Updated 25/01/2023

Responsible investing – a powerful tool for better growth

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visuel Virginie Morgon
25/01/2023 - 6 mins

The investment industry has a crucial role to play in accelerating the decarbonization of our economies and building a more sustainable approach to sourcing and supply chains. The ESG revolution underway opens multiple opportunities for far-sighted investors, says Eurazeo’s CEO Virginie Morgon, but she warns that a rigorous analytical approach based on scientific criteria, such as the Planetary Boundaries framework, is essential to channel investment where it is most effective.
 

The real ESG revolution has finally begun.

There have been many calls in recent months for temperance (or “sobriety” as the French President Emmanuel Macron has dubbed it) especially in energy consumption. Such calls are valid. Yes, of course we should aim to consume less, not only energy but indeed all exhaustible resources.

But simply cutting back won’t be enough. Our call from Eurazeo is for us all – investors, consumers, industrialists, politicians, and regulators – to take a more radical approach to building a sustainable future for our society.

It’s a revolution that we within the investment industry need to lead, working within a clear and coherent framework, by investing in innovation across the board to accelerate the decarbonization process, and at the same time rethinking our sourcing and supply chains to boost sustainability without sacrificing our vision of an open and globalized economy.

 

Investing in decarbonization

The preservation of our natural resources and biodiversity is an absolute priority. As we have heard a lot in France recently, achieving this will involve a degree of temperance, soberly cutting back our consumption patterns so that we use less and recycle more of the world’s precious resources, while also reducing our carbon footprint. At the same time, we will be stepping up our use of renewable energy from an abundance of new resources, including wind, solar, and hydrogen.

We can all cut back, and we can all play a part in achieving more. Despite the calls by some to actually contract the economy, “degrowth” itself isn’t really an option. We want to power better growth if we are going to ensure an inclusive and generous society for the eight billion of us now on the planet. Instead, we need to work on consuming better, not simply consuming less.

This is where smart technology can play its part, transforming the way we produce and consume. Indeed, Europe is at the forefront of the trend. As Alice Besomi and Mélissa Cohen argue in this first issue of Eurazeo Views, the combined impact of the energy crisis, supply chain disruption and climate change has sparked a surge of interest in Europe’s climate tech sector. What’s more, the EU’s ground-breaking approach to setting the regulatory bar high – itself often in response to consumer and activist pressure – is helping European entrepreneurs to position themselves as pioneers in global markets as other jurisdictions start to follow the EU regulators’ lead.

The impact – both real and potential - of new technologies goes well beyond climate considerations. In this edition of Eurazeo Views, Sophie Flak and Zoé Fabian lay out a convincing roadmap for investors looking to leverage the potential of all aspects of sustainable technology, reaching beyond direct aspects of climate change and environmental protection to include numerous ESG-related digital applications to facilitate and accelerate shifts in corporate and consumer behavior.

This innovative use of technology to change the way we live is an important tool to help counter the “degrowth” advocates. It’s thanks to this smarter use of technology and digital science that we can reconcile the call for temperance in our use of energy and natural resources, with the determination to maintain our standard of living, and – in the case of the underprivileged – actually improve conditions.

The scale of the investment necessary is monumental, with a role for infrastructure funds and public spending to achieve these changes. It extends well beyond the needs of carbon-free renewable energies. It includes smart cities, urban mobility, intelligent buildings and energy-intensive factories.

 

Rethinking our sourcing and supply chains

A second aspect of the revolution in thought and behavior will come with our approach to how and where we source our raw materials and our labor supply. Covid, geo-political tensions, climate-related disruptions and the war in Ukraine have wreaked havoc on our supply chains, and sent inflation spiraling higher.

As a result, calls for economic sovereignty from politicians, business leaders and consumers are increasingly loud. As Eurazeo’s Nicolas Debock, Wilfried Piskula, and Arnaud Vincent point out in their article, these concerns extend well beyond the original focus on data, healthcare and energy resources. Today the question of resilience is top of the agenda for companies in every sector of the economy. Where shareholders might have raised their toughest questions about costs and productivity, the biggest concern today is sustainability, notably of production and supply, in an unstable world.

These concerns about sustainability go well beyond a perhaps simplistic demand to see more production brought back “onshore”. In their article, Erwann Le Ligné and Florian Zimmermann examine the state of health of Europe’s small & medium-sized enterprises (SMEs) and conclude that it is precisely those companies that have not only diversified their geographic exposure in sourcing, production and sales, but also successfully tightened up their governance, and successfully pursued the digitalisation of their operations, which are today best positioned to absorb future shocks as they arise.

 

A compelling framework should guide our actions

For us today, our immediate role as long-term investors is to take action now on the strength of our vision of tomorrow.

The complexity of the multi-faceted crisis that we face means that it is no longer enough to simply think it’s enough to pick out a handful companies that will deliver the best returns. The stakes are too high for that. Instead, we require a coherent global framework to guide our actions and maximize the prospect of success.

Our long experience as investors has shown us the importance of a sound analytical process to guide our choices. As a result, in order to make sense of the scale and complexity of the existential issues as we face today, we will have to adopt a new framework to prioritize our actions.

In 2009, the Stockholm Resilience Centre developed the Planetary Boundaries, which are today widely acknowledged by the scientific community for its rigorous approach. The Planetary Boundaries identify the ecological limits such as pollution or natural resources depletion not to be crossed to ensure a livable space for humanity. There are nine Planetary Boundaries: climate change, freshwater change, stratospheric ozone depletion, atmosphere aerosol loading, ocean acidification, biogeochemical flows, novel entities, land-system change and biosphere integrity. Crossing any of these thresholds significantly increases the risk of large-scale abrupt or irreversible environmental changes.

The alarming fact is that six of the nine essential boundaries identified and tracked by the Stockholm Resilience Centre’s framework have already been breached. This has led to three critical challenges for humanity, each of which must be addressed, and resolved within the next ten years, namely:

  • Nature, food and water resources;
  • Climate and air pollution;
  • Material consumption and waste.

Our commitment to building better growth is not new. For the last 20 years, Eurazeo has pursued numerous ESG initiatives, investing 4 billion euros in a more inclusive, low-carbon economy. But today our call is for further and faster action, guided by a clear strategy, to address the urgent problems facing us all.
We, at Eurazeo, have to address these challenges.

We are working to build and finance a regenerative economy, transform the economy from brown to green, and make a circular economy the new normal.

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