What Investors Should Know About the Sustainability Revolution

The world is aggressively seeking sustainability. While the topic has been around for perhaps a decade, the “awakening” really hit the public consciousness in 2020 and has now become a mega-theme. It’s transitioning into a revolution and shepherding an era of conscious capitalism that’s playing out across the investment landscape. This is not the traditional socially responsible movement that has historically involved divestment from tobacco, weapons and other so-called ‘sin’ stocks. This is about driving returns first, while providing social and environmental benefits.

The approach to using the planet’s resources as if they are endless has been damaging to the environment. Fortunately, through technological innovation and sheer force of activism, the tide is shifting. We are making better use of less, while constantly improving quality and affordability. To become more sustainable, there is a necessary change from linear to circular economies, for example, where costly depletion of resources and waste accumulation migrate to recycling and resource replacement with little waste and pollution in the process.

We are experiencing a generational shift and redistribution of wealth that is driving demand for sustainable investing, forcing platforms to design suitable offerings. Although this “awakening” began in earnest sooner, 2020 will be remembered as the year the world finally took steps to address and solve major challenges.

Some of the world’s most pressing challenges have been given newfound attention. The devotion to issues such as climate change, water scarcity, ocean pollution (plastic), diversity gaps, health and safety, income equality, inclusion, and human rights is the bedrock of the sustainable revolution. These are long-term secular themes and structural changes occurring on a global scale. We are in the early stages of a multi-decade tectonic shift. The consequences of these changes are shifts in how we make basic decisions, how we consume resources and how we live on the planet. The permanent shift in behavior is also re-shaping the investment landscape.

We see three converging forces driving the revolution:

  • Technological innovation driving cost declines and efficiency improvements

  • Aggressive action by government and corporate leaders

  • Demand for positive societal changes from consumers and corporates

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. 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. Sustainability requires looking throughout a business and beyond to assess its impact and footprint on the environment, on society as a whole and in communities.

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
Social impact
  • 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.

There are a number of reasons why, starting with the 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 pursuing 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”.

Here are examples of global sustainable mega-themes:

  • Renewables 3.0

  • Rise of electric transportation

  •  Rise of ‘electricity at home’ as a larger growth industry

  • Sustainable project finance in waste and recycling

  • Access to clean water

  • Social impact, affordable housing and income inequality

The case for a return-oriented approach to sustainable investing has become clear. The impact of addressing sustainable issues, from climate change to racial and social justice, has become a compelling investment case and, just as important, not factoring these issues represents an investment risk. Societies need to accelerate the transformation to greener, decarbonized and more sustainable economies. These powerful and secular forces can generate substantial wealth creation and compelling risk-adjusted investment opportunities for both companies and investors for the many decades to come. 

About Brent Newcomb

Brent Newcomb leads the sustainable investment manager under TortoiseEcofin, named Ecofin. Ecofin invests across sustainability-focused public and private, equity and debt securities, with expertise in four key areas: sustainable infrastructure, energy transition, water & environment, and social impact. Mr. Newcomb joined the firm in 2014 and is a member of the Executive Committee, Ecofin Development Committee, Sustainability & Impact Committee, and serves as President of Ecofin. He is a member of investment committees for various Ecofin investment strategies as well as Tortoise Essential Assets Income Term Fund. Previously, Mr. Newcomb worked for GCM Grosvenor where he focused on portfolio management. He earned a Bachelor of Science degree in business administration from the University of Kansas and a Master of Business Administration degree from the University Of Chicago Booth School Of Business.

TortoiseEcofin is an Associate member of TEXPERS. The views expressed in this article are those of the author and not necessarily TortoiseEcofin nor TEXPERS. Follow TEXPERS on FacebookTwitter, and LinkedIn for the latest news about the public pension industry in Texas.

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