Key trends and themes in Responsible Investment
It’s a new world
For investors, the 21st century has opened the door to issues that are unfamiliar, volatile and complex.
Climate change is one outstanding example, but there are many others: our urgent need for more water, the end of cheap oil, human rights in emerging nations, failures of corporate governance and ethics on a grand scale, soaring rates of diabetes, heart disease and obesity and finally, the scarcity of our natural resources in the face of a ballooning population.
These issues are serious drivers of investment value with serious costs attached: whether short or long-term, devastating or incremental or the very real cost of missing an opportunity.
The global population is growing at an exponential rate. Consider this – from the beginning of mankind 160 thousand years ago until 1945 AD, the earth’s population grew to a total of two billion people. But in just 65 years since 1945, our population has tripled to six billion and will grow to over nine billion by 2050.
Most growth will occur in developing nations, creating unprecedented pressure on natural resources such as energy, food, water, timber and land. Increasing demand for food, infrastructure and health services will have to be met. Waste and pollution will have to be managed.
But we’re also facing an aging population. Around one fifth of the population in the developed world is now over 60. By 2050 one third of all people will be over 60.
With so many people close to or in retirement, there will be less taxation and less overall savings impacting upon economic growth, investment patterns, labour markets, government pension schemes and superannuation planning.
Responsible investments analyse these long-term trends to identify companies that are positioning themselves to meet the needs of a growing and aging population. Those industries include health and aged care, progressive and responsible finance, mass transit, new models of education and energy efficiency and renewable energy.
The supply of energy is likely to become one of the biggest challenges of the 21st century. Demand for food, water and land won’t be far behind. Resources will be scarce and food prices will climb.
The World Bank estimates that higher food prices have increased the number of undernourished people by as much as 100 million since 2007. There will be competition for land between those who wish to plant food crops for consumption and those who wish to use those crops to produce biofuels. This competition is expected to require a 10% increase in farmland worldwide by 2030.
Meeting the world’s fresh water demands will be just as challenging: by 2025 the United Nations predicts that 20% of the world’s population will not have access to adequate drinking water. Half the world’s population doesn’t have access to basic sanitation.
Freeing the world from its dependency on traditional fossil fuel energy sources and finding new ways to conserve and purify water would help counter many of these issues.
There are already some significant success stories: wind power, for instance, is growing at 30% pa globally and is likely to provide up to 15% of the US electricity needs by 2020. The role of new energy technologies (cleantech) is expected to be critical. According to the UN global projections of $630 billion investments in renewable energy by 2030 would translate into at least 20 million additional jobs.
Clean technology investment experts have been at the forefront in identifying those companies best positioned for the transition to a carbon and water constrained world. Green technology funds operating in Australia have performed exceptionally well, far exceeding the performance of the broader market.
International scientific consensus has now reached a peak around the issue that human activity is contributing to the increase in greenhouse gases in the atmosphere, leading to warmer temperatures and unpredictable weather patterns.
There’s considerable debate across the world about the most cost-effective way to solve the problem but it’s important to also count the cost of not doing something.
A major global transition is already taking place in the way we fuel our economies, moving us away from fossil fuels toward clean energy alternatives. Over 15% of all electricity in Denmark is now fuelled by wind. In Iowa 5.5% of the state’s electricity was generated by wind in 2007 but it has since doubled its cumulative wind installations. China’s renewable energy sector generates output worth $US17 billion and employs one million people. Of those, 600,000 are employed to make and install solar thermal products such as solar hot water systems.
Investment in renewable energy and clean technology helps to build the infrastructure that will create abundant, enduring sources of emission-free energy into the foreseeable future. The increasing cost of finding scarcer and scarcer oil reserves, and our dependence on undemocratic regimes for oil imports is also driving countries toward “energy security” strategies.
Responsible investors believe that a fundamental economic shift of this dimension should be reflected appropriately in any diversified investment strategy. Because of this, most responsible investment portfolios include a positive focus on renewable energy and clean technologies.
But almost every industry will be affected by climate change. Carbon efficiency will become an important component of economic efficiency and productivity. Many ways of making money today won’t be profitable tomorrow.
In the automotive and aluminium industries, for instance, up to 65% of their value could be at risk if they fail to find ways to reduce their emissions and energy usage. Just as responsible investors want to be ahead of the curve in investing in clean technology, they want to avoid investing in companies that are not taking sensible, strategic moves toward energy efficiency.
World power is shifting from west to east and the world population is shifting from rural to urban. Diets traditionally rich in cereals are shifting towards meat and dairy, which means far more land, water and energy will be needed for this type of intensive farming.
In contrast, the United Nations tells us that in 2009 a record number of people, 1.02 billion, did not have enough food to meet their needs. The UN Food and Agriculture Organisation estimates there is a need to increase global agricultural production by 70 percent and almost 100 percent in developing countries by 2050. The level of investment needed will be $83 billion per year, over 50% more than current levels.
Responsible investors look for the economic solutions and investment opportunities that will help to solve these mounting issues. This will include establishing the infrastructure for farmers to collectively store and transport their produce to market.
It will include efficiency in irrigation systems to avoid pipeline evaporation and the long haul transportation of water. Opportunities will emerge for the shift away from using oil and liquefied natural gas in agricultural production to renewable energy. Investment will be made in engineering solutions and the development of innovative agriculture technologies.
Advances in technology have encouraged globalisation and had a positive effect on economic growth and job creation in developing countries. Emerging economies like China and India are now key growth markets for investors.
However, investment in companies operating in developing economies brings with it a variety of risks that are most often associated with issues of concern to responsible investors – human and labour rights abuses, bribery and corruption, poor environmental standards, and a general lack of disclosure and transparency.
Overcoming these obstacles, and finding good research data on these critical risk issues is central to any successful emerging markets investment strategy and has long been a key focus for responsible investment practitioners.
Healthcare now looms as one of the greatest challenges for governments across the world, as various world trends combine in a daunting mix. Our population is now aging at a far greater rate than at any time in history, people are living longer and disease profiles are changing. Health services will come under increasing pressure to cope with rising rates of obesity, diabetes and heart disease with an estimated one billion people (one in six) now overweight or obese.
The World Health Organisation estimates that one-third of the world’s population is currently denied access to the medicines they need. Globalisation and the ease of travel have also heightened the threat of global pandemics such as bird and swine flu.
Responsible investment professionals research the activities of the pharmaceutical industry to assess their strategic goals and risk profile in these critical areas. Over decades, this research has uncovered many unfavourable practices.
For instance, it has exposed the misuse of patents, poor access to medicines in emerging nations, inappropriate government influence, unethical research and trial techniques and the inflating of medical costs due to expenditure on pharmaceutical marketing.
On a more positive note, responsible investors seek out pharmaceutical and healthcare companies that have built sustainable business strategies.
Elements of the information appearing on this page were kindly provided by the Responsible Investment Association of Australasia.