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Investing for the past or investing for the future?

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Companies that provide solutions to the challenges of sustainability will see stronger, long-term growth those that don’t. That’s why they make such compelling investments, says Tim Dieppe.

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

We live in a rapidly and profoundly changing world, facing significant future challenges. The same urban ‘capacity’ will need to be built in the next 40 years as has previously been built in the preceding 4,000 years, in order to meet projected demand.

World population is expected to reach 9 billion by 2050, driven in part by the steady ageing of the population. Most of this population growth is set to come from the developing world, which at the same time is seeing increasing numbers move out of poverty. This is giving rise to a new ‘emerging middle class’, who aspire to consume more in an increasingly resource-constrained world.

Yet these aspirations come at a huge price. McKinsey estimates that by 2030, world demand for water will exceed supply by 40%. It was recently reported that pollution in China has reached such extreme levels that the authorities have proposed executing polluters. Even if the response of governments outside China is a little more moderate, legislation is not tending to favour highly polluting companies.

Ultimately, it will be the emerging middle class who demand improvements, or as former New York City mayor Michael Bloomberg put it, they want “water that isn’t yellow, traffic that moves and air that you can’t see”.

There are major opportunities for businesses that provide technologies that solve problems rather than create them. Companies with ingenious ways of reducing energy and water usage are growing rapidly. Transport that emits little or no pollution will be increasingly in demand, as will technologies that produce energy from the sun, or from waste.

As the challenges facing our planet grow more extreme, and solutions present themselves, then some parts of the global economy will suffer, and others will benefit.

Against such a background, is the conventional framework by which investors decide on their market exposure adequate? Traditionally, investors allocate by region and asset class, and reference their exposure to a market-capitalisation weighted benchmark. However, this doesn’t really allow an investor to take into account long-term risks and opportunities presented by a changing global economy.

The problem with benchmarks is that they are mostly backward looking. They tend to be dominated by very large corporations, and reflect the way the economy has developed over the past, and may have little relationship to how the economy is going to develop in the future.

Take the MSCI World index, a commonly used global benchmark. Over 70% of this index is made up of companies with a market capitalisation of over $20 billion (£12 billion). This becomes the starting point for portfolio construction for many equity products that like to describe themselves as ‘low risk’ – either index tracker funds, or funds that claim to be ‘active’ but actually stick very closely to the index.

But how good a starting point is this? Wind the clock back 20 years, and have a look at the largest index constituents in the MSCI World index and you will see that most of the top stocks in the index have since dropped out of this ranking, and in a number of cases have had to merge to survive. Back in 1994, the index was dominated by Japanese banks. These same banks are entirely absent 20 years later in 2014.

For a long-term investor, therefore, the MSCI World index would seem to be a poor starting point from which to build a portfolio. However, close benchmarking to such an index for short-term risk and performance measurement is still commonly accepted practice for investment funds.

Hence, there was an outcry when the price of BP fell by almost a third and the company was forced to suspend its dividend payments following the Macondo oil spill in the Gulf of Mexico during 2010. Pension and investment funds were heavily exposed, because BP was a very large index weight. This meant that many fund managers held an equally large percentage of their fund in BP shares, in order to “control risk”.

UK investors are invariably heavily exposed to the oil and gas and mining sectors, just because they happen to constitute more than 20% of the FTSE All Share index, and therefore it would be ‘high risk’ to avoid them.

Not enough focus is given to whether or not the FTSE All Share is therefore a ‘high risk’ index for having such exposure to industries whose future may be curtailed because by continuing to do ‘business as normal’, they will pollute beyond a level that becomes acceptable to governments and consumers in the future.

Our job as investors is to make judgements about how to invest our clients’ money today, and for the future, not for recent or longer term history. We have therefore taken a strategic view of where across the economy we should focus our investments, in order both to protect value from some of the downside risks we face, and to take advantage of some of the opportunities created.

Companies that are focused on providing solutions to the challenges of sustainability will see stronger, long-term growth than the market average. Meanwhile, investment funds that focus on sustainability solutions give clients the ability to tilt their overall exposure towards the growth opportunities of the sustainable economy, and away from areas that face increasing risk.  

Tim Dieppe is fund manager at WHEB Listed Equities, managing the FP WHEB Sustainability fund which invests exclusively in companies providing solutions to sustainability challenges.

Photo: US Coast Guard / Petty Officer 3rd Class Patrick Kelley via Flickr

Further reading:

A sustainable investment revolution must emerge from the IPCC’s stark warning

Fiduciary duty: are your investments fit for the future?

Investing in the future: smart investment trends

Building a sustainable global economy

The Guide to Sustainable Investment 2014

Articles, features and comment from WHEB Group, an independent investment management firm specialising in opportunities created by the global transition to more sustainable, resource efficient economies. Posts are either original or previously featured on WHEB's blog or in its magazine, WHEB Quarterly.

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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