Four leading investment houses discuss the compelling case for sustainable investment and the barriers that are currently stopping it from becoming truly mainstream.
This article originally appeared in Blue & Green Tomorrow’s Guide to Sustainable Investment 2014.
Name: Peter Michaelis
Company: Alliance Trust Investments
Career history: Has been managing money in sustainable and responsible investment (SRI) for over 12 years. Prior to joining Alliance Trust Investments in August 2012, he was head of SRI at Aviva Investors. Also has a PhD in environmental economics.
Name: Claudia Quiroz
Company: Quilter Cheviot
Career history: Joined Cheviot from Henderson Global Investors in 2009, prior to its merger with Quilter in 2013. Lead fund manager of the Climate Assets fund. Has 15 years’ experience in sustainability and responsible investment.
Name: Alice Evans
Company: F&C Asset Management
Career history: Associate director and fund manager in F&C’s Global Thematic Equities team. Lead manager of the F&C Global Thematic Opportunities fund. Previously at Henderson Global Investors and JP Morgan Asset Management.
Name: Ketan Patel
Company: Ecclesiastical Investment Management
Career history: Joined Ecclesiastical in 2003 from Insight Investment Management. Now specialises in integrating financial and environmental, social and governance (ESG) analysis into investment. At Ecclesiastical, he leads on several ethical issues such as pharmaceuticals, energy and agriculture.
Why should people consider sustainable investment?
Peter Michaelis: To get strong investment returns. We believe that sustainable companies have better growth prospects and better quality management – two very strong investment attributes. Over the coming decade there will be growth in demand for companies involved in energy efficiency, innovative healthcare, education services, pollution control, healthy eating and clean energy. Sustainable investing targets these areas of future growth. Surely this is a strategy ideally suited for long-term savings and pensions.
Claudia Quiroz: Sustainable investment gives the opportunity to invest in long-term economic growth. Growth is the key reason for investors’ interest in sustainability and environmental themes. Most end markets in this space are expected to grow annually at double-digit rates over the next three to five years. This generates attractive investment opportunities when one understands the changes taking place with regard to consumer preferences, government spending, energy supply and security, the food supply/demand imbalance and the general need for a cleaner and more efficient economy – the new economy.
Companies meeting demand for energy efficiency, for example, are set to benefit the most going forward. Energy efficiency is one of our favourite investment themes at Quilter Cheviot. It is not only the cheapest but also the quickest way of cutting carbon emissions. We are talking about companies involved in transport infrastructure, building insulation and efficient lighting, industrial productivity gains, smart grid and energy storage, just to mention a few.
Alice Evans: As the future isn’t going to look like the past, we need to think differently about investment for the long-term. The global population tripled over the course of the last century and is forecast to increase another 50% by 2050, and huge nations are transitioning to industrial economies for the first time. The challenges of climate change and pressures on natural resources are steadily increasing. The digital age has accelerated globalisation, which creates great opportunity but also brings economic and cultural dislocations that we need to overcome.
Against this backdrop, companies that are thinking ahead, navigating these challenges, aligning their interests with society and bringing solutions will create more sustainable value. In other areas of our lives we make choices that are consistent with our values – how we save and invest for the future should be no exception.
Ketan Patel: More than 100 UK ethical and responsible investment products now provide a rich diversity of investment opportunities, covering all assets and geographies for the retail client. Investing for profits with principles is becoming a mainstream choice for many investors and the choice of products has never been broader. At Ecclesiastical Investment Management, we believe that ethical stock selection based upon financial and non-financial factors will drive better risk management and stronger performance over time.
There is also a growing recognition for companies to take a long-term approach to a wide range of issues from resource scarcity through to climate change and corporate governance, which puts ethical investing front of mind for many investors, particularly in light of recent financial scandals. Ultimately, there is no intrinsic reason why performance needs to be sacrificed in order to invest responsibly in the long-term.
What’s the biggest barrier to sustainable investment becoming mainstream?
Peter Michaelis: Education that there is a choice. We need to raise awareness that there is no compromise between investment returns and selecting sustainable companies. Sustainable investing has delivered strong investment returns without taking untoward risk.
Transparency will also help. The financial services industry is famously opaque and traditionally investors have found it hard to know what is in their funds beyond the top 10. As the industry is forced to become more transparent then people will start to question where their money is invested. It will be analogous to the food and clothing industry where provenance has become an essential attribute of any product. So too, the manner in which investment returns are generated will become an essential attribute of the investment product. Comic Relief and Church of England coming unstuck because of this opacity are early examples of the change to come.
Claudia Quiroz: I think the biggest barrier is that investors are concerned that there is a price to pay for sustainable investing. There is this belief that the performance of these funds will be worse than an unconstrained, or mainstream, fund. This is a matter of perception rather than reality, as proven by our sustainable investment strategy, Quilter Cheviot Climate Assets fund, which has returned 40.50% since launch in March 2010 to February 2014, compared to the VMA Stock Market Balanced Index rising 38.98%.
People would associate sustainable investing with the solar sector for example, which has had poor performance from 2008 through 2013 due to changes in government subsidy policy as well as an increased competitive threat to western solar companies from privately owned firms in China. However, the companies involved in solar power generation are a negligible part of our investable universe. Also, as we only invest in profitable established businesses with attractive valuations, we avoid the solar sector altogether during that period.
Alice Evans: Changing the perception that ethical and sustainable investment necessarily comes with a performance penalty. Long track records of sustainable investment funds can now show there is no systematic loss of performance compared to mainstream funds over time. If anything we would expect this to become even more obvious in the future as sustainable investment is an inherently forward looking thesis.
Ketan Patel: We believe that there is no barrier to sustainable investment becoming mainstream; it has grown steadily as an option, and the range and diversity of products available now numbers over 100 in the UK. Furthermore, 45% of UK adults with investments said that they now want at least some of their investments to take green and ethical considerations into account.
The appetite is clearly present from many investors. However, sustainable investment is essentially a long-term investment model and the City is still often driven by short-term returns. Remodelling the market to be more tuned to longer term horizons would enable the sustainable investment market to flourish.
Photo: Ben Ford via freeimages
Will Self-Driving Cars Be Better for the Environment?
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.
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 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.
New Zealand to Switch to Fully Renewable Energy by 2035
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.
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