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Sustainable investment: what are you investing for?

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Whether it’s for growth, income or your children’s long-term prosperity, there are a range of investment styles for you to consider.

This article originally appeared in Blue & Green Tomorrow’s Guide to Sustainable Investment 2014.

Deciding what you’re investing for is crucial in making your investments align properly with your aims. Many people want to simply grow their long-term wealth; others draw income from their investments. Among those interested in sustainability, the long-term prosperity of their children is often their driver. Meanwhile, some investors are less concerned about making a return, and instead invest with philanthropic goals in mind.

Whatever you want to get out of your investments, though, an important first step should be to speak to an independent financial adviser (IFA) who will explore the different styles in detail. This process is called a fact find and includes questions on goals and objectives, to understand what’s important to the client, and risk, in order to determine a client’s capacity for loss and how much volatility they are happy with. Most fact finds should also include a question on sustainable, responsible and ethical investment, to find out whether the client has any ethical, environmental, social or religious considerations.

Many IFAs are not knowledgeable enough to give advice on sustainable investment. We’ve heard anecdotes from thought leaders in the sustainability space whose own advisers have actively tried to put them off investing in this way. But with 76% receiving requests from clients for this kind of advice, according to Blue & Green Tomorrow’s fourth annual Voice of the Adviser survey, the relatively small market share of sustainable investment compared to the mainstream is almost certainly because of a supply problem – and not because of the lack of demand.

There are, of course, a number of IFAs who specialise in this area. Rather than asking the standard question to see if a client is interested, they go into detail about how adopting a sustainability approach pays off in the long-term. Even with all these extra considerations, the first question is always to do with why the client wants to invest. But once you have established this, along with the risk profile and sustainable investment analysis, an adviser has a good foundation to put together a compelling portfolio.

The three broad investment styles are investing for growth, income and children. While there are certainly crossovers, each has its own approach and usage. Often, a mix of two or three different styles can provide useful diversification for an investor. With the help of Surrey-based financial adviser Richard Essex, a consultant at Grayside Ltd, we’re going to outline all three styles to help you find which is most appropriate for you.  

Investing for growth

One of the most popular approaches, investing for growth means making your money grow considerably by investing in currently undervalued companies, or stocks,  that are expected to be more profitable in the future. This chimes particularly well with investors who are interested in sustainability. Problems such as climate change, air pollution, water shortages and biodiversity loss are only expected to increase in prominence in the future, so companies providing solutions to these are likely to become ever more profitable.

Photo: Jonathan Ruchti via stock.xchng

Growth investors tend to reinvest any profit they make or dividends they receive, and by definition, will have a long-term outlook – so years rather than months. While many investors ask their advisers to put their money into investment funds, others choose to invest directly in companies. In this scenario, growth investors would likely opt for profitable companies whose share price is rising and then buy more shares using the dividend they receive. Investing in just one company does carry with it quite some risk, though; if something goes wrong, you could lose most if not all of your money.

Richard Essex says: If somebody’s investing for growth and they’re happy with a little bit higher risk, thematic funds are extremely good – firms like WHEB and Pictet, because they deal with specific sustainability themes that they think are going to have a positive consequence, but also are going to make money. I would often put some thematic funds in a portfolio – obviously depending on the risk profile. 

Investing for income

An investment strategy focused on income means the investor is receiving regular payments – usually either quarterly or monthly – from the company or fund they invest in. Whereas growth investors may reinvest these payments, income investors would withdraw them.

Photo: Stephen Davies via stock.xchng

If you’re investing for growth and your fund has a bad year, you’d be less worried than if you were drawing an income out of that fund. If the market fell in this scenario, you’d have to sell shares to provide the income you want. There is also no guarantee that your fund will recover. Therefore, with income investment protecting the downside is even more important – so you’d generally want to go for less risky investments.

Sustainability investors looking through an environmental, social and governance (ESG) lens may find that this process helps protect the downside and reduce volatility. There is also research to suggest there is less risk if a company is looking at its ESG footprint.

Richard Essex says: When a client is drawing income regularly, it’s more important to protect the downside. In this respect, I think there is real value in investing in funds that include ESG factors as well as the more conventional financial analysis. This extra dimension can help to reduce the downside risk of a fund further. One suggestion here might be to invest in a ‘best of sector’ fund. This would be a fund investing in large companies from across the spectrum that are taking a lead in sustainability.

Investing for children

While investing for growth and income are the two most common investment strategies, the primary driver for many investors is a desire to leave something to their children or grandchildren. This wish chimes very well with sustainable investment, which is all about tackling the biggest sustainability challenges so that our ancestors – the client’s children or grandchildren included – inherit a planet, society and an economy that are not just healthy but flourishing.

Photo: Benjamin Earwicker via stock.xchng

Anecdotal evidence suggests many investors adopting this approach want funds that not only screen out morally questionable sectors like tobacco and weapons, but invest positively in sectors that are crucial to future prosperity like renewable energy and medicine.

Richard Essex says: Asking clients if they are interested in leaving some sort of positive legacy can be quite a useful approach. When you put the idea in their head, they are generally quite receptive. It’s something that people grab onto very quickly. It gives another dimension to investment, because I think a lot of people are interested investing for children. Many people are quite blasé about the whole investment process, so if you can say there are funds around that are looking at an extra factor as well, that is very useful. 

Conclusion

The best, most balanced investment portfolios would tend to deploy a mix of styles so as to nullify the potential risks associated with adopting one on its own. What is clear is that if you have a desire to invest sustainably, you can do so with growth, income and your children in mind.

Richard Essex is a financial consultant at Grayside Ltd, where he specialises in green and ethical advice. He is the author of the soon-to-be-published book: Invest, Feel Good, And Make a Difference.

Further reading:

Are we investing in the future we want for our children and grandchildren?

Ethical investors are not tree huggers, but air breathers (and responsible global citizens)

‘We need investment that prioritises long-term wellbeing for people and planet’

Happy birthday, Will! Being 4 years old in 2013 compared to 1976

The Guide to Sustainable Investment 2014

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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