“There’s a way to do it better – find it” – Thomas Edison
The science is clear: the planet is facing a climate catastrophe that threatens life as we know it.
The average temperature on Earth is now 1.2C higher than at the start of the 20th century – and still rising. This February was the warmest on record globally, according to scientists, making it the ninth month in a row of record-breaking temperatures.
Climate change is no longer something for ‘someone else’ to deal with. Its effects are already impacting us all, from droughts, floods and wildfires and the loss of biodiversity to increased poverty and inequalities.
Investing sustainably ‘matters now more than ever’
The good news is that we hold the key to turning this around: responsible investing. Responsible investing means using money as a force for good by taking environmental, social and governance (ESG) issues into account.
When times are hard amid a cost-of-living crisis – especially when responsible funds have been through a rocky patch on the stock markets – it can feel tempting to put sustainability on the back seat for a while. But the reality is that it matters now more than ever. In fact, the cost of doing anything OTHER than investing sustainably is huge.
Investing in the wrong way (putting profit first at huge cost to the planet, by funding activities like fossil fuels and deforestation) has, for a long time, been the driving force behind the pressing problems we now face. Now, investing for good needs to help provide the solution.
Exciting long-term opportunities for investors
Investing responsibly is not philanthropy. Yes, it benefits the planet and society, but it also creates exciting opportunities for investors to support companies that are contributing to a sustainable future – and take advantage of the financial rewards of that, too.
The United Nations (UN) Conference on Trade and Development estimates that meeting the Sustainable Development Goals – a universal call to action to end poverty and protect the planet – by 2030 will require $5 trillion (£3.91 trillion) to $7 trillion (£5.47 trillion) per year from the private sector.
Companies driving important positive change can be found in a wide range of industries including clean energy, electrification of transport, healthy and sustainable food, life-saving treatments, healthcare for a better quality of life, and improved access to education and financial services.
And we don’t have time to wait around. The UN Secretary-General has warned that “unless we act now, the 2030 Agenda will become an epitaph for a world that might have been.” He said the “business-as-usual” approach is no longer viable. Responsible investment has a crucial role to play in redefining what ‘business-as-usual’ is and supporting the transition from exploiting our planet to restoring it for us and future generations.
If you believe this must be the direction of travel, it is important to stick with it for the long term. The last couple of years have provided the first major setback for responsible investment. The war in Ukraine turned into a money spinner for oil and gas giants like Shell and BP, and high-growth companies – which responsible funds are naturally tilted towards – were hit by rocketing inflation.
Sticking with sustainability for the long term
But sustainable investment managers see this as a short-term blip rather than a long-term trend. It makes good sense that companies providing the solutions to urgent environmental and social challenges will experience increasing demand for their products and services over time. This in turn makes higher profits for investors more likely and more sustainable.
For example, Government support for de-carbonisation (as well as increasing consumer demand) has led to the availability of clean, cost-competitive renewable energy and a sizeable increase in market share for electric vehicles.
In contrast, those companies that fail to embrace sustainable practices will eventually lose out. For example, a business that is a heavy carbon emitter will be penalised either through taxation or regulation to the point where it becomes less profitable and eventually unsustainable. There is also the increasing risk of being invested in ‘stranded assets,’ where industries that cannot be adapted to being low-carbon and zero-emission – such as fossil fuels, steel, and plastics – become a liability.
Sustainability and profit increasingly go hand-in-hand
Smart companies are quickly discovering that it is no longer a choice between going green and growing long-term profits – they increasingly must go hand in hand.
Despite difficult years in 2021 and 2022, when traditional, non-sustainable stocks (oil and gas, mining, tobacco, and financial stocks) returned briefly to favour, longer-term returns for responsible investments remain healthy – as is evidenced in this Review.
Now, prices of oil and gas are already well below their peak and if anything, the events in Ukraine serve to highlight the importance of investing in reliable clean energy.
Because responsible investing in areas such as renewable energy is focused on growth (rather than making a quick buck), the aim is to provide ‘patient capital.’ Of course, all investing carries risks and there will be winners and losers in every field, but good active fund managers apply their skills to try and find those winners over the long term.
