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There is a disconnect between investment and the real world

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Across all forms of investment and finance – from ISAs through to equities – most people still don’t associate what they invest in with real world outcomes. This knowledge gap needs bridging, and quick.

Those who invest responsibly try to alleviate their negative footprint or to leave a positive one. They are, as Blue & Green Tomorrow likes to call them, enlightened investors because they consider returns other than just financial ones.

There has been a disconnect between what people invest in and what happens in the real world for as long as investors have been intermediated. An article by economist John Kay in the Financial Times, called The parable of the ox, outlines this perfectly.

While this charge can be levelled most often at mainstream investors, sustainable investors are also sometimes prone to falling down this knowledge gap.

If you invest in a fund that invests in tobacco, you are contributing to one of the most prominent causes of preventable death on the planet. We in the developed world have access to health services that can mitigate the effects of smoke-related diseases and are aware of the risks; people in developing countries often lack even the most basic health education and facilities. These are the places that the tobacco industry has now targeted to secure future growth.

Similarly, if you invest in a fund that invests in renewable energy, you are helping wean the planet off unstable and unsustainable fossil fuels, with volatile prices, imported from unstable regimes. It works both ways.

WHEB Asset Management’s Sustainability Fund is one of the most overtly sustainable products on the market. Its remit, which it abides by rigorously, is that it only invests in companies that are tackling the most urgent sustainability challenges. And this aspect of a business must form at least a third of its overall revenue.

At WHEB, there is often a clear link between real world results and investments. But even then, it’s not always straightforward to connect all the dots, all the time, between the themes of sustainability and investment outcomes.

Recent stories around horsemeat and the length and complexity in supply chains directly benefit companies like Intertek in our portfolio that tests consumer products, as well as Halma that makes the equipment that is used to do the testing”, says Seb Beloe, head of sustainability research at WHEB.

The intensity and level of air pollution episodes in Beijing recently has also driven demand for air pollution measurement and control equipment such as that provided by the Japanese company Horiba.

These issues all link back to the companies that sit in our portfolio and we anticipate will help support demand for their products and services.”

Barack Obama’s state of the union address in February, in which he said, “If Congress won’t act soon to protect future generations, I will”, is another example of real world happenings that have influenced investor behaviour. Beloe says that there was an increase in interest in companies that were actively trying to mitigate climate change following the US president’s speech.

For smaller companies with niche technologies, politics can often be the difference between success and failure. Many firms that manufacture or install solar panels have taken a hit or even gone under because of the government cutting financial support in the form of the feed-in tariff. Even some larger developers have had to dramatically downsize in the wake of the cuts.

This challenge has been exacerbated by a majority of EU member states recently voted against imposing tough import duties on Chinese solar panels, which EU trade commissioner Karel De Gucht said were disadvantaging European manufacturers.

The majority of businesses that WHEB invests in are tackling some of the most urgent sustainability challenges. Sometimes, they have evolved around a specific emerging technology and are, to some extent, dependent on government policy.

As companies grow and diversify, Beloe says, politics begin to have less and less impact.

He adds, “The time horizon is important too, but often the direction of travel is clearer over the long-term even if there is still short-term uncertainty around specific policies.

We also take our lead from the underlying science. If the science says that water scarcity is a problem in India, then our view is that eventually, policy will move to address this. The critical thing of course is to judge when this will happen.”

But the relationship between the real world and investment can have some disastrous side-effects.

According to the US Geological Survey, around 13% of the world’s oil reserves are to be found in the Arctic, as well as 30% of as yet undiscovered gas deposits. This has led to a rush by fossil fuel firms, who want to exploit the region for its precious resources.

However, oil giant Shell has been banned from drilling in the Arctic until it can prove it can adequately cope with the harsh conditions and the threats of a possible spill, while the boss of French multinational Total said in 2012 that his firm wouldn’t be engaging in such activities because of safety fears.

The sad irony is that the rush to the polar regions by oil firms is only possible because of the melting of Arctic ice from climate change – a phenomenon primarily caused by the burning of fossil fuels by these very companies.

Some forms of investment are also dangerously unstable. In April, the Associated Press Twitter account was hacked, and a fake tweet sent out describing an explosion at the White House, in which Obama was hurt. Momentarily – for about five minutes – the Dow Jones Industrial Average dropped by 145 points, wiping out approximately $200 billion in an instant.

Once AP issued a statement that their Twitter account had been compromised and that the news was in fact a hoax, the fall was reversed and the stock market continued ‘working’ in its usual fashion. Some will hail this as a sign of the markets’ resilience; others will see systemic weaknesses.

This particular incident highlighted the vulnerability of investment. The rise of high frequency trading (HFT) – where stocks are traded over and over, in a matter of milliseconds – can see stock markets plummet and rocket seemingly in the same breath.

But just as what happens in the real world governs investment, what happens in investment is increasingly governing the real world.

As of 2010, for every dollar of GDP, $26 was traded in the financial world. In the fight against climate change, you can drive a Prius and buy as many energy saving lightbulbs as you want, but if your pension is invested in BP, you’re arguably negating all the good eco stuff you’ve been doing.

Beloe says that it’s the inherent short-termism within the market that is at the crux of this problem.

Short termism in markets, driven in large part by the short-termism of end investors who are keen to monitor quarterly performance, influences management styles – particularly where companies and their management teams are incentivised in relatively short-term ways by the share price”, he says.

Essentially, in the short-term it is all about the market: what other investors think, any recent news and how that is interpreted, momentum etc.

But in the long-term, the market matters less and less and the real world matters more and more. This is why looking at wider environmental, social and governance issues really only makes sense with a longer time horizon.”

American economist James Tobin suggested a tax on foreign exchange transactions in the 1970s in an effort to alleviate the speculating and short-term nature of currency trades. His thought was to put some sand in the machine to slow the velocity of trades. This idea has been resurrected by campaigners recently in the form of the Robin Hood tax, which is seeking to implement a 0.05% tax placed on all financial transactions.

However, Beloe says, “We are strongly in favour of efforts to encourage more long-termism in financial markets. Whether this type of tax is the best way to achieve it, is not clearcut.”

Ultimately, investors are starting to understand this relationship. We’ve seen the UK green and ethical fund market grow 30 times over, from a size of £372m in 1992 to just under £11 billion in June 2012, but compared to the wider fund market, even this is a drop in the water. In the same time, market capitalisation of listed companies has grown 3.26 times, from $927 billion to £3 trillion.

The disconnect in understanding between what we invest in and what happens in the real world will exist as long as investors are happy with the status quo. That status quo will see their financial returns become increasingly thin and their risk amplified, as the impacts of climate change and other social and environmental challenges come to the fore.

Investing sustainably, directly in companies or through funds that invest in areas for the long-term, goes some way to closing this disconnect while creating a more sustainable and transparent economy in the process.

Further reading:

We need investment to return to its ‘patient evolutionary path’

Transparency, simplicity and honesty is urgently needed in investment

Ethical funds ‘exposed’ or the lesser of 3,000 evils?

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

The Guide to Sustainable Investment 2013

Economy

How Going Green Can Save A Company Money

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going green can save company money
Shutterstock Licensed Photot - By GOLFX

What is going green?

Going green means to live life in a way that is environmentally friendly for an entire population. It is the conservation of energy, water, and air. Going green means using products and resources that will not contaminate or pollute the air. It means being educated and well informed about the surroundings, and how to best protect them. It means recycling products that may not be biodegradable. Companies, as well as people, that adhere to going green can help to ensure a safer life for humanity.

The first step in going green

There are actually no step by step instructions for going green. The only requirement needed is making the decision to become environmentally conscious. It takes a caring attitude, and a willingness to make the change. It has been found that companies have improved their profit margins by going green. They have saved money on many of the frivolous things they they thought were a necessity. Besides saving money, companies are operating more efficiently than before going green. Companies have become aware of their ecological responsibility by pursuing the knowledge needed to make decisions that would change lifestyles and help sustain the earth’s natural resources for present and future generations.

Making needed changes within the company

After making the decision to go green, there are several things that can be changed in the workplace. A good place to start would be conserving energy used by electrical appliances. First, turning off the computer will save over the long run. Just letting it sleep still uses energy overnight. Turn off all other appliances like coffee maker, or anything that plugs in. Pull the socket from the outlet to stop unnecessary energy loss. Appliances continue to use electricity although they are switched off, and not unplugged. Get in the habit of turning off the lights whenever you leave a room. Change to fluorescent light bulbs, and lighting throughout the building. Have any leaks sealed on the premises to avoid the escape of heat or air.

Reducing the common paper waste

paper waste

Shutterstock Licensed Photo – By Yury Zap

Modern technologies and state of the art equipment, and tools have almost eliminated the use of paper in the office. Instead of sending out newsletters, brochures, written memos and reminders, you can now do all of these and more by technology while saving on the use of paper. Send out digital documents and emails to communicate with staff and other employees. By using this virtual bookkeeping technique, you will save a bundle on paper. When it is necessary to use paper for printing purposes or other services, choose the already recycled paper. It is smartly labeled and easy to find in any office supply store. It is called the Post Consumer Waste paper, or PCW paper. This will show that your company is dedicated to the preservation of natural resources. By using PCW paper, everyone helps to save the trees which provides and emits many important nutrients into the atmosphere.

Make money by spreading the word

Companies realize that consumers like to buy, or invest in whatever the latest trend may be. They also cater to companies that are doing great things for the quality of life of all people. People want to know that the companies that they cater to are doing their part for the environment and ecology. By going green, you can tell consumers of your experiences with helping them and communities be eco-friendly. This is a sound public relations technique to bring revenue to your brand. Boost the impact that your company makes on the environment. Go green, save and make money while essentially preserving what is normally taken for granted. The benefits of having a green company are enormous for consumers as well as the companies that engage in the process.

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Energy

5 Easy Things You Can Do to Make Your Home More Sustainable

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sustainable homes
Shutterstock Licensed Photot - By Diyana Dimitrova

Increasing your home’s energy efficiency is one of the smartest moves you can make as a homeowner. It will lower your bills, increase the resale value of your property, and help minimize our planet’s fast-approaching climate crisis. While major home retrofits can seem daunting, there are plenty of quick and cost-effective ways to start reducing your carbon footprint today. Here are five easy projects to make your home more sustainable.

1. Weather stripping

If you’re looking to make your home more energy efficient, an energy audit is a highly recommended first step. This will reveal where your home is lacking in regards to sustainability suggests the best plan of attack.

Some form of weather stripping is nearly always advised because it is so easy and inexpensive yet can yield such transformative results. The audit will provide information about air leaks which you can couple with your own knowledge of your home’s ventilation needs to develop a strategic plan.

Make sure you choose the appropriate type of weather stripping for each location in your home. Areas that receive a lot of wear and tear, like popular doorways, are best served by slightly more expensive vinyl or metal options. Immobile cracks or infrequently opened windows can be treated with inexpensive foams or caulking. Depending on the age and quality of your home, the resulting energy savings can be as much as 20 percent.

2. Programmable thermostats

Programmable thermostats

Shutterstock Licensed Photo – By Olivier Le Moal

Programmable thermostats have tremendous potential to save money and minimize unnecessary energy usage. About 45 percent of a home’s energy is earmarked for heating and cooling needs with a large fraction of that wasted on unoccupied spaces. Programmable thermostats can automatically lower the heat overnight or shut off the air conditioning when you go to work.

Every degree Fahrenheit you lower the thermostat equates to 1 percent less energy use, which amounts to considerable savings over the course of a year. When used correctly, programmable thermostats reduce heating and cooling bills by 10 to 30 percent. Of course, the same result can be achieved by manually adjusting your thermostats to coincide with your activities, just make sure you remember to do it!

3. Low-flow water hardware

With the current focus on carbon emissions and climate change, we typically equate environmental stability to lower energy use, but fresh water shortage is an equal threat. Installing low-flow hardware for toilets and showers, particularly in drought prone areas, is an inexpensive and easy way to cut water consumption by 50 percent and save as much as $145 per year.

Older toilets use up to 6 gallons of water per flush, the equivalent of an astounding 20.1 gallons per person each day. This makes them the biggest consumer of indoor water. New low-flow toilets are standardized at 1.6 gallons per flush and can save more than 20,000 gallons a year in a 4-member household.

Similarly, low-flow shower heads can decrease water consumption by 40 percent or more while also lowering water heating bills and reducing CO2 emissions. Unlike early versions, new low-flow models are equipped with excellent pressure technology so your shower will be no less satisfying.

4. Energy efficient light bulbs

An average household dedicates about 5 percent of its energy use to lighting, but this value is dropping thanks to new lighting technology. Incandescent bulbs are quickly becoming a thing of the past. These inefficient light sources give off 90 percent of their energy as heat which is not only impractical from a lighting standpoint, but also raises energy bills even further during hot weather.

New LED and compact fluorescent options are far more efficient and longer lasting. Though the upfront costs are higher, the long term environmental and financial benefits are well worth it. Energy efficient light bulbs use as much as 80 percent less energy than traditional incandescent and last 3 to 25 times longer producing savings of about $6 per year per bulb.

5. Installing solar panels

Adding solar panels may not be the easiest, or least expensive, sustainability upgrade for your home, but it will certainly have the greatest impact on both your energy bills and your environmental footprint. Installing solar panels can run about $15,000 – $20,000 upfront, though a number of government incentives are bringing these numbers down. Alternatively, panels can also be leased for a much lower initial investment.

Once operational, a solar system saves about $600 per year over the course of its 25 to 30-year lifespan, and this figure will grow as energy prices rise. Solar installations require little to no maintenance and increase the value of your home.

From an environmental standpoint, the average five-kilowatt residential system can reduce household CO2 emissions by 15,000 pounds every year. Using your solar system to power an electric vehicle is the ultimate sustainable solution serving to reduce total CO2 emissions by as much as 70%!

These days, being environmentally responsible is the hallmark of a good global citizen and it need not require major sacrifices in regards to your lifestyle or your wallet. In fact, increasing your home’s sustainability is apt to make your residence more livable and save you money in the long run. The five projects listed here are just a few of the easy ways to reduce both your environmental footprint and your energy bills. So, give one or more of them a try; with a small budget and a little know-how, there is no reason you can’t start today.

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