Sustainable investment opportunities for 2023

The sustainable investment sector is evolving fast: governments are directing more capital towards environmental projects, which is helping create innovation and opportunities.

2022 was an important year for the sector, as companies matured and built momentum. We believe these areas could be ones to watch in 2023.

Hydrogen has long been seen as the solution to hard-to-decarbonise sectors, such as iron and steel production, aviation or shipping. The problem has been cost. While renewable energy sources such as wind and solar are now cost-competitive with fossil fuels, the production of ‘green’ hydrogen was too expensive for it to be a practical option.

However, the landscape changed in 2022, as the EU and US put significant incentives in place for the development of hydrogen solutions. The Eurozone’s RePower EU initiative and the US’s Inflation Reduction Act both pushed capital towards the sector. This is likely to see it become a viable source of energy supply within a decade, bringing the economies of scale needed to push prices lower.

For investors there are a range of options. There are direct hydrogen companies, such as ITM Power, Plug Power or Bloom Energy. There are also ETFs that focus on companies in the hydrogen ecosystem, including L&G Hydrogen Economy ETF or Invesco Hydrogen Economy UCITS ETF.

Increasingly, people recognise that their diet has a meaningful impact on the planet. For example, it is now clear that red meat comes with a significant environment footprint. The global agricultural and food industry contributes to account for around a third of global greenhouse gas emissions and this may increase as the world’s population grows. People need to address how they eat if they care about the planet.

Four of the UN Sustainable Development Goals incorporate this theme - zero hunger, responsible consumption and production, life below water and life on land – and there are a range of investment options that support them. These may be companies creating meat substitutes, or that promote responsible agriculture, or that use the Internet of Things to minimise pesticide usage. John Bean Technologies, for example, aims to maximise agricultural yields and reduce emissions.

Sustainable food companies will be part of generalist impact investing funds, such as the Baillie Gifford Positive Change fund, but investors can also look at dedicated ETF options – the Rize Sustainable Future of Food UCITS ETF or the Ossiam Food for Biodiversity ETF are two examples.

Biodiversity is an increasing priority for policymakers and now has a ‘COP’ all of its own, with the 2022’s Biodiversity COP 15 held in Montreal. Biodiversity loss is part and parcel of climate change, alongside other environmental problems such as deforestation and pollution.

Investment groups and policymakers are becoming increasingly engaged on the issue of biodiversity. The European Commission adopted the EU Biodiversity Strategy for 2030, which aims to put Europe's biodiversity on a path to recovery by 2030. Companies will need to report on and manage their biodiversity impact, and those that transgress may face risks of fines and litigation.

Biodiversity is increasingly a key criterion for sustainable investment funds. It will also be an important area in so-called ‘circular economy’ funds, which aim to ensure natural resources are used efficiently. BlackRock has a dedicated Circular Economy fund, as does Robeco. There are also specific biodiversity investments, such as the HSBC World ESG Biodiversity Screened Equity UCITS ETF. This weights companies according to their biodiversity impact.

Impact investing has a dual mandate: funds aim to achieve financial returns, plus a clear second target of, for example, reduced carbon emissions, or access to education. This is different to a normal ESG fund which will aim to invest in companies with a lower carbon footprint but makes no definitive commitment. Impact funds are still a relatively small part of the market, but have proved popular in 2022, with inflows showing more resilience than any other part of the market. Initiatives such as the EU environmental taxonomy are helping to put a framework in place for companies to report and manage their environmental risks. This makes it easier to measure the impact of individual companies. This area of the market is likely to grow as investors increasingly demand a purer approach to sustainable investment and tangible evidence that their capital is making a difference.

As ESG analysis becomes more sophisticated, it is spreading to new asset classes, including social housing, infrastructure and commercial property investing. These ‘alternative’ sustainable investment options allow investors to create fully diversified portfolios, exclusively from sustainable funds. This has allowed the creation of multi-asset sustainable funds which, while not a new opportunity as such, bring together a balanced portfolio of funds and offer a one-stop shop for investors.

The sustainable investment sector now has real momentum, having matured in 2022. It remains one of the strongest themes for the year ahead with backing from governments, investors and individuals. The Fineco platform lets you choose from an extensive range of investment options, including Fineco Asset Management’s MegaTrends, Evolution and Series ranges.