Sustainable investment is an investment management theme that is growing. Sustainable investment is investment that fully considers all risks and rewards of a given investment. After the global financial meltdown, Madoff and Copenhagen in the past two years, how much better is sustainable investment understood by investors in London, New York, Stockholm, Amsterdam or Tokyo today? Billions of dollars of new investment in new technologies is needed to de-carbonize the global economy. In January the “2010 Investor Statement on Catalyzing Investments in a Low Carbon Economy” - issued by four investor groups representing more than USD 13 trillion in assets including INCR - called on Governments from their podium at the UN in NYC to take immediate steps to catalyse the development of a low-carbon economy and attract the necessary private capital. Their call even reached the Sundance Channel. Do most institutional investors still fail to understand sustainable investment? Pension funds and institutional investors – with their advisors at private banks and hedge funds in wealth management centres like Geneva or Melbourne – are fiduciaries who should efficiently and effectively allocate and manage their assets. Looking at macro sustainability trends such as natural resources, urbanization and demographics change, how well are these funds and their advisors giving appropriate consideration to any factor which may materially affect the sustainable long term risk-adjusted performance of the Fund's investments, including environmental, social and governance factors, across all asset classes? Sustainable investment is opposed to the concept of externalities, the economic term for costs pushed onto society, and the planet. Nobel Prize-winning columnist Paul Krugman this week surveyed the “economics of climate change or, more precisely, the economics of lessening climate change”. Krugman describes externalities this way:
“What if you manufacture a widget and I buy it, to our mutual benefit, but the process of producing that widget involves dumping toxic sludge into other people’s drinking water? When there are “negative externalities” — costs that economic actors impose on others without paying a price for their actions — any presumption that the market economy, left to its own devices, will do the right thing goes out the window."Some of that capital will come from High Net Worth [HNW] investors like those who manage their wealth through Switzerland’s established private banks and hedge funds. Returns are not guaranteed. In fact millions of Euros were thrown into the clean tech sector at companies that could never be competitive or commercially viable in the long term. But some high-risk, high return investors will be the first to back new technologies. We had a small but globally significant example in Vaud last week. The Solar Impulse first flight on 7 April in the commune of Payerne VD is a good example [see Wired video]: experimental technology co-funded by Swiss adventurer Bertrand Piccard with partners giving corporate funding for research and individuals providing project financing through subordinated loans. Seriously experimental - imagine sitting in that cockpit for an around-the-world flip? And of course, at the Geneve Auto Salon in February 2010, hybrids and electric cars were represented at most stands [seriously, a metallic green Ferrari 599 hybrid and I am meant to think it's green?!]. Actually the real pushing technology was in the dim and out-of-the-way green hall, away from all the flashy lighting and chick models. Credit Suisse posted a note on the "environmentally friendly stars was developed in Switzerland: The Lampo2 from the Protoscar think tank based in Ticino".
When we at SinCo design investment architecture for institutional investors, we design to integrate environmental, social and governance [ESG] factors. Major Swiss investor [and now Swiss big brother after UBS meltdown the past 2 years] Credit Suisse considers “Sustainable investment is no trend but a key sector for the future.” We disagree. Putting ESG into a bucket misses the innovation it offers. We prefer to describe sustainable investment as a theme – it is neither an asset class nor sector, but an approach to investment management that explicitly integrates all factors – including environmental, social and governance [ESG] factors – into the decisions.
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