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UKSIF’s Simon Howard on investing the right way

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Simon Howard, chief executive of the UK Sustainable Investment and Finance Association (UKSIF), talks to Blue & Green Tomorrow about the key investment risks – and opportunities – presented by sustainability challenges.

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

What is UKSIF and what does it do?

UKSIF is a membership association for organisations and practitioners leading the way for sustainable investment and finance in the UK. We have around 250 members, ranging from financial advisers, to fund managers, to service providers, to retail banks, to investment banks. What unites us as a world-leading cluster is a desire to grow the market for sustainable investment and improve knowledge, techniques and conditions to ensure the UK stays ahead of the curve.

Where does the momentum currently lie in the sustainable investment world?

I think there is growth across a wide range of investment approaches. The negative screening approach is still widely practiced and still attractive to many people – in particular with the ethical side because it is quite easy to express your ethics by using screening. But there is a wide variety of approaches in use in the UK.

There are people who seek to identify areas of growth driven by sustainability themes and they look to invest in companies of all types exposed to those; and there are also people who are just making sustainability considerations integral to all of their investment processes. So fixed income investments, property investments and equity investments will all be considered, in part at least, by their sustainability impacts – the risks and opportunities offered to them by a wide range of environmental, social and governance (ESG) issues. There is a wide range of techniques practiced by banks and fund managers and we support and encourage them all.

Is sustainability a mainstream investment consideration?

I don’t think you could generalise and say it is across the board. I think it is increasingly becoming ‘mainstream’ in the sense that a fund manager who doesn’t consider these elements is ignoring real risks. If you just look at the downside of an investment, if you’re not considering how the value might be impacted by public perception of a company and its ethics; if you don’t consider the liabilities it may incur if a company pollutes; if you don’t consider the risks to business models if companies rely on scarce resources, then you’re ignoring some very important risk factors.

On the other hand, if you don’t consider how a company may be well positioned to benefit from the opportunities – from developing new sources of supply to replace outdated, unsustainable, ones and so forth – you’re probably not doing your job fully. But whether one can say this thinking is now really mainstream and now really core across all investment is probably going a bit too far. It’s increasing, but it’s not yet core everywhere.

What are the real risks for an investor who doesn’t factor in sustainability issues?

I think the risks are potentially huge in scope. They affect almost every part of a company’s operations. Let’s just look at the very pragmatic: if sea levels rise and if flooding becomes a problem, then no doubt some economically active buildings are built in the wrong place. So at a very simple level, where is your factory and is it going to get flooded? Will the rail line servicing you be cut off?

There are climate change effects, and that’s before you consider your existing sources of supply in the food business for instance. If the crops you use to make your product are challenged by drought or excessive rain or increases in temperature, you’re cut off at the knees if your suppliers can’t give you what you need. There is an almost infinite variety of risks to which companies are exposed. In IT, which presents itself as a relatively clean industry with young motivated people, if you’re reliant on rare earth metals – the production of which pollutes or damage the prospects for indigenous people – you’ve got an issue there, because that won’t be very well regarded by your customers.

Simon Howard, chief executive of UKSIF

I think pretty much every economic enterprise needs to consider these risks. It’s a pity that we do have to focus on the risks; we don’t really have the opportunities yet that are readily investable, but hopefully in the coming years, we’ll be able to offer more attractive investment opportunities that let people invest in the benefits of sustainability.

There are many myths about sustainable investment, usually relating to performance, risk and volatility. Do they have weight nowadays?

It’s very hard to say anything simple, because depending on the universe you choose to include as being your ethical or sustainable funds, their performance overall depends on which funds you include and which you don’t include. Al investment styles – be it large-cap, small-cap, yield or return on capital – have times when they do well and times when they do badly.

I think there is quite good evidence that investing the right way, as I would turn it, in certainly the medium and long-term need not damage your returns and need not be more volatile. There are academic studies that show that, but people will always be able to point to a period where the funds they define as ethical or sustainable have done badly. The honest, blunt answer is that performance is driven by what you choose to measure, and we should be aware of generalisations. I certainly think that a case that says sustainable funds do badly is very hard to maintain now.

What would define success for UKSIF in 2014?

I want UKSIF to be increasingly regarded as a relevant organisation – by which I mean the work we do is for the benefit of members and is recognised as being for the benefit of members. I’d like, in particular, our public policy work to be recognised – that we are pushing for the right kind of things to regulators and to politicians. I want people to recognise that we’re saying the right thing, trying hard and achieving. It’s a very difficult question to answer on a 12-month view, but I’d like people to think there’s a buzz about us and that we’re pointing in the right direction.

What would define success for the sustainable investment industry?

Again, that’s a very wide question. I think that if it’s recognised that the finance sector – the banks, the fund managers, the financial advisers – is developing the expertise to cope with and adapt to the sustainability challenges that are almost certainly coming our way, then I think that would be a very good outcome. If we can tell more people that they can get advice and get their funds invested in a way which can cope with sustainability challenges, I think that will offer valuable reassurance.

Any final thoughts for our readers?

How are the risks being managed? There are clear risks, which we can call sustainability risks. Anyone who is sceptical has to be happy that someone is considering the risks to which they’re exposed, and happy that someone is managing them. That’s the kind of base argument to put to the sceptics. If things continue to get worse, how are your funds being managed?

Simon Howard is chief executive of the UK Sustainable Investment and Finance Association (UKSIF).

Further reading:

A new beginning for sustainable investment in the UK

UK ethical fund value grew more than 20% in 2013

F&C: responsible investment ‘continues to gather momentum’

Active ownership: investing as ‘responsible stewards, not absentee landlords’

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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