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Investing ethically across global environmental markets

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To coincide with National Ethical Investment Week, Hubert Aarts of Impax Asset Management explains how investing ethically across rapidly growing global environmental markets appeals to a broad range of investors.

An ethical investment is simply an umbrella term for any investment that takes environmental, social and/or governance issues into consideration. However, this definition is open to a range of interpretations.

Mr Smith and Mrs Jones may both be thoughtful investors who seek to invest in products with investment criteria closely aligned to their personal values. However, what Mr Smith considers ethical may not be so for Mrs Jones. Everyone draws their line in the sand in a different place, although there are several areas that are generally deemed beyond the pale such as:

– Armaments

– Animal exploitation

– Human rights abuse

– Environmentally damaging practices

– Poor employment practices

– Alcohol

– Gambling

– Pornography

These sectors are usually screened out of ethical funds and it is this exclusion aspect which has given rise to the common misperception that negative screening leads to weaker of performance. Not necessarily so.

Well managed companies, committed to strong sustainability and good governance, generally demonstrate superior long-term performance. We are all painfully aware of the result of years of poor governance within the UK banks and the far reaching impact this continues to have. The omission of companies that don’t deliver on these practices is simply another layer of risk reduction.

However, we believe that it is the additional layer of positive vetting that can add real value for investors.  In our case, this is the commitment to investing in efficiency solutions to the problem of finite resources across high growth global environmental markets.

This focus is also high on the priority list for most ethical investors as it endorses the important theme of optimising our limited resources and/or in finding alternative solutions. But it is also gathering interest from investors who do not necessarily consider themselves ‘ethical’ or ‘green’ but are simply seeking long-term growth opportunities in global equities.

Alternative and renewable energy, energy efficiency, water, waste will be amongst the fastest growing global markets. The drivers are compelling and as the world economy stabilises these markets should deliver superior returns relative to the more over-valued yield stocks which have been preferred in recent years.

Drivers for strong long-term risk-adjusted returns

The world population is growing rapidly. We are seeing massive wealth creation in developing countries and subsequent changes in consumption. In the future, more of us will inevitably live in water stressed areas and water shortages will be further exacerbated by changes in agriculture and an increase in extreme weather patterns and possibly longer term climate change.

These resource efficiency markets are growing considerably faster than most other sectors, as companies are seeing rapidly increasing demand for their products and services. Globally there are currently some 2,400 listed companies with a combined market capitalisation in excess of $7.3 trillion.

Successful investing in these sectors not only requires a deep understanding of the industries in which these companies operate, but also the mispricings that occur because of the inherent complexity of technologies, increasingly strict regulation and the fact that many of these companies are generally not well understood or deeply researched by the investment community.

Why now?

Alongside the obvious benefits of rising earnings and wider investor confidence across the economy, stock ratings should rise further following the announcement of new US policies to conserve water, reduce flood risk and limit greenhouse gas emissions, and news on Japanese, Chinese and European energy policy and pollution regulation. Investors who ignore these fundamental economic drivers could miss out on an enormous opportunity for value creation.

The prospect that these markets should outperform the wider economy over the next decade and beyond, resonates strongly with a broad-based interest in long-term ethical investing.

Hubert Aarts is managing director listed equities at Impax Asset Management and co-manager of the Old Mutual Ethical Fund.

Further reading:

Leading voices need to reframe the debate during National Ethical Investment Week

Invest, spend and vote sustainability: why National Ethical Investment Week matters

Poll shows investors’ ethical disparity between spending habits and investments

Financial returns from ethical investment funds ‘better than mainstream’ in last 12 months

The Guide to Sustainable Investment 2013

Economy

Will Self-Driving Cars Be Better for the Environment?

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self-driving cars for green environment
Shutterstock Licensed Photo - By Zapp2Photo | https://www.shutterstock.com/g/zapp2photo

Technologists, engineers, lawmakers, and the general public have been excitedly debating about the merits of self-driving cars for the past several years, as companies like Waymo and Uber race to get the first fully autonomous vehicles on the market. Largely, the concerns have been about safety and ethics; is a self-driving car really capable of eliminating the human errors responsible for the majority of vehicular accidents? And if so, who’s responsible for programming life-or-death decisions, and who’s held liable in the event of an accident?

But while these questions continue being debated, protecting people on an individual level, it’s worth posing a different question: how will self-driving cars impact the environment?

The Big Picture

The Department of Energy attempted to answer this question in clear terms, using scientific research and existing data sets to project the short-term and long-term environmental impact that self-driving vehicles could have. Its findings? The emergence of self-driving vehicles could essentially go either way; it could reduce energy consumption in transportation by as much as 90 percent, or increase it by more than 200 percent.

That’s a margin of error so wide it might as well be a total guess, but there are too many unknown variables to form a solid conclusion. There are many ways autonomous vehicles could influence our energy consumption and environmental impact, and they could go well or poorly, depending on how they’re adopted.

Driver Reduction?

One of the big selling points of autonomous vehicles is their capacity to reduce the total number of vehicles—and human drivers—on the road. If you’re able to carpool to work in a self-driving vehicle, or rely on autonomous public transportation, you’ll spend far less time, money, and energy on your own car. The convenience and efficiency of autonomous vehicles would therefore reduce the total miles driven, and significantly reduce carbon emissions.

There’s a flip side to this argument, however. If autonomous vehicles are far more convenient and less expensive than previous means of travel, it could be an incentive for people to travel more frequently, or drive to more destinations they’d otherwise avoid. In this case, the total miles driven could actually increase with the rise of self-driving cars.

As an added consideration, the increase or decrease in drivers on the road could result in more or fewer vehicle collisions, respectively—especially in the early days of autonomous vehicle adoption, when so many human drivers are still on the road. Car accident injury cases, therefore, would become far more complicated, and the roads could be temporarily less safe.

Deadheading

Deadheading is a term used in trucking and ridesharing to refer to miles driven with an empty load. Assume for a moment that there’s a fleet of self-driving vehicles available to pick people up and carry them to their destinations. It’s a convenient service, but by necessity, these vehicles will spend at least some of their time driving without passengers, whether it’s spent waiting to pick someone up or en route to their location. The increase in miles from deadheading could nullify the potential benefits of people driving fewer total miles, or add to the damage done by their increased mileage.

Make and Model of Car

Much will also depend on the types of cars equipped to be self-driving. For example, Waymo recently launched a wave of self-driving hybrid minivans, capable of getting far better mileage than a gas-only vehicle. If the majority of self-driving cars are electric or hybrids, the environmental impact will be much lower than if they’re converted from existing vehicles. Good emissions ratings are also important here.

On the other hand, the increased demand for autonomous vehicles could put more pressure on factory production, and make older cars obsolete. In that case, the gas mileage savings could be counteracted by the increased environmental impact of factory production.

The Bottom Line

Right now, there are too many unanswered questions to make a confident determination whether self-driving vehicles will help or harm the environment. Will we start driving more, or less? How will they handle dead time? What kind of models are going to be on the road?

Engineers and the general public are in complete control of how this develops in the near future. Hopefully, we’ll be able to see all the safety benefits of having autonomous vehicles on the road, but without any of the extra environmental impact to deal with.

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Economy

New Zealand to Switch to Fully Renewable Energy by 2035

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renewable energy policy
Shutterstock Licensed Photo - By Eviart / https://www.shutterstock.com/g/adrian825

New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.

New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.

Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.

Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”

The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.

Zero net emissions by 2050

Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.

Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.

She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.

Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”

A worldwide shift to renewable energy

Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.

Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.

Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.

Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.

Sources: https://www.bloomberg.com/news/articles/2017-11-06/green-dream-risks-energy-security-as-kiwis-aim-for-zero-carbon

https://www.reuters.com/article/us-france-hydrocarbons/france-plans-to-end-oil-and-gas-production-by-2040-idUSKCN1BH1AQ

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