Society has the tools to become fully sustainable, but it won’t happen without the engagement of investors on a global scale writes Dan Wells
Think about investment as a spectrum. At one end you have philanthropy, at the other you’ve got purely financial investment. Somewhere in the middle is impact investing, which isn’t purely driven by profit and can deliver real value for the environment. It is also a very good strategy in terms of risk-adjusted return.
My work involves raising money from institutional investors, pension funds and insurance funds, and then investing that money into infrastructure and assets that generate a good financial return and also contribute to benchmarks such as the UN Sustainable Development Goals and offer wider non-financial benefits. To do that successfully, you have to understand the long-term trends shaping society. We wrap investment programmes around global trends such as decarbonisation of the power system and sustainable agriculture.
Impact versus ESG
It is important to distinguish impact investing from environmental, social and governance (ESG) concerns. I spend a lot of time with pension funds and insurance firms which are under pressure to have an ESG policy, but it tends to be a compliance-led approach. Consider the following choice: you can invest in a coal-fired power plant that has some written policies in place – for instance labour practices – or you can invest in a wind farm, which has none because it doesn’t employ anyone. Under some methodologies, the coal plant might get a better ESG score on “social” indicators while the wind farm is, in reality, much more consistent with a sustainable investment strategy.
I advocate for investment programmes that have a genuine sustainable impact rather than trotting out an ESG-friendly policy. Ask yourself what you are trying to achieve through impact investing. Is it motivated by improving your reputation or do you genuinely want to create impact? Once you understand what your objectives are, you can clearly define how you view those terms and then set your business structure around them.
We already have the technology that we need to transition to a society that can maintain quality of life without compromising the natural world, but actually restoring it. We can produce food from smaller areas, such as vertical farms, and we are freeing up land to be reforested and rewilded. However, we have to put finance to work at scale and that will only happen through institutional investors and insurance funds – the biggest owners of capital in the world – having long-term sustainable investment programmes.
Power of perception
People outside of the energy sector may not know that over the past two years, the cost of renewables has fallen so much that it is now the cheapest and “best” form of energy generation. Electric vehicles are far more efficient when it comes to energy conversion than petrol engines, and countries with lower levels of pollution are more resilient to health issues. A recent report from the International Renewable Energy Agency stated that transforming the energy system “could boost cumulative global GDP gains above business-as-usual by $98trn (£79trn) between now and 2050”.
The environment has become a polarising issue – either you’re wrong and the problem doesn’t exist or you’re not doing enough to save the planet. Let’s take judgement out of the equation and think about the huge opportunity that has been presented in recent months. If there’s a positive to be taken from the Covid-19 pandemic, it’s that a light has been shone on what we need in terms of infrastructure to have a resilient economy. By putting capital to work in the right ways, we can get the economy back to work and build the infrastructure required for a genuinely sustainable economy.
Dan Wells, Infrastructure Partner
First published in the July/August 2020 edition of CA Magazine