The growth of ESG investment has been aided by the changing regulatory landscape. In Europe, this is best illustrated by the European Green Deal, a comprehensive package of measures launched by the EU in June 2021 to transform the EU into a modern, resource-efficient, and competitive economy. The UK has its own vision linking energy security and the "net zero" goal of replacing the country's reliance on imported fossil fuels with cheaper, less polluting domestic energy sources.

The United States has similar plans, with its Inflation Reduction Act (IRA). Elsewhere in the world, Saudi Arabia and the United Arab Emirates are aiming to become world leaders in sustainable development. When it comes to decarbonization, the United Kingdom and Europe are leading the way.

Despite the colossal efforts mentioned above, it must be said that global emissions have risen from 25 billion tonnes in 2000 to 37 billion tonnes in 2022. And three countries - the USA, China and India - account for over 50% of the planet's total CO2 emissions, making their participation essential in the fight against climate change.

Another major ESG investment concern is the potential for negative externalities. For example, an investment in renewable energies may seem intrinsically positive. However, if the production of these technologies involves exploitative labour practices or environmental degradation in the extraction of the necessary metals, the ethical position becomes blurred. In addition, the decarbonization process has forced under-investment in new sources of hydrocarbon exploitation and exploration.

The result: underproduction, which has contributed to the rise in crude oil prices in 2022-2023. Decarbonization is therefore inflationary and increases the risk of an energy crisis for countries that mainly import their energy.

After years of effort devoted to the energy transition, the global economy remains highly dependent on fossil fuels, as the graph below shows.

ESG ratings are also a conundrum. Different ESG rating agencies may assess the same company very differently, due to varying methodologies and subjective interpretations. This inconsistency is a major challenge for investors who rely on these ratings to make informed decisions, often leading to confusion and scepticism about the reliability of ESG assessments.

Several sectors and raw materials seem well positioned to benefit from the energy transition. Contradictory as it may seem, there can be no green revolution without the extraction and use of metals and natural resources. Consequently, the biggest opportunities are likely to come from commodities with the highest supply risk coefficients, such as those needed for electric vehicle batteries: lithium, nickel, cobalt, copper, and graphite.

Copper is a cornerstone of the transition to clean energy. Its high conductivity makes it indispensable in electric vehicles, renewable energy systems (solar and wind) and energy-efficient building materials. As the world moves towards greener technologies, demand for copper is set to double by 2050 (compared to 2022 levels).

While environmental and social components often take centre stage in ESG discussions, governance is arguably the forgotten letter of the ESG acronym. Think back. A few years ago, Volkswagen was embroiled in an emissions scandal, in which the company was caught installing software to manipulate emissions tests. A corporate culture that prioritised performance over ethics and compliance tarnished VW's reputation, led to billions in fines and had a strong impact on its shares. Just last year, the world experienced several failures due to poor governance, the most striking example being the collapse of Credit Suisse.

The importance of good governance to a stock's long-term performance cannot be underestimated. A recent study published by the CFA Institute shows that companies with good governance not only outperform others but are also less volatile. Studies by McKinsey have shown that companies with a high governance score had a higher return on equity than those with a lower score. In the long term, a quality "G" increases shareholder value and resilience. A quality "G" also leads to high "E" and "S" values. In fact, portfolios focused on companies with strong corporate governance outperformed their benchmarks in all four regions analysed (APAC, Europe, North America, world).