The warning that, “Past performance is no guide to future results”, which appears under every investment advert in the UK, has never been more true. Our rapidly transforming world faces a perfect storm of rising demand for food, energy, living space and water, while also dealing with climate change - and these forces mean investors cannot rely on a rear-view mirror to invest their money.
[caption id="attachment_2224" align="aligncenter" width="492"] Shanghai apartments: Global population is heading towards nine billion by 2050 with most people aspiring to a high-consumption lifestyle.[/caption]
Sustainable investment is investment that considers the long-term risks and opportunities that our changing planet presents. As Seb Beloe of prominent sustainable investment firm WHEB Asset Management describes:
“Fundamentally, sustainable investment is about investment in companies that are providing solutions to the world’s critical social and environmental challenges. Ultimately we want to invest in companies that enable and benefit from a transition to more sustainable development.”
With the global population accelerating towards nine billion by 2050, and with most people aspiring to a high-consumption lifestyle, it is widely accepted that our current pattern of resource use cannot continue indefinitely. The International Energy Authority expects global demand for energy to increase by 50% over the next 17 years, while demand for steel is expected to rise 80% in a similar timeframe. According to McKinsey, we have already seen a 147% increase in commodity prices since 2000.
Although technological innovation may help accommodate some of these growing demands, it is almost inevitable that these changes will have major economic, social and environmental impacts. That affects how companies do business.
Including sustainability issues in investment decisions
These powerful demographic trends have led an increasing number of investment managers to view sustainability issues as a key element in designing and building investment portfolios.
When making investment decisions about a company these managers analyse whether that company is finding ways to use less resources or to run its business more efficiently, and assess whether the company has identified long-term sustainability risks. These investment managers argue that sustainability is not just about doing good, it’s about doing good business.
Investment managers like Alliance Trust, which manages in excess of £1.4 billion, have placed sustainability at the centre of their investment strategy as they seek to identify innovative companies that are developing solutions to issues such as water scarcity and increasing energy demand.
Companies that make money and make a difference
For example, Alliance Trust invest in medium-sized US firm BorgWarner. The company is meeting the growing demand for fuel-efficient technologies with products such as automatic transmission trains that are cheaper and 15% more fuel efficient than alternative versions, and light vehicle turbochargers that are up to 30% more fuel-efficient. BorgWarner also produce technology to reduce nitrous oxide emissions, a major greenhouse gas.
Alliance Trust is not alone. Investment businesses like Pictet and RobecoSAM are investing in innovative, sustainable companies such as those focusing on water purification, pumping and efficiency in water infrastructure. Sustainable investment is becoming a part of mainstream investment practice, with over 1,000 investment institutions from more than 50 countries now signed up to the UN Principles for Responsible Investment.
Can you afford not to be a sustainable investor?
In the 1970s, economist Milton Friedman coined the elegant business maxim that “the business of business is business”. That remains true today, but one of the things that has changed since Friedman’s day is that the management of sustainability issues has become part and parcel of doing business, and so an increasingly important element of investment decisions.
Sustainability is part of our changing world, and investors that want decent, long-term returns cannot afford to ignore it.