To Gain A “Triple Green Premium” investors need to focus on the numbers 59, 2.5 & 78.
The frequent question I receive from investors and asset owners is, How can we deliver alpha, impact, and capitalise on the transition market conditions?
The short answer is to stop trying to price the science into the market.
The longer answer is:
Investors All Want the Same Thing
Large, small, loud, bullish, or discreet and humble, from New York, London or Malaysia, by and large, all investors want the same thing.
Scalable returns over time from a business in growth mode.
The opportunity to invest in a company that can drive the circular economy and offer a solution to the climate crisis.
The thing that confuses them about sustainable finance and its subsets of ESG and Impact is science and capital. One discipline is based on fact, analysis, and detail, the other on risk, hubris, and fantasy, with no straight line to succeed.
There Is No Market Premium for Measuring the Wrong Things
Investors who built their investment portfolios and strategies using ESG ratings and non-science-based metrics realise they cannot deliver alpha or impact to their clients. So, how useful is and has been ESG integration? How many climate-impact unicorns have you backed? This has been the method for every large and medium sector in every part of the market.
The Opportunity Is Huge
We don't engage in doom or ESG culture wars. Why would we waste time when the market opportunity is $50tn? Climate change is here; it is accurate, and there is a massive demand for companies that find solutions and investors who back them. If you are unsure, the three figures to focus on are 59, 2.5, and 78.
59 gt of carbon must be removed each year (IPCC).
$2.5 Tn is the capital per year to invest in low carbon/climate products and services. (MIT).
78% of asset managers are willing to pay a premium for an impact company that can drive the transition.
What Is a “Triple Green Premium”
We have been working on our "triple green premium" methodology with clients, combining science and capital to deliver impact and alpha.
Company and asset level: can we identify a low-carbon company, service or asset that is either adaptive or a substitute to a high-carbon alternative for which we can charge a green premium.
Capital – can we use science-based metrics to access debt capital at between 36bps or 42bps lower – or drive a premium in the equity markets due to "downward disclosure" of assets and portfolios.
Returns – We are higher by using pure science and impact metrics, identifying companies or assets that can deliver transition – we can provide a conservative 13 – 15% return over time.
Which Sectors?
We focus on the companies with direct and indirect entry points to the energy, transportation, industrial clean-up, natural capital and food supply sectors. These are the highly intense areas with the companies that need the most reform and change.
Take Systematic Approach
We systematically understand the recurring shifts each sector requires, the capital sources and costs, and how these can be modified or made favourable by impact measures. We look at the scalability and speed of the business. Most importantly, we asses and the cognitive barriers of co-investors to the climate transition the resulting capital markets opportunities. These invariably sit with larger institutions that lack innovation but lack capital.
Stop Trying to Price Science into the Market
We don't subvert science to meet capital needs. Climate, biodiversity, and carbon are all ecological factors. This is a science which takes years to understand. The more hubristic investors have thought this entire body of work, analysis and themes can be "priced in" or mitigated away instead of system change. Ecology factors are not 'risks'; they become risks when we don't identify the systematic innovative and economic changes to halt the failure.
The more funds and asset managers understand the science, the greater their chance of achieving a 'triple green premium' in the $50 tn transition market.
We'll get there in the end.
J.M.
