By Ian Brooks
From its early beginnings as a financially risky and purely philanthropic venture, Sustainable Investing has evolved into not only a viable but also a financially rewarding sector. Below, Ian Brooks makes the case for Sustainable Investment and argues that in its modern form it has positive implications for the investor in more ways than one.
Perhaps the best advice on Sustainable Investing is to contemplate being in it for the long haul. That helps in overcoming the spaghetti of acronyms that immediately confront you. It also helps with the plethora of considerations that can beset the intended investment process.
What can certainly be understood from the 2014 UNCTAD World Investment Report is that the need for private investment in this area is more important than ever. And an investor considering this area can rest assured that significant work is being done to make investing easier.
“Sustainable Development Goals (SDGs): An Action Plan” is the emphasis in the report, and within this “Mobilising funds for sustainable development – raising resources in financial markets or through financial intermediaries that can be invested in sustainable development” is an important aspect.
As with so many things, definition is important. Sustainable Investment, “SI”, embraces several investment sectors – environmental, energy, transportation, agriculture – and overlays these with a plethora of acronyms: SRI and ESG amongst them.
I suggest that the scope can perhaps be broadened further by looking at changes, some of these disruptive, which are impacting whole industries:
• 3D printing, which will significantly impact distribution and large-scale manufacture and many more areas besides;
• Proctor and Gamble’s initiative to reduce its packaging, partly through manufacturing more concentrated products, enabled a significant percentage to be removed from its distribution costs;
• Recent history has shown how smartphones have impacted the camera industry, means of communication, news coverage and even the way many interact socially. Banking is already being pressured by this alternative payment media.
Purists may argue that technological advances and disruptions are not really sustainable, but it can also be argued that these changes are certainly sustainable over at least the medium term, and at the same time achieve a reduced burden on the planet, human consumption and impact on the environment – the very same claims that many proponents of Sustainable Investment make.
What is “Sustainable”?
“Sustainable” can be defined as operating, producing or manufacturing in such a way that items consumed can be replaced with either minimal additional or no negative impact on the environment or the planet’s resources. To this we can add that the human involvement in this is non-exploitational.
By way of example, methane produced from waste creates little pollution from combustion and reduces the amount of residual waste in producing energy. This meets all the above criteria.
What has been definitively established over the last two decades is that far from negatively impacting returns on capital, this investment philosophy can actually offer superior returns. And to this, the humanitarian and ecological advantages can also be added. These are significant additional benefits and engender cooperation – at a local and governmental level.
The concept of stakeholders, rather than solely shareholders, has been at the core of this type of investment from the outset – a holistic approach, rather than narrow. What has become increasingly obvious is where all stakeholders benefit the investment is far more likely to succeed.
Sustainable Investment would, by most, be seen as including alternative energy, agriculture (which includes forestry) and recycling. Infrastructure projects can also be crucial to development in more remote regions and putting this in place within the constraints of ESG can be the first step in a region to facilitate further investment.
Being persuaded of the investment advantage of SI should be more than enough, as the other measures are clearly laudable and at the same time give no reason not to pursue this course.
Socially Responsible Investing (SRI)
Socially responsible investing (SRI) – also known as sustainable, socially conscious, “green” or ethical investing – is any investment strategy which seeks to consider both financial return and social good.
In general, socially responsible investors encourage corporate practices that promote environmental stewardship, consumer protection, human rights and diversity. Some, in harmony with Shariah and Christian principles, would anyway avoid businesses involved in alcohol, tobacco, gambling, pornography, weapons, abortion, and/or the military.
SRI criteria influence and, in some cases, govern, how asset managers invest their portfolios. The term “socially responsible investing” sometimes narrowly refers to practices that seek to avoid harm by screening companies included in an investment portfolio.
According to some, shareholder advocacy and community investing are pillars of socially responsible investing, while doing only negative screening of projects is inadequate. [Positive shareholder influence on corporate policy has been demonstrated in Kellogg’s reduction in its use of palm oil in some of its cereal products].
Environmental, Social and Governance (ESG)
Environmental, social and governance (ESG) refers to the three main areas of concern that have developed as central factors in measuring the sustainability and ethical impact of an investment in a company or business. Within these areas are a broad set of concerns increasingly included in the non-financial factors that figure in the valuation of equity, real-estate, corporations and fixed-income investments. ESG is the catch-all term for the criteria used in what has become known as socially responsible investing.
Governance aspects, ever more important in this age of burgeoning regulation, assist the investor in achieving transparency in an investment project. Knowing that the structure is in place and that there is independent review and proper controls to ensure funds go where they were intended mean that individual, family or professional investors can rest assured that standards are being met and rules are not being broken.
Impact investing is a more recent development of socially responsible investing. There has been considerable growth in this area with estimates of US$500 billion annually within ten years. The macro economic picture is less positive with reduced direct investment since 2008 and thus a real need to increase private investment. With rates of return that vary from less than 5% to more 30% the financial incentive is there to additionally reward the social benefits of investing in this area. And with more than 125 funds and foundations claiming to be involved with impact investing it is becoming easier to join in.
Impact investments are made into companies, organisations and funds, with the intention of generating a measurable, beneficial, social and environmental impact alongside a financial return. According to Global Impact Investing Network (GIIN):
“Impact investments can be made almost anywhere. Their intention is to address social and environmental challenges through their deployment of capital. So criteria to evaluate the positive social and/or environmental outcomes of investments are an integrated component of the investment process.”
Having worked our way through some of the nomenclature of Sustainable Investing, I feel it is important for those that want to be involved in this arena to do so for the right reasons and use the discipline provided by the concepts to select meaningful projects with, probably, superior returns.
Private family offices have become keen participants in this area. I have attended a number of conferences where the projects invested in have seen huge rewards for both those investing and those invested in. And the rewards go significantly beyond the financial.
Let’s call it 3D Investing – not the now reasonably well-known printing devices, but the investing approach that satisfies three dimensions: Social, Financial and Environmental.
There are ten main types of alternative energy – nuclear, which is the most controversial, only really applies at governmental level under current technology so can be ignored for the purposes of this article. Radiant energy I cannot claim to understand. The remainder are largely familiar to readers: hydro, geothermal, wind, tidal, wave, solar, biomass (methane production, mentioned above). There is also Compressed Natural Gas “CNG” which I mention only for the sake of completeness [in truth this has a reduced environmental impact rather than being genuinely sustainable.]
These different forms have been adopted quite widely in different areas: France and Japan derive over 50% of their energy from Nuclear, while the world overall dependency on nuclear energy was 14% in 2007. Geothermal energy, meanwhile, provides over 15% of energy in countries as diverse as Iceland and Costa Rica.
What should be borne in mind is that the technology in several of these alternatives has developed significantly. The headlines have mainly been about globalisation when they have not been about global warming, but the technological advances have supported miniaturisation and other features that enable local, isolated and small-scale projects.
Solar panels have come down exponentially in price and have improved significantly in efficiency – and with new materials and construction methods the improvements are continuing. These developments are important because they allow power to reach remote locations without having to link to a grid.
Solar was only providing about 0.5% of world energy needs in 2011, but with a 200% growth rate, that is likely to accelerate due to the advances already mentioned, it has been predicted that they will seriously rival and replace fossil fuels within the next twenty years.
Advances in technology are providing many ways in which projects and investment in them can be sustainable. Where smaller projects are possible, their positive social impact is increased and their attendant negative environmental impact is reduced.
Sustainable Investment has matured from a purely philanthropic, ideological or even charitable cause, to being something that not only ticks those boxes, but offers a serious alternative to traditional investments.
They are also attractive because:
• They are non-correlated [to stock markets];
• The financial returns can equal or even exceed those of traditional investments;
• The opportunities frequently arise in frontier or more remote areas. [Ones where once a presence has been established other projects will almost certainly present themselves];
• The investor now has greater means to measure the economic performance of the investment alongside its social and other benefits. There are also indexes that can act as a benchmark and several thousand funds and companies that are reported on in the ESG arena.
The application of newer technologies to socially beneficial projects and the focus on frontier settings for these will, almost inevitably, mean there is significant upside potential to counterbalance any real or perceived downside risk.
There are also a number of projects which combine old and new. An example I came across very recently was using church steeples in rural England to provide the network for local internet – enabling “black holes” or lack of service to be effectively overcome without significant infrastructure cost or environmental impact.
There is now a track record and success stories in this sector as well as many not-for-profit organisations to provide assistance and guidance as you select your project.
This article has drawn on different types of projects and diverse locations. If any of these have intrigued you then please feel free to follow up with Mutual Trust and Highworth International for further information about ways to invest. As well as having an affinity with this area of investment, we also have a number of clients active in this arena. Alternatively we would be happy to direct you to various organisations actively involved in shaping this area of investment as well as the growing number of funds that would allow you to be involved on a scale that you choose. I hope that I have made the case for sustainable investment: it no longer has to be a decision that penalises the investor. Indeed, it can now be argued that it rewards the investor in three dimensions. An important part of that sustainability is the financial, and here the factors are now more favourable than ever.
About the Author
Ian Brooks is Chief Executive Officer of Highworth and has been Managing Director of Mutual Trust since 1996. Before this he held Senior Financial and Finance Director positions worldwide. He has spent almost twenty years in the Trust and Corporate sector,and has over twenty-five years in service industries, as well as in banking, finance and investment. He is a Chartered Accountant (FCA), and a member of both the Society of Trust and Estate Practitioners (STEP) and of The Institute of Certified Public Accountants of Cyprus (ICPAC).