metrics such as greenhouse gas emissions from each constituent may miss the wider picture.

We have also developed two indices: Wisdom Tree Energy Transition Metals Commodity Index TR and Wisdom Tree Battery Metals Commodity Index TR, which focus on the underlying metals that support the energy transition and batteries mega-trends and are examples of exposure through a rolling metals futures strategy.

We also believe significant efforts towards decarbonisation can be achieved through better waste management and recycling.

Our partnership with Tortoise EcoFin, for example, looks at businesses that are capitalising on the growth of renewable fuels, recycling services, and carbon capture technologies.

FTA: When it comes to picking an ESG investment today, what are the key things investors and advisers should look out for?

NS: We think investors should think dynamically and focus on the aspects of the ESG spectrum that matter to them the most.

We believe that narrowly focusing on metrics such as greenhouse gas emissions from each constituent may miss the wider picture. For example, a nickel miner may have a relatively high scope 1 greenhouse gas footprint compared to a software company, but what the nickel miner produces is instrumental to the decarbonisation effort.

Therefore, looking at the emissions of the full life cycle of the applications of nickel is very important.

We acknowledge gathering all the necessary information is difficult, but asking the question ‘does the technology, company, or commodity help or hinder the decarbonisation effort over its life cycle (from production to application to recycling)?’ is a good staring point. 

FTA: Technological development around green products is fast-paced, how do you decide as an investment house which strategies are future-proof and which ones will fail?

NS: We acknowledge that the pace of technological development is fast and subject to abrupt changes.

As an investment house, we generally partner with industry experts to keep our strategies well informed. We maintain close dialogue with our partners.

Moreover, we like our partners to talk to clients through webinars and blogs to ensure knowledge is shared and investors are comfortable that our strategies are at the cutting edge of the most recent developments.

FTA: What has the war in Ukraine taught us about current global energy strategies and how could geopolitical power shifts shape the energy transition?

NS: The war in Ukraine has illustrated that the need for energy independence in Europe [from Russia] is more urgent than ever before. That goes hand-in-hand with the climate-driven energy transition.

Having liquidity screens, minimum market capitalisation requirements and caps on country exposures have proven to be great risk-mitigation tools.

We believe policymakers are likely to double down on their efforts to decarbonise because that will fulfil the goal of energy independence at the same time as climate goals. Any softening on climate policy will likely be very temporary in nature to deal with price shocks.

We also find that the materials to enable the transition have become scarcer, with production and exports from Russia being hampered. Therefore, the prices of these materials have also increased and investors in the upstream business have benefited the greatest.

FTA: The events in Ukraine have caused considerable investment volatility. How do exchange-traded fund providers mitigate liquidity risk and screen companies based on geographical conflict risk? 

NS: Having liquidity screens, minimum market capitalisation requirements and caps on country exposures have proven to be great risk-mitigation tools.

Also, our ESG screening has helped remove companies from indices that could have been a problem when the Ukrainian war emerged. 

FTA: Is now a good time to invest in ESG ETFs?

NS: We believe the market has turned decisively in favour of ESG. Investors increasingly feel they have an important role in making sure capital is allocated to companies that behave in a responsible manner.

Also, while a few years ago ESG was simply viewed through the lens of doing what is morally correct, today ESG investment is increasingly motivated by participating in a mega-trend that could deliver meaningful returns as they pivot towards the technologies that will be shaping the future of the world we live in. 

carmen.reichman@ft.com