Investment attitudes are changing to create a more sustainable world


Investors today care about more than just money.

Whether they are individuals or institutions such as pension funds, decisions about where to place money is determined by more than just the potential financial return.

Investments must increasingly meet a strict set of environmental, social and governance (ESG) criteria. These consider things like the carbon footprint of a company or asset, the way workers are treated, and the transparency of decisions made at board level.

Some investors are even tracking their investments on ethical share indices, which combine a company's share price with its ESG performance to give an "ethical score".

There are three big trends driving this move towards ethical investing, which together give businesses further impetus to build a more sustainable world.

These are: concern over an investment's potential impact on climate change; the strong financial performance of sustainable investments; and a generational shift in attitude towards ethical investments.

Singapore is an example of how sustainable infrastructure investments can be made
Singapore is an example of how sustainable infrastructure investments can be made

Climate change as a priority

Investors' growing concerns about climate change can be most clearly seen in the sharp rise of money flowing into assets such as renewable energy and sustainable transport since the COP21 Climate Change agreement in Paris in 2015.

In France, for example, there was growth of 213% in sustainability-themed investments in the years before and after COP21, according to a 2016 report by Eurosif, the European body that promotes responsible and sustainable investment.

This growth in sustainable energy and transport investment is also driven by a huge need for such infrastructure.

Global infrastructure spending will grow from US$4 trillion a year in 2012 to $9 trillion a year by 2025.

In established markets like the US and Europe, ageing and polluting infrastructure must be replaced by modern, energy efficient technologies.

In developing markets such as Asia, new transport and energy infrastructure is needed to keep pace with the region's rapid economic growth.

At least 60% of the $9 trillion per year global spend on infrastructure will be absorbed by Asia.

And many countries want to ensure that the new infrastructure they are installing is the most energy efficient and sustainable technology available today.

Singapore is an excellent example of this, as highlighted by a series of projects realized by Mitsubishi Heavy Industries (MHI) Group.

Driverless trains -- so-called Automated People Movers - serve Changi Airport, while Light Rail Transit networks shuttle commuters around suburban neighborhoods. Cars drive under electronic toll systems designed to ease peak-hour congestion in the city.

In addition, much of the island's waste is processed in a waste-to-energy plant with one of the world's largest incinerators, and work is underway on an upgraded water reclamation plant that will be more energy efficient and produce biogas for power.

Financial gains

As well as climate change concerns, investors are increasingly moving towards more sustainable investments because they want to build a track record of strong financial performance.

Companies with favorable environmental or social characteristics have on average outperformed companies with negative characteristics in these areas, according to research by Hermes Investment Management.

This is hardly surprising when you consider just one element of the environmental profiles of most assets and businesses; energy efficiency.

In the UK alone, energy efficiency measures in the industrial, services and domestic sectors helped boost the economy by £1.7 billion over a five-year period.

And as soon as you dive into the specifics of energy-efficient technology, it becomes clear how such vast sums of money can be saved.

For example, Combined Cycle Gas Turbines (CCGTs) are the most efficient and cleanest way to generate electricity from natural gas.

Gas is first burned in a combustion turbine and then the exhaust heat is used to drive a steam turbine. Capturing this waste heat helps make CCGTs one and a half times more efficient as turbines that only burn gas.

Mitsubishi Hitachi Power Systems' J-series air-cooled gas turbine, the M501JAC, is a case in point, achieving an energy efficiency of more than 64%.

This helps make gas-fired power plants greener by cutting carbon emissions. It also reduces the amount of natural gas consumed to make each kilowatt of electricity, significantly reducing the overall fuel and running costs of a power plant.

Concerns about climate change are driving infrastructure investments
Concerns about climate change are driving infrastructure investments

Generational shift

The third and final driver of changing investment attitudes is the difference between subsequent generations in how they regard ethical investments.

51% of baby boomers -- the generation born between 1946 and 1964 which currently holds the majority of investment capital -- believe environmental and social factors play an important role in investment decisions, according to US Trust's Insights on Wealth and Worth Survey.

This figure, recorded in 2016, was 5% higher than just two years earlier, reflecting the influence of global events like COP21.

However, this attitude shifts dramatically when you look at baby boomers' children and grandchildren born in the millennial generation between 1981-1995: 93% of millennials believe that social or environmental factors play an important role in investment decisions.

The transfer of baby boomers' wealth to the millennial generation is expected to be the biggest ever in history, at US$30 trillion.

As this happens, it seems likely that environmental and social factors will dominate every major investment decision, and become a fundamental pillar of how we conduct business.


John McKenna

John McKenna is an award-winning business journalist with specialist experience in the energy, infrastructure and industrial sectors, John's stories have appeared in leading British newspapers including The Times and The Daily Telegraph.

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