Green futures: A good time for sustainable investment?

Do investors get better returns for making green choices? A new book claims that they do, because ethical investors tend to adopt a more forward-thinking strategy.

Sustainable Investing was written before the credit markets crunched, but it still holds valuable advice on the subject. Firstly, author Nick Robins tells ClimateChangeCorp, the definition of sustainable investing “should not be too prescriptive”.

Robins, who is head of HSBC’s Climate Change Centre of Excellence, says the general expectation is that investors will look to screen out companies that don’t perform according to a portfolio’s ethical guidelines. From an environmental perspective, these guidelines could specify anything from screening out oil and gas companies to only factoring in the ones with a credible strategy to move towards greener energy. In the book, Robins’ co-author, Cary Krosinsky, categorises 11 types of sustainable investment.

However, the badge “sustainable investor” is not always worn honestly. Krosinsky found a number of “socially responsible investment funds” that in reality were anything but. Rather that naming and shaming, the book discusses the credible investors, analysing their performance and listing the companies they prefer to invest in. The ethical investors’ hotlist, according to Krosinsky’s research, includes the insurance company Aviva; Telecom company BT; Itron, the smart electric and water meter company; and Vestas, the world’s leading producer of wind turbines.

Krosinsky calculates that, overall, sustainable investors perform better than their regular counterparts. As Robins says: “These funds are more likely to anticipate what’s going to happen to companies in the future”.


Long-term clarity


Robins is critical of the short term-ism of the financial markets. “Financial markets do not tell the economic truth”, he says, referring to the sudden nature of the recent economic crash, “and they do not tell the ecological truth”.

Robins estimates that around only 50% of investors are taking any notice of carbon risk and reading resources like the Carbon Disclosure Project, where companies report on their climate change strategy. Institutional investors need to take a longer view than one, two or three years ahead if they are to nurture any kind of economic stability, he says.

The contradiction in the markets, says Robins, is that “oil and gas companies are treated as if oil and gas are assets when, in reality, they are carbon liabilities”.


Oil and gas flows


One age-old argument is that oil and gas will always be a safer investment, as long as renewable energy relies upon shaky government subsidies to survive. But Robins doesn’t buy it. “All forms of energy are supported by government subsidies,” he says. “OECD countries support the oil industry to the tune of $310 billion … a huge amount is spent on military costs.”

Robins supports the International Energy Agency’s (IEA) inquiry into how oil and gas subsidies could be reallocated to support a green energy structure. “Last year the head of the IEA was saying a low-carbon economy was unachievable; this year the IEA released an energy report saying that a 50% emissions cut is possible by 2050”.

There has been some progress towards this goal on the corporate side. Robins points out that both car giant Ford and cement producer Lafarge are starting to generate their own onshore wind energy to balance out the volatility of oil and gas prices. “Onshore wind is mainstream and it’s competitive with gas … and solar power will become the preferred choice of many countries [over fossil fuels],” he says, “To quote Chevron, ‘The age of easy oil is over’”.


Crash, and burn less


Following this year’s economic crash, the next five years are an opportunity to balance two critical needs, says Robins. Investors are in need of secure assets and the world needs investment in an adaptation and mitigation structure to deal with climate change.

He expects a boom in government infrastructure investment over the next few years to boost the economy, and hopes that governments will choose to direct heavy investment towards “environmental infrastructure”.

Robins sees a possibility of funding green infrastructure through corporate or government bonds and environment infrastructure funds, and singles out energy efficiency as the single biggest sustainable investment opportunity of our time.

“People talk about expensive things like carbon capture and storage and solar,” he says, “but energy efficiency presents a secure revenue system for investors”.

Robins criticises the lack of emphasis on efficiency in the EU energy package earlier this year. However, as countries around the world react to the economic crash and aim to cut costs, and as America looks towards energy independence, Robins believes we are likely to see investors setting up “energy efficiency funds” in the US, China and India, dedicated to investment in energy efficiency service companies.


The Obama factor


Robins reserves judgement on the EU Emissions Trading Scheme. It maybe good for reining in industrial sectors, he admits, but says he’s seen little advancement in energy efficiency and renewables under the scheme.

Critical of the EU’s focus on emissions trading, Robins instead praises the more joined-up thinking of the US, where talk of climate change has focused on creating jobs and reducing oil dependence: “Obama is talking about creating five million green jobs”.

Whilst Obama supports cap and trade, the key issue is energy security, explains Robins.

“[Obama’s plan includes] reducing consumption of oil, producing one million plug-in hybrids, upgrading building efficiency codes, and setting a renewable energy target. Cap and trade will be the fifth pillar of a comprehensive plan.”

Although there’s a chance that the EU climate package may bring more to the table, says Robins, the new US administration is reviving hopes of a fast-paced global low carbon economy that “brings upwards rivalry on climate change rather than downward rivalry.”