Environmental, social and governance investment strategies can improve a portfolio’s ability to generate alpha, according to Patrick Vizzone, managing director of global private equity at Franklin Templeton, speaking during a session at the Canadian Investment Review‘s 2022 Investment Innovation Conference.
“Impact investing is sometimes regarded as being a drag on financial returns, but we believe there’s very good evidence to suggest that you could actually do good and do well at the same time.”
For any impact strategy to succeed on an actuarial basis, Vizzone suggested it focus on three things. First, it should target opportunities to invest in areas that have a measurable and verifiable impact. Second, the investment should target market opportunities with compelling fundamentals. “And then you need an ecosystem to make this all work.”
Highlighting examples from two sectors — agri-food technology and energy transition — he noted about 60 per cent of humanity’s carbon emissions stem from activities within these arenas. “If you’re looking to decarbonize, it’s a clear place to focus.”
To limit climate change to below 1.5-degrees Celsius and avoid widespread famines, the agriculture sector will need to produce about 40 per cent more food while releasing 80 per cent less greenhouse gasses within two decades, said Vizzone. “At the same time, deforestation has to stop and water, agrochemical and synthetic fertilizer use will become more constrained. The thing that’s going to get us from where we are now to where we need to be at in 2050 is technology.”
These challenges make it likely that some areas of agricultural technology will produce outsized returns, he said, noting one area he’s particularly interested in is emerging gene-editing technologies, which can be used to make raising livestock less damaging to the environment — though he’s less bullish on cultured protein meat alternatives.
“Some of these applications are. . . trying to recreate the biological processes which take place inside of an animal, essentially competing with millions of years of evolution and natural selection. Improving animal genetics is more investable from a growth equity perspective — you’re producing food that is more readily recognizable, culturally acceptable, less risky and in a more productive manner.”
The agriculture sector isn’t the only one that will need to adopt new technologies to reduce carbon emissions. With smartphone ownership becoming more common across the world and the number of electric vehicles on the roads rising dramatically, there’s an increasing amount of attention being paid to the environmental toll of battery manufacturing.
“There’s opportunities in new technologies that would change the mix of minerals used in batteries, ensuring they’re produced more sustainably and with increased energy density. . . . These types of technologies will allow [EVs to have] 1,000 kilometre ranges quite soon. We’re getting to that point where range anxiety is no longer a factor. Also, the same applications can be used in stationary storage to address things like curtailment and abatement for the use of renewables.”