Future returns depend on sustainable investment

The dynam­ics around wealth cre­ation are chang­ing and sus­tain­able invest­ment is set to become fun­da­men­tal to good returns as the world faces up to the chal­lenge of mov­ing to a resilient and resource-effi­cient soci­ety.

Today, we face envi­ron­men­tal lim­its and their social con­se­quences. For exam­ple, inter­na­tion­al agen­cies pre­dict that by 2030 the world will need around 50 per cent more food and ener­gy, togeth­er with 30 per cent more fresh water, at the same time as we seek to mit­i­gate and adapt to cli­mate change.

We see the impact of extreme inequal­i­ty in a world of near instant com­mu­ni­ca­tions and a shift to new ways to man­age pub­lic spend­ing with­in the devel­oped economies.

These forces intro­duce huge demand for inno­va­tion and new busi­ness mod­els. New ways to seek prof­its are emerg­ing while chang­ing reg­u­la­tion and con­sumer demand are alter­ing the returns from some tra­di­tion­al indus­tries. This is why many thought­ful invest­ment pro­fes­sion­als think sus­tain­able invest­ment approach­es offer some of tomorrow’s best oppor­tu­ni­ties for prof­it, growth and jobs.

Pri­vate investors have seen the ben­e­fits for some years, par­tic­u­lar­ly in the­mat­ic invest­ments, where funds invest in com­pa­nies using social and envi­ron­men­tal themes like water, agri­cul­ture or ener­gy effi­cien­cy, which focus on areas where social or polit­i­cal pres­sures are cre­at­ing strong busi­ness oppor­tu­ni­ties for the future.

The chal­lenge is com­pa­ra­ble to the indus­tri­al rev­o­lu­tion or to rebuild­ing after a major war

Insti­tu­tion­al investors are recog­nis­ing the chal­lenge. In a 2011 report com­mis­sioned by 14 glob­al investors, Mer­cer, the invest­ment con­sul­tant, high­light­ed the risks of cli­mate change to invest­ment port­fo­lios and rec­om­mend­ed that investors could ben­e­fit from increased allo­ca­tion to “cli­mate-sen­si­tive assets” such as infra­struc­ture, prop­er­ty, sus­tain­able equi­ties, agri­cul­tur­al land and tim­ber­land to help to mit­i­gate these risks. Ear­li­er this month, Mer­cer released new research show­ing that these investors were chang­ing their asset allo­ca­tion strate­gies and increas­ing their engage­ment with com­pa­nies in response to the report find­ings.

Here in the UK, we need to “rewire” the econ­o­my for suc­cess with­in envi­ron­men­tal lim­its. The chal­lenge is com­pa­ra­ble to the Indus­tri­al Rev­o­lu­tion or to rebuild­ing after a major war. We must build new sources of ener­gy and man­age and dis­trib­ute it more effec­tive­ly. Sim­i­lar­ly, we need to devise new ways of reusing nat­ur­al resources in place of vir­gin mate­ri­als. To achieve this, some £370 bil­lion of addi­tion­al invest­ment is need­ed by 2025, accord­ing to a 2010 report from man­age­ment con­sul­tants Ernst & Young.

The UK gov­ern­ment has respond­ed by cre­at­ing the Green Invest­ment Bank, the world’s first devel­op­ment bank for the low car­bon econ­o­my. When it starts to invest lat­er this year, it should speed up pri­vate sec­tor invest­ment into UK green infra­struc­ture so that our econ­o­my is fit for the future.

With sim­i­lar invest­ment demands around the world, civ­il soci­ety projects like the Cli­mate Bonds Ini­tia­tive are already set­ting glob­al envi­ron­men­tal stan­dards for the new invest­ment vehi­cles that are expect­ed to result.

Retro­fitting the UK’s hous­ing stock to dra­mat­i­cal­ly increase its ener­gy effi­cien­cy is anoth­er huge chal­lenge. The Green Deal mech­a­nism will enable house­hold­ers to pay for this through their ener­gy bill sav­ings rather than mak­ing an upfront pay­ment. This intro­duces a sig­nif­i­cant need for cap­i­tal to meet the ini­tial cost. Before Christ­mas, the gov­ern­ment recog­nised the impor­tance of this area by con­firm­ing that the Green Invest­ment Bank would also facil­i­tate invest­ment into the Green Deal.

Oth­er invest­ment areas such as forestry funds are still devel­op­ing. In time, these are expect­ed to prof­it from pro­vid­ing a wide range of ecosys­tem ser­vices.

Of course, the oppor­tu­ni­ties are not only envi­ron­men­tal. We are see­ing the ear­ly stages of a rev­o­lu­tion in pub­lic ser­vices com­pa­ra­ble to the pri­vati­sa­tion of the 1980s. Today, the focus is on new non-prof­it organ­i­sa­tions at arm’s length from gov­ern­ment that are paid for the social out­comes they achieve rather than the ser­vices they deliv­er. Invest­ment is need­ed to pay for the ini­tial ser­vice deliv­ery and share the risk and return of this results-ori­ent­ed approach. Social impact bonds are one mech­a­nism being used to fund ear­ly pilots in areas like reduc­ing reof­fend­ing and sup­port­ing fam­i­lies with com­plex needs.

Whether you see tack­ling envi­ron­men­tal and social chal­lenges as a busi­ness oppor­tu­ni­ty or a social imper­a­tive, or both, now is an excit­ing time to con­sid­er sus­tain­able invest­ment.

The dynamics around wealth creation are changing and sustainable investment is set to become fundamental to good returns as the world faces up to the challenge of moving to a resilient and resource-efficient society.