Investing is future-centric. But information for making forward-looking decisions is necessarily backwards-facing; data can’t tell us where we’re headed, it only shows where we’ve been. And past performance, as we’re so often told, is no guarantee of future returns.   

That dichotomy sounds hopeless but people make sound investments all the time, some posting truly exceptional returns. Superstar investors, such as Peter Lynch or modern-day oracle Warren Buffet have gained worldwide notoriety for consistent insights about the future in their portfolios. So what’s their approach?

Lynch’s can be boiled down to a few short tenets: buy what you know; do your homework; invest for the long run. Buffet’s pointers are similar. He famously avoided tech stocks because he claimed not to understand technology companies, and advocates in-depth study of individual business risks (Coke vs Pepsi for example).

That unsatisfyingly simplistic advice implies lots of research and data discipline, regardless if you are investing from an institutional or retail perspective.

What about the big picture?

It also tends to overlook macro considerations that, at times (like now), can have significant implications for any portfolio, over and above risks that individual businesses face.

The Covid-19 pandemic and the war in Ukraine have been massively disruptive to global businesses and economies, but there is a far bigger threat looming on the horizon that markets have not yet fully priced in: climate change. 

Just consider inflation, the current bête noire for investors almost everywhere. If the battle against rising prices stems from supply chain troubles related to war and Covid-19, then we ain’t seen nothing yet. 

In the face of climate change, shortages and inflation are likely to be far worse.

An exacerbating environment

Even with a steady uptick in natural disasters, the devastating impacts of more and bigger storms, less available drinking water, lost farmland, rising oceans and more floods have not yet made their way into mainstream financial markets or much of asset analysis. That may be fair; we are still on the brink of climate change. It’s a slow train and the worst of its threats still wait in theoretical models; temperature rises haven’t crossed the point of no return. So what should we price in?

As the world warms and sea levels rise, even the most studied investors will need to think carefully about climate change’s risks and implications. This is where integrating ESG with investments becomes so important. 

ESG critics charge that the methodology is merely box-ticking or greenwashing. No doubt, there are degrees of that in the market—we’ve certainly learned that anything financial has fraud potential—but if investors do their homework, as Lynch and Buffet recommend, they will find multiple ESG-focused asset managers that are already embedding ESG into their fundamental research and stock-picking procedures. They’ll find real estate firms using climate data to pick investment and development locations (the ‘location, location, location’ mantra will matter even more when more locations are underwater).

Flaws inspire fixes

An ESG view can help identify not only climate risks and the types of industries or individual companies poised to suffer losses, such as stranded assets or massive demand loss. What may be overlooked, however, is the flip side of that equation. Identifying ESG risks also leads to fixes, and those fixes could represent substantial investment opportunities. 

In the future, we’ll either make our world more sustainable via productivity cutbacks and tamping down economic activity, or we’ll invent our way into a cleaner, greener future. Given humanity’s history (again, no guarantee of future performance) the technological option seems most likely.

Looking at the investable universe through an ESG lens can help uncover opportunities in energy transition, climate-tech, battery technologies, plant-based meats or materials, electrification of mobility and manufacturing, smart buildings and countless business or industry optimisations that software or advances with artificial intelligence will create.

Asset managers with active ESG frameworks are already looking at transitioning to net-zero and identifying industries and companies with high potential to deliver low-carbon solutions by 2050. Investors with long-term views should look in the same place to understand tech’s future landscape. Technology is virtually the only path to a more sustainable future. ESG strategies can help manage that transition for investors, helping to spot risk and expose opportunity.