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Investing in a Sustainable Future

The transition to a more sustainable global economy presents both risks and opportunities to investors and asset managers alike. Though sustainable investing (SI) has become a buzz phrase in recent years, Pax World Funds has been investing in the risks and opportunities resulting from the transition to a more sustainable economy for nearly 50 years. In 2018, Pax World Funds was acquired by Impax Asset Management Group, allowing both firms to expand their ESG investing capabilities.

ESG investing involves more than the responsible allocation of capital — engagement with the companies in which they invest helps the firm drive the adoption of sustainable practices while also contributing to economic growth in a responsible way.

From petitioning the SEC in 2007 for guidance on climate change-related risks to voting on shareholder resolutions that ask companies to report their emissions, Impax goes beyond paying lip service to sustainability and takes concrete actions. The firm introduced an environmental solutions fund — the Pax Global Environmental Markets Fund; signed the Montreal Pledge; established below‑benchmark emissions caps for its Smart Beta funds; made nine of its 11 Pax funds fossil fuel free; made the firm’s own operations carbon-neutral; and incorporated a SmartCarbon™ approach into three Pax funds. SmartCarbon™ is a proprietary, risk-based investment approach for managing exposure to companies with fossil fuel reserves on their balance sheets.

Julie Gorte, Senior Vice President for Sustainable Investing, explains why the company has prioritized sustainability for some time: ‘If we proceed on the path that we are on now — which is going to lead to something around four or five degrees of warming — we will suffer a catastrophe with many facets, one of which is financial. The estimates of the financial and economic losses due to climate change are all quite high — anywhere from two to 20 percent of GDP in perpetuity by 2100. That’s bound to affect financial markets.’

Building on its rich heritage of responsible investing, the firm quantifies the extent to which the Pax Global Environmental Markets Fund delivers impacts that constitute positive action on climate change.

As President Joe Keefe acknowledges, younger investors are focused on allocating their capital to companies they believe are confronting the climate challenge, and there is now an inherent reputational risk — to go along with the physical and financial risks — to brands that fail to operate sustainably.

‘Every company we invest in goes through what we call an A-list introduction,’ says Hubert Aarts, a Portfolio Manager of the Pax Global Environmental Markets Fund. ‘We look at the quality of the management, the quality of the product, the business model and, of course, the ESG (environmental, social and governance) criteria.’

With many facets, one of which is financial

Scrutinising ESG factors allows the firm to target areas of the economy that are providing solutions to environmental problems, identify risks related to environmental and social challenges and foster engagement between organizations on these issues.

While Impax is encouraged by the progress being made on sustainability within companies in the private sector, driven by their own engagement as well as evolving consumer expectations, it is clear that where governments are concerned, there is still potential for huge strides to be made.

‘What we really need from governments with regards to climate change,’ says Co-Head of Listed Equities Bruce Jenkyn Jones, ‘is a consistent policy and regulations across the world to really encourage this transition to a lower carbon economy.’

As the industry evolves, companies and governments alike will become more sophisticated and diligent in their approaches to climate change, an evolution Impax is helping to drive through sustainable investments and engagement.