A new climate for sustainable investment

A growing number of global investors are realizing that sustainable investment is no longer a choice between profit and planet.

January 03, 2017

Not so long ago, sustainable investment was the preserve of an eco-conscious minority. Now attitudes are changing amid mounting evidence that it’s not a choice between profit and planet.

Whether it was reports in the Financial Times of green funds outperforming ‘black’ ones, or Morgan Stanleybusting the myth that Socially Responsible Investment (SRI) necessarily costs more, markets were on the move. After the COP21 Climate Change summit held in Paris in December 2015 where, for the first time, 195 developed and developing countries agreed a climate deal, sustainable investment has gained even greater momentum, leading to talk of institutional investors finally heeding climate warnings.

“Leading property investors started integrating climate change related issue analysis in portfolio and asset strategies many years ago, but what has changed is that climate change impacts are more systematically taken into account in investment committee sign-offs,” says Franz Jenowein, Head of Global Sustainability Research at JLL.

So what’s behind this change in perception? Here are five key reasons:

1. Divestment

The global divestment movement is seeing money increasingly migrate away from investment and property portfolios with exposure to fossil-fuel markets, carbon intensity and climate-risk scenarios. Whilst the campaign might have built its early success on grassroots support from students and academics on US university campuses, the effects are now widespread.

The fossil-fuel exit is in full flight: Institutions have pulled funds; cities from Stockholm to Berlin have voted out; whole countries including Norway and the Netherlands have dumped coal, as has the world’s largest insurance company, Allianz; plus the biggest global PR firm, Edelman quit the oil lobby.

“In parallel to phased divestments from fossil fuels by investors corporates need to shift their R&D budgets from legacy technologies such as internal combustion engines for cars and trucks to alternatives, for example electric propulsion technology”, notes Jenowein.

2. Corporates

So where is the smart money actually going?

Unsurprisingly, investment in renewable energy generation is booming and it is not just coming out of the public purse or utilities. Some 81 companies have so far made a commitment to go ‘100 percent renewable’ as part of the RE100 global initiative.

Taking into account environmental, social and governance (ESG) factors in corporate performance is now no longer a niche activity, but championed by such behemoths of investment banking as Goldman Sachs and the world’s largest asset manager BlackRock.

3. Urbanization

Shifting from smart money to smart cities engages the prime development driver for real estate and infrastructure: urbanization.

We have already passed the point where more people are now living in cities worldwide than not, with the twin megatrends of population growth and urbanisation continuing apace. In response, the global smart city market is forecast to be worth at least $1.56 trillion by 2020, with London, for example, looking to generate €500 million of investment, working with Lisbon and Milan, plus Bordeaux, Burgas and Warsaw.

To place matters in perspective, however, it should be remembered that in Africa, for all its abundant clean energy sources, only 6 in every 10 people are actually connected to the grid.

“With the cost of electricity from solar panels and battery storage coming down, there is hope that off-grid electricity can plug a gap in supply where the roll-out of a full blown electric grid is un-economical,” says Jenowein.

4. Billionaires

With grid-connected energy storage described as a market ‘set to explode’ beyond 40GW by 2022, it has though become the unlikely investment vehicle of choice for billionaires.

Never mind the Powerwall home battery product from Elon Musk of Tesla Motors fame, storage has been declared an investment and innovation priority by the new Breakthrough Energy Coalition. Dubbed the ‘billionaires coalition’, this initiative is spearheaded by Bill Gates, accompanied by Jeff Bezos of Amazon, Mark Zuckerberg of Facebook, plus Sir Richard Branson. Storage is now the stuff of aspiration.

5. Millennials

Last, but not least, come the Millennials. Lauded as conscious consumers for their eco and ethical awareness and activism, plus recognised by recruiters for seeking a values-led and purpose-driven career path, Millennials are almost certain candidates for one unwelcome job if climate change accelerates unchecked in future – they will pick up the tab.

Their generation faces the prospect of an $8.8 trillion bill, with a middle-earning 21-year-old college graduate in the class of 2015 set to lose over $126,000 in lifetime income.

For them, climate change is not just real, it is personal.

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