Sustainability: The economic argument for investors
By Hubert Keller, CEO Lombard Odier26/11/2019
Why should investors consider sustainable investments?
The world of finance needs to throw its weight behind the transition to renewable energy and combatting climate change. Investors are increasingly pursuing this goal, particularly given the potential for sustainability to become an extremely powerful driver of performance in the next three to five years, and possibly beyond.
Many of us experienced the internet revolution. It completely changed the way we live, transformed entire industries, brought to life new business models and made others obsolete. It also created some of the most valuable companies in the world today. Sustainability has the potential to do the same, if not more, and could create unprecedented investment opportunities and risks.
How has the economic model changed?
The last few decades observed an economic growth model that relies on ever more consumption, ever more resource extraction, ever more pollution and lots of waste. This model has not always fairly distributed the benefits of that growth and is a source of inequality in our economies today. The complex interaction between economic growth, the planet and our social structures was manageable in 1970, when the global population was around three and a half billion. But today with eight – soon to be 10 – billion people in the world, this growth model simply doesn’t work anymore.
We have already breached four of the nine planetary boundaries that define the biophysical safe operating space for humanity. Crossing these limits leads to potentially irreversible change. If we do not tackle climate risk, for example, then our society and the economic model we know will simply collapse. While economic growth is essential in responding to the challenges facing our societies, for this growth to be sustainable, it needs to deliver inclusive and positive social impact without leaving a negative footprint on the environment. We need to move away from an economy that is wasteful, idle, lopsided and dirty, towards one that is circular, lean, inclusive and clean.
Has the transition already begun?
This transition is already well underway, but it will accelerate going forward, driven by extremely powerful catalysts. In most of the world's major regions, politicians are enacting policy changes and implementing new, often very restrictive, regulations.
Locally, the UAE Vision 2021 National Agenda focuses on improving the quality of air, preserving water resources, increasing the contribution of clean energy and implementing green growth plans. The Dubai Clean Energy Strategy 2050 also aims to produce 75 per cent of Dubai's energy from clean sources by 2050.
Consumer behaviour is also changing rapidly towards a model that is more respectful of the planet and society, and people are ready to pay more for it. Last, but not least, continual technological innovation is providing solutions that enable the development of more efficient, cleaner and often cheaper business models.
A Masdar report published in 2018 on the results of its renewable energy desalination pilot programme, for example, found that one of the most promising solutions was solar-powered reverse osmosis, a technique where saltwater is purified through membranes. This method proved to be up to 75 per cent more energy efficient than the thermal desalination technologies currently used in the UAE.
This transition will require us to completely rethink many established norms. We are going to need to rethink the way we feed ourselves, the way we plan and power our cities, and the way we produce and consume. We will need to completely overhaul how multiple sectors operate – healthcare, energy, food, mobility etc.
How will this impact business?
The impact on business from the transition will be substantial. For example, how will sectors such as transport, construction or aviation adapt to a decarbonised world? How would a company manufacturing gearboxes for the automotive industry adjust if the transition to electrical vehicles happens sooner than expected? How would a company selling bottled water globally adapt to more stringent regulation of plastic, or its prohibition?
As some companies prepare for the transition, we are at a crossroads, with some companies anticipating the profound changes ahead and others in denial. Companies in the former group have the vision and courage to reassess their business models to ensure they are fit for the reality of this far-reaching economic shift. The latter continue to ignore the inescapable forces of change and are at risk of becoming obsolete. They could lose their customers, innovation could render them obsolete, or regulation could severely constrain their business and starve it of capital.
To use an analogy from the animal world, the business world is bifurcating, with eagles on one hand, and ostriches on the other. The Eagles will more likely emerge triumphant from this transition, while the Ostriches – with their heads firmly buried in the sand – risk disappearing all together. This presents a unique opportunity for investors. Selecting companies that will be winners in the future has always been a major source of performance. This differentiation could become even more pronounced, enabling asset managers to deliver very attractive performance.
Moral and ethical considerations naturally lead us towards sustainable investment, but the arithmetic is also very important for investment professionals who have fiduciary duties. It is inevitable that sustainability will be a major source of return in the years to come.
 Source: Stockholm Resilience Centre: J.Lokrantz/Azote. Citation: Steffen et al. 2015. Planetary Boundaries : Guiding human development on a changing planet. Science vol. 347 no. 6223.