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Investing in the future: smart investment trends

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Seb Beloe, head of sustainability research at WHEB Asset Management, outlines a new model of sustainable investment that is leaving traditional negative screening strategies in its wake. In the 21st century, he says, the momentum is with investing in industries that are providing solutions to critical sustainability challenges.

William Gibson the science fiction writer once argued, “The future is already here, it’s just not evenly distributed.” As investors, we are very interested in the future and what it holds, but as Gibson suggests, perhaps it is not as unpredictable as we think it is.

Long-term trends underpinned by science

In fact, the broad parameters of what the future will look like are arguably already well-known. For instance, demographic trends change only relatively slowly. We were able to predict decades in advance that the human population would become predominantly urban in the mid-2000s (actually in 2007).

We can also predict with reasonable accuracy that by 2030 approximately a quarter of the UK’s population will be 65 or older (the same proportion, incidentally, that China will have by that time).  These trends around demographics – principally the ageing of developed and some developing countries – and on-going urbanisation are relatively predictable and provide an important steer as to what the future will look like.

The science that underpins these projections is largely settled and accepted. This is also true for much of the debate about resource scarcity which essentially boils down to there being more people in the future, collectively consuming a lot more stuff.

By 2030 for example, the global population can be expected to be consuming 50% more food globally, 50% more energy and 40% more water. Technological advances can help deliver a portion of this, but a consequence of this escalating demand will be growing scarcity, upward pressure on commodity prices, greater price volatility and real constraints on resources in some areas.

The precise figures and timing of all this are of course impossible to forecast accurately, but the trajectory created by these trends is absolutely clear and the demand for efficient solutions to these challenges all but assured.  

Water scarcity

And there is no shortage of challenges to choose from. Water scarcity is something that will affect over half of the world’s population by 2030.

Polluted water already affects a huge swathe of the developed and developing worlds. Nearly 20% of all of China’s rivers are now so polluted that they are unsafe to touch (let alone drink). As a consequence, China plans to spend an average 400 billion yuan per year from 2011-2020 on water projects. Water is already a $500 billion market with 6-7% annual growth. 

The future is urban

Urbanisation is also a megatrend that is creating enormous challenges for economies in the developing world (all 25 of the world’s fastest growing cities are in developing countries).

The World Economic Forum estimates that the same urban ‘capacity’ including housing, infrastructure and facilities will need to be built in the next 40 years as has been previously been built in the preceding 4,000 years in order to meet projected demand.

Cities are already responsible for 75% of total resource consumption and accommodation and services for all these extra people will need to be provided without putting yet further pressure on already massively strained natural resources.

So demand for smart technologies, whether in reducing heating and cooling costs in buildings, reducing demands for fresh water, limiting air emissions in already polluted urban centres or in managing and recycling urban wastes, will have to grow enormously if the city life of tomorrow is to be tolerable.  

An ageing world

Healthcare, too, is an area that is set to see burgeoning global demand. In developed countries healthcare already represents a massive proportion of overall spending. In the US, healthcare costs accounted for nearly 18% of total GDP in 2011.

People aged 65 or over consume healthcare at a rate three times the average of the population as a whole. At 85 or older, it is six times.

Layer in growing incidence of obesity, which typically increases healthcare costs by 40% compared with normal-weight patients, and the affordability of healthcare becomes enormously challenging. So companies helping to reduce costs either through keep people healthy (weight loss, healthy diets, exercise) or through more effective treatments and shorter stays in hospital will be well-placed to meet this expanding demand. 

Evidence of higher growth

So far the theory stands up in practice with the WHEB investment universe of 900 companies in nine social and environmental themes delivering higher five-year historical sales growth, higher five-year historical diluted earnings per share (EPS) growth and higher one-year forecast sales growth than the MSCI World Index.

Given the steadily accelerating trends around resource scarcity, demographics, obesity and urbanisation, this faster growth can be expected to continue. 

Doing well by doing good

Ethical investors have curiously been largely absent from investing in these areas. The traditional approach to ethical investment, involving screening out the most controversial types of companies (e.g. tobacco, weapons and pornography) and investing in the rest of the market, almost entirely overlooks what is surely the greatest opportunity for investors to make a real difference.

What more profound impact can investors have than investing in industries that are providing the products and services that help meet the critical challenges of our age such as ageing populations, obesity, resource scarcity and urbanisation? Rarely has the old adage ‘doing well by doing good’ been more apposite than in this new model of sustainable investment.

Seb Beloe is head of sustainability research at WHEB Asset Management.

National Ethical Investment Week 2013 runs from October 13-19. Join the debate on Twitter using the hashtag #moneydoinggood.

Further reading:

The sustainable investment tipping point is now

Investing sustainably in an ageing population

Green versus grey infrastructure

‘Saints or sinners’ of ethical investing is out of date thinking

We need expert problem-solvers to build the cities of the future

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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