What is driving this revolution?
We see a convergence of 3 forces:
1. Technological innovation: driving cost declines and efficiency improvements
2. Policy shifts: aggressive action by global leaders
- Most countries have translated their commitments to the Paris Agreement into laws, policy documents and national targets, and these are evolving and pushing further almost constantly.
- Conference of the Parties (COP)
- EU Taxonomy for sustainable activities
- Low-Carbon Fuel Standard (LCFS) program
- Renewable Portfolio Standards
- Likelihood of standardization between EU, UK and S. as well as a push by the SEC for ESG disclosures and the DoL’s recent decision on ESG
- Irrespective of the actions of governments, many companies are developing and implementing strategic and operational shifts – some directional, some seismic – to make their businesses more sustainable, less carbon-intensive and more socially focused
- A circular economy will promote more sustainable activities and favor more durable business models. In turn, strong sustainability credentials will positively impact business growth and performance. Therefore, companies which take a stakeholder view of their business as opposed to a purely shareholder view are more likely to deliver sustainable wealth creation and align their business behavior with the long-term interests of investors.
3. Demand for positive societal changes: from consumers and corporates
- Front-page news on everything from climate change to racial injustice and income inequality
- Global pandemic in combination with social media spotlighting problems and forcing accelerated change
- Multi-generational shift in behavior and lifestyle preferences (e.g., what to buy, who to support, where to live, how to commute)
- Investors and employees are seeing corporations as people and through stakeholder activism compelling them to seek purpose and profits to survive and win
The UN PRI provides a framework for sustainable investing
The UN SDGs gives the best summary of the challenges being addressed. The 17 sustainable development goals (SDGs) are the most widely used investor framework for setting, measuring and reporting on impact. This includes major challenges including poverty, gender equality, health of oceans, sustainable communities and more. The SDGs build on decades of work by countries and the UN.
Looking at the most frequently applied SDGs, we believe the following are the major issues that are most important to investors:
Climate change and climate action
- Clean & affordable energy, reducing emissions, expanding recycling and re-use, improved resource management, efficient transportation, water scarcity and sanitation
- Education, healthcare, affordable living, sustainable communities
What really matters to investors is that we are undergoing a re-imagining of the role and views of success for companies, countries, technologies and leaders. The sustainable capital movement has now joined with employee and consumer activism in holding companies accountable for their impact on society and the environment, and to reward sustainable business practices.
How does this translate into portfolio performance?
After decades of debate and procrastination, it is now clear these forces of change are irreversible and here to stay, strengthened by demands from multiple generations. The power of these forces makes sustainable investing a GARP- like strategy (Growth At a Reasonable Price), and in some cases, tech-like, in which companies’ growth potential and valuations are misunderstood. They have aggressive growth prospects where value is not appreciated. The “green- ness” and/or “social-ness” is not properly valued.
Why is that? A number of reasons starting with the main fact that addressing societal and environmental challenges can be a highly profitable business. This is part of the conscious capitalism philosophy that businesses should operate ethically while they pursue profits. Many companies are growing their top and bottom lines and benefitting from rapidly improving growth prospects, multiple expansion and lower cost of debt. Moreover, the expanding pool of ESG capital is bringing greater awareness and receptivity to their stocks. In addition, these companies will have better access to talent, be less exposed to certain regulatory risks and the risks posed by environmental and social variables.
The companies that are dedicated to sustainable practices - and providing transparency - are attracting lower costs of capital and experiencing the early stages of a “sustainability premium”. As some have said, you cannot put a multiple on a revolution.
Capturing the returns of the sustainability revolution
Our primary goal at Ecofin is to provide strong risk-adjusted returns for our clients while tackling some of the planet’s biggest challenges by investing in companies earning solid returns and doing business in ethical and responsible ways. Here are some examples of global mega-themes, the impact they are having on the world and Ecofin strategies focused on these challenges and solutions.