Mid-year review: AI tools won’t replace critical thinking for investors, says Ambienta’s Tronchetti

Nino Tronchetti Provera, managing partner and founder of environmentally-focused private markets firm Ambienta, describes how emerging trends like political attacks on ESG and the emergence of generative AI technology, are affecting his business, as part of our mid-year impact Q&A series.

Has the political backlash against ESG affected your business? How do you feel about it?

Over 15 years ago, Ambienta was founded on the firm conviction that sustainability drives value. While the recent noise around nomenclatures and ESG definitions will prove a significant headwind and pose challenges for businesses who do not have a fundamental and well-established footing in their conviction around parameters in this space, the increased discourse will play in favour of businesses who differentiate themselves with authenticity. For Ambienta, which is synonymous with authenticity in sustainability investing, we see this as a tremendous opportunity to stand out. In 2007, Ambienta was a pioneer in recognising that sustainability is pivotal for strategic value creation, while proper management of ESG factors can prove a valuable operational risk management and value creation tool.

Beyond this, the current environment provides an opportunity to meaningfully contribute to bringing clarity to the often confounded space of concepts. Namely, to distinguish between “sustainability”, the overarching mega-trend and the concept of “ESG”, which, simply put, is a framework setting out best practices. The former we see as “what” companies strive towards, while the latter we view as “how” businesses are set up to achieve this.

As economic and population growth put increased demand on our environment’s resources, sustainability driven businesses will drive long-term performance. Companies whose products and services address global environmental issues of resource efficiency and pollution control reinforce their long-term competitive advantage. Sustainability drives value.

The impact investing market is scaling up and going mainstream; how is this affecting your business?

In a similar vein to our view on the discourse around ESG, the entry of mainstream players to the space presents an opportunity for managers like Ambienta that bring unmatched authenticity and legacy to stand out. While the interest in exploring sustainability investing has recently grown among big brand names, for the majority the concept remains a bolt-on to an already established investment approach. In contrast, there are less than a handful of investment managers who have sustainability investing ingrained in their DNA as the founding principle on which they were built. For Ambienta, having dedicated since inception over 15 years exclusively to sustainability investing, we expect the perceived crowding to be an opportunity for clear differentiation.

As a case in point, according to research by Global Impact Investing Network (GIIN) published in July 2023, today the greatest proportion of impact AUM is allocated to energy. So, while most mainstream impact investors concentrate the environmental proportion of their capital deployment towards energy, for Ambienta energy represents only about 10 percent of a much wider opportunity set. There is significant impact on core environmental issues such as GHG emissions, water consumption, plastic consumption, waste generation, and deforestation by Buildings, Manufacturing and Agriculture. These are sectors representing allocation opportunities, which remain largely untapped by mainstream players. In this context Ambienta, as a firm exclusively dedicated to environmental sustainability with an established legacy and deep understanding of the impact across the full sector spectrum, has a clear advantage.

Which impact themes, sectors or strategies do you see as being most exciting and untapped?

Ambienta’s proposition is anchored on the notion that two environmental sustainability catalysts – resource efficiency and pollution control – are a source of competitive advantage. More importantly, we recognise that environmental sustainability is a mega trend cutting across all traditional sectors, shaping industries and value chains, and ultimately generating value for companies and investors. Conversely, companies across all sectors, which are not taking into consideration solutions to global environmental sustainability issues when evolving their business, are being heavily penalised.

It is important therefore when assessing opportunities to apply tools, which allow an assessment on a holistic basis not narrowed by a specific sector focus. Our sector agnostic view has enabled us to develop and refine a methodology over 15 years, which delivers a pragmatic and measurable analysis, quantifying contribution to resource efficiency and pollution control, two indisputable drivers of competitive advantage, irrespective of sector.

With this backdrop in mind, we leverage our sustainability and strategy division, a dedicated team entirely committed to understanding how environmental sustainability trends reshape the value chain and sectors and create investment opportunities. In terms of theme, we are particularly keen on exploring circular economy business models enabling access to sustainable, high-quality materials. Across many materials we have reached an inflection point of consumers preferring recycled over virgin materials, with many more expected to follow over the coming decade. Similarly, in terms of strategy, we believe private credit is an area in which specialist sustainability and impact competences have the potential to prove a critical competitive advantage for managers. Testament to this is our launch of Ambienta Credit earlier this year. We expect the landscape to continue to evolve and further innovative strategies to emerge, contributing to addressing the capital needs of the sustainable development challenge.

Do you use benchmarks to evaluate your impact and why (or why not)?

Centred around the unwavering conviction that environmental sustainability drives value, Ambienta only invests in businesses that have a positive impact on the environment through either, or both, a resource efficiency or pollution control contribution. Measuring impact is key. This is why any target acquisition must meet our initial environmental due diligence benchmarks:

1. Resource efficiency and pollution control must be growth drivers for the business;
2. The environmental impact must be measurable;
3. The environmental impact must be material, in relative or absolute terms.

To assess this, we always define a relevant industry specific benchmark based on market research, which enables us to provide transparency around the environmental improvement. The environmental impact of our portfolio is measured in line with our proprietary methodology, which has been developed over more than a decade.

More recently, since the 17 UN Sustainable Development Goals (SDG) framework came to live in 2015 and, because the SDGs it sets out are naturally coherent with Ambienta’s investment strategy, we have developed a taxonomy which allows us to also report impact against the UN defined SDGs.

How will the development of generative AI affect your business? Are you using or planning to use it?

We have been exploring use cases for AI across our entire research process with the view to standardise use cases for example for information gathering, news flow screening and financial figures updates. While we believe AI tools can offer an opportunity to accelerate or improve cost efficiency of certain labour-intensive tasks for investment managers, they inherently bear significant risks in the context of alpha seeking managers like Ambienta. AI tools use probability-based algorithms and as such are intrinsically built to provide beta and beta only. Critical thinking, intuition for identifying disruptions and focus on deviations from the most probable outcomes so far remain irreplicable.