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Sustainable Investment: A distinct possibility, or just another buzzword?

The key areas of investigation when examining sustainable investment opportunities are Environmental, Social and Governance. While this is comprehensive, perhaps the ask may be too much if all three elements are key to set the definition.

A recent article posted by McKinsey & Company provides great insights into the evolution towards sustainable investment practices. It has been a road fraught with difficulties related to measurement, resetting definitions as well as understanding how the implementation will proceed, in case compliance issues surface after an investment program has run a part of the course.

It also brings a lot of questions to surface, including some of the decisions taken by funds to opt in or out of specific segments in the global marketplace.

Let me bring a specific case to improve focus on one quandary-investment in energy. Without going into detailed statistics, at a macro level, if global economies continue to grow at an annual average of 2% per annum, it is estimated that the energy needs will need to grow by 80% by 2030.

 

The World Health Organization (WHO) said that low- and middle-income countries in the WHO South-East Asia and Western Pacific regions had the highest air pollution-related burden in 2016, with a total of 8.2 million deaths linked to indoor and outdoor air pollution. This represents about three quarters of all factors that contribute to death due to living in unclean environments, an increase of over 15 percent between 2012 and 2016.

If we were to look at growing energy needs on one hand, and the rising deaths due to the use of fossil fuels to meet energy demands, the answer is fairly clear. Move away from this source of energy into alternatives, quickly.

Let us say that the investment majors are interested in investing in the energy sector. Among clean energy, there is solar, wind and wave energy among clean energy sources.  Given the nature of these sources, they tend to be higher in terms of initial investment than traditional energy building blocks.

If one looks at energy investments globally, however, the focus is on developing nuclear energy.

This is somewhat paradoxical, because the harm and long term solutions for effectively treating nuclear waste is nothing close to what the alternative clean energies bring to the table.

On the flip side, there is a return on investment that is the driver, for all intents and purposes, for most funds. While impact investments are happy to see lower returns, they do not always have the appetite for long term investments, which clean energies require. Hence, even though solar energy investment cost have halved over the last ten years, it is still at a disadvantage when compared to traditional energy sources.

If the funds were determined to make an impact, they can insist that they stick with clean energy only.

This will help in more R&D going into making these energy sources viable quickly, as well as drive economies to look at hybrids, which will possibly make the turnaround even shorter.

It is only through these very committed stances that sustainable investing can become a reality, not just geek speak for today’s ‘fintech’.



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