State of sustainable investing (crisis or opportunity?)

Welcome to Beyond the Benchmark, the EFG Podcast with Moz Afzal.

Moz Afzal:
Hello everyone. So today we are going to do everything related to climate and ESG. So with me to get through all of this, I have Melanie Beyeler. Melanie, welcome to the podcast.

Melanie Beyeler:
Thank you so much. Excited to be here.

Moz Afzal:
So let's go straight into the detail. Obviously we'll tackle Trump in a second and exactly what he stands for and the challenge he's certainly bringing to the investing climate, at least anyway around climate and climate transition. But maybe we just go back to basics. What does sustainable investing today mean for you and obviously for investors?

Melanie Beyeler:
Yeah, thank you for the question. I think especially during these days where we have so much noise, so much news flow, it's easy to get a little bit lost in all that. And so let's just take a step back and realise, remember that sustainable investing has been here actually for hundreds of years. So sustainability has been a topic for hundreds of years. It started really a long time ago when for religious reasons, people started to exclude certain stocks. They were called sin stocks. The space then evolved. It was broadened in scope, was called SRI investing then even more broadly to ESG investing more recently than it translated to impact investing. Engagement becoming really important. But just what I'm saying is sustainability has been here for a long time. So it's not at all a short term trend, it's just evolving over time.

Moz Afzal:
Yeah, I was going to say my claim to fame in this topic, actually back in the, gosh, I'm showing my age here, but in the mid nineties, I actually did my MBA project on sustainable investing. And actually I interviewed all of the major SRI companies who were offering those services at that time. And so I actually knew the topic before it became fashionable. So obviously in this day and age of ESG and climate and MiFID scoring and all this sort of thing is quite confusing in terms of the investor's perception. So maybe Melanie, can you unpack what we mean by sustainability and then how does that contrast with say, ESG and some of the other terminology that's out there

Melanie Beyeler:
Yeah with pleasure, I think that's really one challenge that we have all these terms and they are sometimes quite confusing. So maybe to get rid of the first term, it's E-S-G, ESG scores. That's really a narrow term per definition. It's used in the financial industry. It's used to distil all the sustainability information you find about the company in one score. So that's ESG. Sustainability is a broader term. It's more the question, how do we secure long-term business success? How do we sustain, right? That's the core of this word is how do we sustain and bring into balance the economy with the environment and with society. And I think when it comes to all these discussions about sustainability, the most important to remember is that it all comes from the fact that there's climate change happening. So there's science behind that, and even the most strong sceptics agree that a climate change is real. So sustainability is not a trend, it's not a choice, it's not a philosophy, it's not the ideology. It's scientifically proof that this is a challenge of our time that we need to solve if we want to be in business in 5, 10, 20 years time. I think that's important to remember.

Moz Afzal:
Yeah, absolutely. And I think understanding those stages is important. Now, obviously sustainability also means corporate sustainability, and I guess you could always say sustainability should be built in any company that is still going to be around over the long term. And obviously one could also argue is that the most successful companies really have that sustainability as part of their core franchise.

Melanie Beyeler:
Yeah, I think here we can distinguish between two aspects, right? First of all, sustainability is about risk management. So that's why for a company it's important to avoid material financial losses. So that's why they have to at least take into consideration climate risks, sustainability risks, no matter what their philosophical point of view is, just because it makes financial economic sense to do that. And then the other part, I think more the fun part is then also there's an opportunity in all of that, and companies often want to move forward because they want to shape and benefit from these future business models. So there's money to be made in innovation in finding solutions to one of the most pressing challenges of our time.

Moz Afzal:
So let's talk about the situation today. What's the latest news, latest developments that are going on out there? And obviously Trump is a big hurdle in some respects, or at least it's taken away the attention that the topic deserves. And also maybe you can touch upon I guess the European and I guess the Chinese view where they seem to be a much more advanced than say the US.

Melanie Beyeler:
Yeah. So let me start maybe with the people and the companies and then let's come to the more government situation. So I think again here, it's good to remember that citizens care, and even if we have in the US quite some hard news to swallow, there was a study done with US citizens end of last year, and they are also aware of climate change. They care about the situation and they want their government to work on solutions. So I was quite impressed that over 70% are supportive of such actions. And I think sometimes it's also good to just distil it to something simple. People want to be healthy, people want to breathe clean air. Every year we have about 7 million people that just die because of air pollution issues. So just not to forget the people in that. And then when you think about companies, they're also, we don't hear as much from them anymore because there are certain reasons they're afraid to be as vocal as they have been in the past, but that doesn't mean that they don't take action anymore.

So what I said before, there are still opportunities out there for companies. And I found it in that regard. Interesting that there was a CFO study done just very recently globally, and what it found is that over 90% of CFOs find a clear business case for investing in sustainability. So exactly the people that decide how to allocate money, they still see really an economic opportunity over 90%. Now, when it comes to politics, just be, let me be honest and just say it as it is, Trump is really a disaster for climate. So there's no way around it.
There has been, since he's been in office in January, a lot of damage done, especially in the short term, I'm more the optimistic and look for the opportunities or why it might not be as bad as everybody thinks right now. So what makes me hopeful are some facts, right? So if you look the US IRA, which was so important for clean investments over the last years, when you look where this money has gone to, almost 80% of that money was allocated, was spent in states that voted for Trump. So does it really make sense for Trump to put jobs at risk, to put plants, manufacturing plants at risk, growth at risk in exactly the states that voted for him? I'm not so sure. And then also when it comes to the competitiveness of the US GA politically, not sure if it's really everything about backtracking the clean energy transition, especially also when you look at certain moves by Trump to secure critical minerals, which exactly are critical for such endeavours.

And then I think it's good to know and realise that there's not only the federal level that decides about things, but there's also the state level and many states have already policies in place to decarbonize and they're organising themselves in alliances, for example, the Climate Alliance with 22 states. And they also intend, for example, to represent the US at the upcoming COP meeting in Brazil this year. So I think not all lost because it also not makes economic and competitive sense for the US to really backtrack as much as is being talked about right now. Europe, I think it's actually the opportunity for Europe to step up to change a little bit tack. And so that's what we've have seen. So end of last month, we've seen really big announcements. So for example, the Clean Industrial Deal was announced with a hundred billion to decarbonize industrial activities and with a clear message that Europe not only wants to focus on decarbonization, but really competitiveness.

So they realise if they want to stay competitive, they have to invest in that space. Also, in the past, there were always the complaints that the stick approach by Europe is just too harmful, it's too complicated. Costs are very high to comply with all these rules. So we've seen now the announcement of the Omnibus packages that reduces the administrative burden to apply to all these environmental rules and also should free up some additional investment capacity. And then in Germany, just this week, we've seen that they approved major fiscal reform. So 500 billion in infrastructure investments of these 500 billion, hundred billion alone are reserved for decarbonization efforts like foreign buildings, energy efficiency, EV charging, et cetera. And even the other 400 billion, some of it could be used for example, to invest in power network infrastructure buildup, et cetera. So really big signs that we've seen from Europe and China, China is just powering ahead. They've realised earlier than anyone else that this is really an economic opportunity to be leading in the clean energy transition. And that's what they've been doing. They're leading in solar, wind, EVs, batteries, everything. They also safeguarded a critical amount of the minerals needed for the energy transition. So yeah, they're just ahead of everyone.

Moz Afzal:
Yeah, well, it certainly seems that way. Have you seen any of the Chinese cars on the road? I guess bringing it down to more tangible things in the short term, I think what's quite interesting, certainly what we've been reading is around these sort of big infrastructure funds, climate infrastructure funds that have been created. And certainly we've seen that over the last, well, last six months, but we could say over the last five or six years, some of those assets have really depreciated in value. So what we are seeing in is quite a lot of private equity type firms raising tens of billions of dollars euros to take advantage of some of those cheap assets. So I think alongside the sort of, I guess the grand plans that lot of the governments and states have, as well as if nation champions, even the sort of opportunistic private markets individuals who are looking at this area starting to raise big funds, we're talking ten to tens of billions of dollars looking for those, some of those cheap opportunities. And I think that indeed is quite interesting. Now, moving on to Trump specifically and his agenda, what are your sort of, I guess you alluded to your initial thoughts and you talked about how Texas is probably a good example, which is if you like the energy capital of or an energy capital of the United States, there's more renewable activity in Texas than there are in other parts of the United States, and of course a strong Trump cohort in terms of voters. Just talk about how you think this will play out over the coming years.

Melanie Beyeler:
So over the coming years, I think what we will more and more see is that just power demand is increasing substantially, and this is moving the market. So there are major drivers behind that. First of all, it's just the electrification of our industry of transportation, of buildings. So these are huge drivers for power demands. So for example, when it comes to buildings, you have the switch to heat pumps using electricity that are 3 to 5 times more efficient than gas and have 50 to 80% less emissions. And then another important driver is the rise of data centres. So the whole digitalization in general, and then AI just on top that is driving that. And then announcements in Germany, I mean this is really like the US IRA for Germany that has just been announced, which will just provide another important post to the overall economy and therefore also to rising power demand.

So it's positive for renewable developers for power grid infrastructure modernization. And so I think we just going to see this trend to continue. So investments in the energy transition, they're increasing year over year still. They were at 2 trillion US dollars last year, and we are going to see even more investment in renewable energy. So most of all, solar, which is leading by far in terms of investments, over 70% of investments go to solar, but also wind is still very important, especially onshore wind. And so we are going to see the cost for clean power to just reduce further. Already right now the cost of solar and onshore wind is much cheaper, is about half the price of coal or gas. And also if you combine it with battery cost, so for example, for our energy storage, these technologies are really competitive. And then long-term, I think nuclear also comes into the picture. I think short term it takes some time to develop a nuclear, especially when it comes to also new technologies, until they really make up a significant part. But eventually nuclear is reliable, always available and clean. So I think it's an important piece of the puzzle, especially in combination with solar and wind.

Moz Afzal:
So how do you as an investor or even someone who really cares about climate, obviously nuclear has a very negative connotation to it. I mean, generally it's been unpopular and I guess most people don't really want a nuclear power plant in their backyard. So there's always that issue. How do you think about it from your perspective? And someone obviously cares deeply about the climate.

Melanie Beyeler:
I think it makes a lot of sense to keep nuclear power plants that are already online to keep them running. It just makes economic sense, it's a clean solution. And then we have new developments like SMR, so small modular reactors that are quite attractive because they can be built in a shorter amount of time, are more cost efficient, and as the name says, they're more flexible. So I think this is really a promising solution. And also in terms of safety considerations, we've seen significant progress and we've also seen significant progress in, I would say, very short amount of time how nuclear is being perceived. There's a discussion happening and I think opinions are being changed.

Moz Afzal:
Yeah, no, exactly. I think as I said, we saw in Germany it was a huge backlash to it with respect to some of the issues that happened in Japan and previously in Eastern Europe. So there's always been a question mark. But yeah, I do sense that people have started to change their tune and just recognising that ultimately this is a good solution that we'll actually need and it's clean. And as I said, the new technologies are less harmful as well from a long-term perspective. So just kind of flipping back to the power demand, do you think we've kind of hit the inflexion point with the use of AI, I guess electric vehicles and technologies that are really consuming a lot more electric power? Do you think we've kind of hit that inflexion point and where do you think that the winners and losers going to be going forward?

Melanie Beyeler:
I hope, and I believe that in the long term, the losers are the fossil fuel providers, right? Short term, I think we just need everything, especially gas. We cannot get rid of gas in the short term. So right now we have the situation that power demand, especially for example in Europe, is increasing for the first time in 15 years. So that's really a new situation and will lead to some tightness in the market, which is positive for the providers and just underlines the fact and the need for all types of energy we can get. So in the short term, we need all the solutions over time. I'm convinced that renewable energy combined with nuclear and less and less gas over time will be possible. That's certainly, for example, also the clear goal of China.

Moz Afzal:
Yeah, of course. Yeah, no, absolutely. And I think also we've already seen, for example, as you pointed out earlier, that renewables are already cheaper than coal. And I think that's probably the tipping point in some respects for possibly the most dirtiest of the old fossil fuels. And obviously gas is, I guess oil, then gas if you had to do a ranking. So that certainly makes a lot of sense, but certainly the first one has now become uneconomical, and I think that's a really important development selling on a 30 year perspective. I want to pivot back to Trump a little bit and just I would say certainly today, and I was at a board meeting yesterday and some of the directors were indeed asking me about climate. And indeed whether Trump has really damaged it beyond repair, obviously as we've discussed today, we think it's just it's that's not true. What are your thoughts around, I guess, the movement that he's creating and both philosophically and then obviously as you said, from a vote winning perspective?

Melanie Beyeler:
I would say it's sometimes difficult to understand Trump. I sometimes just struggle to understand why if his strategy is to include or bring back more white male to the workforce with rolling back actions on climate change, I just don't know how effective that really is because as I said, majority of spend is in Republican states, people working in these factories are not per definition women or I don't know who would be the issue. So I don't understand it from that perspective. I have to be frank. What I understand and what I agree is that when it comes to the whole DEI conversation, that probably it went too far, especially in terms of communication, because I have a son myself, and my most important person is my husband and he's a man. So I care about white men. And what I've seen is that in certain communications, it's like it is been advertised that we stand for this and that type of group, but the white men is not part of any group that is been advocated for. And I think that's an issue. I support diversity, I support inclusion, but in my understanding, that also includes white men if we want that to be that blunt. So also, when it then comes to all these reversals of the EI policies, I hope we reverse maybe the label, we reverse how we talk about it, but not the actions so that the actions are still about diversity and inclusions as I understand it, but not excluding certain people.

Moz Afzal:
Yeah, I think it's probably well said in terms of inclusion means broad inclusion rather than some inclusion and some exclusion. I think that's probably right. Moving then on to other parts of the Trump agendas around sort of Greenland, Canada, those minerals, mining and oil extraction in some of those areas. Clearly from your perspective, that's absolutely wrong, but what are your thoughts around that and is it just going overboard in terms of allowing that to happen?

Melanie Beyeler:
So here again, we have the situation as China was just pretty smart, pretty quick, and so they secured, especially when it comes to critical minerals, refining, they just dominate. Every material you can find by about 70, 80% is at least done in China. So it's understandable that Trump wants to have some share of that pie. I would say there are other means to achieve that. So I don't think you have to take over Canada or Greenland, but maybe just do smart deals with them. I mean, that's also something he claims he's pretty good at, so I would just change the tactic a bit, but the underlying reason for that I understand very well. It's really important, crucial for the competitiveness of the US. 

Moz Afzal:
Yeah, I guess with Trump, there's always something. There's a little bit of truth in everything he says, which is what he preys on. Anyway, the last question I guess, and probably the most important question for you is, do you still believe that one and a half degrees is still achievable?

Melanie Beyeler:
I have to be honest, and I don't think it's achievable anymore because again, it comes back to scientific research and scientific research just tells us it's out of reach. What I hope is that we get soon, probably with COP 30 in Brazil later this year, we get some new targets, credible targets. So the situation is that there was never a global commitment to one and a half degrees. The commitment was always to well below two degrees and nobody specified what is it, well below two degrees. So I hope we can maybe come up with a new target that says, okay, specifically we target 1.8 degrees, so we have clarity again, and we can a little bit move on from that discussion and think in that regard. What is important to notice? The good news, because we need some good news, is that if we want to accelerate the transition, we can do so.

We already have the technology in place that would help us to accelerate the transition. So as I mentioned, the price for solar wind, LP batteries is sufficiently low. EVs are fully competitive with ICs, especially in China, as you mentioned. So we see price points below 10,000 dollars, sufficient range of EVs. But I think what is missing or what is at least very important for success is that there's public policy action that we realise and we accept that companies cannot do it alone. So we need clear, strong messages from governments to allow companies to make the right long-term decisions.

Moz Afzal:
No, absolutely. I think that's right and possibly without subsidies, otherwise, we probably may go back into the economic cycles of it becoming unaffordable. We never really get to the place where we are in some cases, as we just discussed about sustainable climate projects and coal. So I think that's super important. So Melanie, thank you very much for spending the time with us. I think it was super interesting in terms of the latest update tackling some of the tough questions around Trump and how people feel about it today. So I really, really appreciate your time today. So thank you very much.

Melanie Beyeler:
Thank you.

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