Active is: Accelerating economic growth through sustainability

by Steffen Hörter | 08/05/2019
Accelerating economic growth through sustainability

We stand at the crossroads of European Union’s (EU) sustainability strategy that is full of turning points with important implications for investors. In its recent reflection paper the European Commission (EC) highlights that it envisions strong future EU economic growth through sustainability transformation and business innovation.¹

The EC aims to win GDP Growth and Sustainability in tandem and estimates an annual finance need of EUR 270bn for Climate, Energy, and Water alone. The potential global benefits have been estimated to unlock USD 26tn of economic value through new jobs, well-being, and competitiveness.* Question remains which economy will snap up the most of it?

In this Environmental, Social, Governance (ESG) economic research, we summarise the key EU targets for the Sustainable Europe Agenda. We start with an overview about the sustainable development’s status quo in the EU and put out the key questions. Then we lay out three potential future EU sustainable development policy scenarios. As an outlook we highlight the opportunities for the EU on globalization of sustainability to win the international race to be the first true sustainability leader.

European Commission’s reflections for Sustainable Development

In a recent 2019 reflection paper, the Commission sees the UN Sustainable Development Goals (SDGs) as a compass to achieve prosperous future economic growth in the EU.

Expectations are set high in business success by sustainability innovation and transformation of sectors and corporates. Complex environmental challenges require new technology and business solutions, especially, as the EU is also sensitive towards the large societal challenges that a rapid sustainability transformation will bring with potential short term costs to its citizens and corporations.

Internationally, the EU’s SDG reflections also discuss how sustainability could exert more strategic independence and be exported globally.

Ideas to stimulate successful growth via Sustainable Development innovation and investments

How can the EU economy capture its slice of business, and investors contribute to financing the USD 6tn per annum to reach the 17 SDGs until 2030? In our view, the responsibility to commercialize this opportunity lays primarily with the private sector, with EU crucially supporting and accelerating this change. For this, a clear political direction with set policy and economy targets by the EU is desired.

Access to capital and investment opportunities is key. For example, we think joint private-public partnership (PPP) desks with active investors can critically bridge SDGs closer to long-term investors via a much larger scale of project flow. To achieve these, the EU could promote more sustainable investment knowledge innovation communities (KICs).3 Long-term investors, such as pension funds and insurers will be central.

Sustainable Development in the EU4

  EU Aspirations EU Status Quo
Economic Growth
  • Maintain and increase the economic growth in the European Union
  • Economy in the Environmental sectors has far outpaced the Total Economy growth, both in terms of Value Added and Emplyment as seen in Chart 1
Chart 1: Change in GDP and Employment of Environmental Economy versus the Total Economy in EU-288b
Chart 1 Change in GDP and Employment of Environmental Economy versus the Total Economy in EU-28

 

Climate Transition
  • 2030: Reduction of Greenhouse Gas (GHG) emissions by min. 40% vs 1990
  • 2050: Net-zero GHG emissions
  • Emissions in the EU-27 have been reduced by 23%5 out of the 40% necessary
  • In the next EU budget, 25% are to be used for climate objectives, 12% of the bdget will be from sustainable resources6
Energy Mix
  • 2030: Renewables share of 32% in end-use of energy
  • 2050: More than 80% of electricity to originate from renewable energy7
  • EU is on track to meet its 2020 goal of 20% energy from renewables (currently – 17.5%8a)
  • EU is the global leader for Renewable Energy per capita
  • Currently 55% of the gross EU energy consumption is imported, and only 0.35% of it is from renewable sources8c
  • EUR 55bn2 p.a. of energy subsidies in the EU are still going towards coal and carbon sources
Energy Efficiency
  • 2030: Lower Energy consumption versus 1990 by min. 32.5%7
  • Energy use in the EU-28 still must be reduced by more than 34%
  • Currently total EU energy consumption is 2% higher than in 199011 (Chart 2)
Chart 2: Energy consumption in the EU‑28 from 1990 to 201610
Chart 2 Energy consumption in the EU-28 from 1990 to 2016
Sustainable Agriculture
  • With EUR 79bn of the EU budget allocated to agricultural rural development, at least 30% have to be spent on climate measures9
  • Organic Farming has increased by 25% in the last 5 years
  • 45% of EU agricultural soil is still poor organically2




Key questions still in need of clarification on Sustainable Development in the EU

If the EU see SDGs as a general indicator for the direction of the economy, then investors seek answers to:

  • How can sustainability technology innovators find a better access to private sector investment?
  • What incentives could be given to small, mid and large caps corporates to innovate sustainable services and products with the direction to transform business models?
  • How does the EU plan to improve the accessibility/ supply of SDG-related investments for private investors?
  • Public-Private Partnerships (PPPs) work - what more roles can they play, e.g. European Investment Bank, European Fund for Sustainable Development, or the European Fund for Strategic Investments?
  • Fiscal policy is a powerful tool for policy objectives – how can sustainability driven fiscal policy be leveraged better to achieve global sustainability aims? Should the Finance Ministry Coalition for Climate Action be expanded further?

Three potential policy scenarios

For addressing these sustainability challenges, we outline three potential policy scenarios that may define the Sustainable Europe agenda from an investment perspective going forward.


Global race to sustainability: outlook on the future of international sustainable development

If the EU will be successful as a global leader in sustainability technologies and innovation, including sustainable finance standards and solutions, then sustainability as a trade commodity has the option to lift the EU GDP growth even further as a global export and a trailblazer success. There could also be positive effects via the Generalised System of Preferences through more trade policies and Foreign Direct Investment opportunities in countries also endorsing sustainability, which attracts back to the EU economy.

On the financial standards side, a comparison to be drawn here is the increasing international adoption of International Financial Reporting Standards (IFRS), which were pushed forward by the EU.

In the mid-term, the EU collaboration with China and other countries about sustainability is important for investors, especially if joint standards were developed to ease cross-border investments and joint ventures around sustainability themes and issuer listings for green finance for example. In the long-term, the EU’s global sustainability role can shift due to Africa, e.g. the new Africa-Europe Alliance for Sustainable Investment and Jobs may present new and previously unseen investment opportunities.

In the global race, for the EU to become the leading sustainability economy that achieves high GDP growth and a balanced sustainable ecological footprint (as shown in Chart 3) the jury is out and the stakes are high. The EU has a good starting position but must make the right calls soon.

Chart 3: Countries’ ecological footprint in relation to Human Development12
A race to be first

Chart 3 Countries’ ecological footprint in relation to Human Development, A race to be first


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* Of great example are the Climate-KIC initiative and Potsdam Institute for Climate Impact Research, which have helped to foster innovation that is necessary to tackle climate change. German readers might also find of interest the article by Prof Hans Joachim Schellnhuber in Perspektive “Einbindung institutioneller Investoren in nachhaltige Lösungsstrategien”

1. European Commission, Reflection Paper Towards Sustainable Europe, 2019.

2. The views and opinions expressed in this paper, which are subject to change without notice, are those of the author, Global ESG Strategy Team, at the time of publication and do not necessarily reflect the opinion of the issuer and/or its affiliated companies.

3. Garrido, L., Fazekas, D., Pollitt, H., Smith, A., Berg von Linde, M., McGregor, M., and Westphal, M., 2018. Forthcoming. Major Opportunities for Growth and Climate Action: A Technical Note. A New Climate Economy contributing paper.

4. We leave out of the analysis other sustainable development themes, such as, education, poverty, etc, due to the EU already being one of the leaders in these fields or due to the developing methodologies about their measurement

5. European Commission, Two years after Paris – Progress towards meeting the EU’s climate commitments, 2017

6. European Commission, The Multiannual Financial Framework for 2021-2027

7. European Commission, A Clean Planet for all, A European strategic long-term vision for a climate neutral economy, 2018

8. Source: Eurostat a) nrg_ind_ren b) env_ac_egss2, env_ac_egss1, nama_10_gdp, nama_10_pe c) Energy Balances

9. European Commission, EU Budget: the Common Agricultural Policy after 2020

10. Source: Eurostat (nrg_110a)

11. Carbon Pricing Leadership, https://www.carbonpricingleadership.org

12. Data Human Development Index and Global Footprint Network as at 2014 (latest date available)

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About the author

Steffen Hörter

Steffen Hörter

Global Head of ESG

Dr Steffen Hörter is the Global Head of ESG at Allianz Global Investors which he joined in 2001. He is internationally responsible for the ESG integration strategy at AllianzGI including ESG Policy and Framework, ESG Investment Positioning, ESG Investment Offering/ Product Design and ESG Client Investment Advisory.

Active is: Finding new sources of income

Low rates are back, so where do you turn in fixed income?

by Mona Mahajan | 12/05/2019
Low rates are back, so where do you turn in fixed income?

Summary

Investors who need income and return potential should consider an active, balanced, global approach. Consider pairing high-quality investment-grade corporates, Treasuries and select securitised assets with infrastructure debt and higher-quality US, European and Asian high-yield bonds.

Key takeaways

  • Faced with low or even negative bond yields, many investors are looking to preserve income and return potential – and an active, holistic approach could help
  • We see opportunities in the securitised fixed-income market and higher-quality corporate bonds, though investors should be cautious and selective with BBB exposure
  • For additional income potential, look to higher-quality US high-yield bonds, select global high-yield bonds (particularly from Europe and Asia) and infrastructure debt
  • Using these securities in a “barbell” approach can help investors take selective risks while providing the potential for favourable yields and returns