Impact investing and the rise of sustainable tech

1. The view from GP Bullhound

Manon Rodier

Associate

Guillaume Bonneton

Partner

Joy Sioufi

Partner

In this report, we list the sectors within technology that can most help accelerate the climate transition and chart the progress of tech impact investing and M&A. We also zoom in on two verticals that have played a big role in enabling and accelerating the development of sustainability: data analytics and resource-efficient consumption.

At GP Bullhound we are convinced that the tech ecosystem can play a major part in making our planet greener, fairer and safer, and we hope this report conveys our enthusiasm.

Key takeaways

Climate change - the biggest, most pressing challenge in recent history

Climate change represents an unprecedented threat to human living conditions, with a range of devastating potential socio-economic consequences.
Climate change is largely the consequence of recent human economic development, with an economic and social system massively relying on abundant energy consumption from fossil fuels.
The shift towards a decarbonated economy will have massive social implications, at a time when inequality is growing.
To manage to stay well below 2°C of global temperature rise, often considered the level above which economic damages start becoming catastrophic, the world would have to reduce its CO2 emissions by 30% in 2030 compared to 2020 (they were still increasing as of 2019). There is true urgency!

Considerable capital reallocation

All economic agents are starting to implement reforms in the way they produce and consume, and this is accelerating. Governments have adopted sustainability goals and climate-neutrality targets in past decades, which are now being translated into compulsory measurable reporting frameworks, financial incentives, and constraining regulation and tax.
Consumers are increasingly aware of the impact of their consumption choices, and of their personal responsibility – they demand transparency and favour sustainable investment instruments, retailers and ethical products. Financial institutions are rapidly responding to regulatory and investors’ pressure, adopting investment frameworks in favour of ESG and impact-compliant assets. Corporates know they can no longer rely on half-hearted initiatives and light greenwashing but need to embrace this new era and align with their stakeholders.
Massive divestment and reinvestment is underway. Hundreds of trillions of dollars in assets from or reliant on the fossil fuel sector could become stranded, with large financial institutions having committed to divesting $11tr from fossil fuel assets. Major investment flows are being reallocated to sectors and specific assets with the potential to decarbonate our economies, alleviate resource-consumption intensity, and meet sustainability goals.
Like the digitalisation of our economies, decarbonisation will require all sectors and companies to progressively adopt innovation, and significant investment flows are being redirected to support this.

Language to measure risks/opportunities that traditional financial metrics cannot capture: ESG and Impact

ESG and impact are becoming frameworks, with their metrics and standards, that all market participants will need to adapt to, and will become as prevalent as financial accounting to assess companies and investment opportunities. As these frameworks turn mainstream, they are coming to be increasingly more rigorous, with the recent apparition of science-based targets.
For instance, ESG and impact assessment will be mandatory for financial institutions in the EU in early 2022. As discussions around the social cost of carbon grow, the impact of extra-financial performance on returns is becoming increasingly direct.

Tech sector - a transition friend or foe

The technology sector, with its ability to enforce change, and emphasis on transparency and data-based decision making, is naturally well placed to lead in the sustainability revolution. However, it also disrupts increasingly large parts of the economy, with social and environmental consequences, some of which are now under scrutiny.
The confidence in the tech ecosystem has declined following controversies around the carbon impact of e-commerce, last-mile delivery and cloud server farms, as well as consumer data privacy (Google and Huawei), SUV pollution and driver status (Uber), and fake news (Facebook and Twitter). The 5G debate is another strong signal that times are changing, with stakeholders weighing the usefulness of this technology versus the privacy and environmental potential negative impacts.
Tech giants‘ ability to continue launching large-scale projects will require them to prove their positive impact. We believe this is likely to influence their choice of suppliers and services, increase their appetite for sustainable assets, and ultimately accelerate the alignment of the entire Tech ecosystem towards a sustainable economy.

The long and winding road to climate change awareness

Economists Randy Barber and Jeremy Rifkin, among others, have spoken of responsible investment since the 1950s, considering the impact on society and the environment. The publication of the Brundtland Report in 1987, also known as Our Common Future, is considered by most as the watershed moment when the imperative of reducing the impact of economic activities on the environment became known and understood in political, regulatory, societal and economic spheres globally. As all climate indicators turn red, the rhythm of awareness spread is accelerating.

Key sustainable development perception milestones within economic and financial ecosystem

GLOBAL LAND AND OCEAN SURFACE TEMPERATURE CHANGE VERSUS 1951-1980 AVERAGE (°C)