The sustainable investor’s view
Simon Howard was the CEO at UKSIF (UK Sustainable Investment and Finance Association) – the UK’s specialist industry body for sustainable finance.
Here is his thinking as to why now is the time for timber.
What is sustainable investment?
Sustainable investment is an approach which considers the longer term, the externalities and all the by-products of what a business is doing. The most notable example is climate change. So, for example, when an oil company gets oil out of the ground it may do little environmental damage. However, the environmental damage is done when the oil is burned. Sustainable investment considers the emissions from the use of products. It’s that long term, breadth of vision which distinguishes it from the short term, narrow focus of much of conventional finance.
Is there a different attitude to risk with sustainable investment?
Sustainable investors consider risk on a longer-term basis. They are also looking increasingly for opportunities, so we mustn’t always be framing this in terms of negatives, they are looking at risks from the 2nd and 3rd order risks. Take the recent example of the retailer BooHoo. It was reported that the company was treating the workers in its supply chain very badly. That had a reputational impact, although it’s several degrees removed from the BooHoo shopping experience. To mitigate that risk you need to look at the suppliers and how they are treating their staff. But, the reputational damage cruised to the top of the value chain, to the BooHoo brand. This is the kind of thinking which sustainable financiers do a lot – what are the risks, what are the emerging risks and what are the long-term risks? They are not always obvious, so our members are looking for the problems and also the converse of that – looking for the opportunities. There are benefits if you can find a supply chain which treats its workers well; they will probably stay longer, leading to lower recruitment and training costs. They then become more proficient at their work as their efficiency rises. The risks are different in the longer term and this is where the opportunity for investment may lie.
Why is it important to invest in sustainable funds?
Our opinion polling suggests that many of the end customers would like their money to be not doing harm, or even actively doing good. There is that groundswell, but it is the financial argument that if you are managing the risks and finding the opportunities, we think your return should be better. Financial performances during the COVID crisis do suggest that to be true. It looks like over the six month period – the sustainable funds are in companies which treated their staff better, which have more robust supply chains and generally have more integrity. Their share prices and fund performances appear to have held up better. There is no guarantee that this will continue, but it does validate the hypothesis that if you’re looking more longer term, treating people with a degree of integrity, that the performance will be better. It all comes together with climate change. You have to be cognisant that we cannot continue burning as much carbon as we are; you don’t want to be investing in business models dependant on the unalloyed burning of carbon. That is the fundamental risk that people need to be managing.
What is the future of sustainable investments in light of the Government’s drive for a green recovery?
I think it’s very positive future. The government is actively asking people like us, what do you think we should be doing? Our response is that, if you’re going to give a support package to an industry, the quid-pro-quo must be that industry starts and then begins to implement a really good decarbonisation, or resource mitigation plan. Take mining as an example. There’s got to be a quid-pro-quo aligned with Britain’s legally binding net zero objectives. There is also a very important social part and that’s the bit which has changed during COVID. There is a lot of focus on climate and environment, but now we recognise the social element is very important too. There is an increased talk of a ‘just transition’, where we transition away from a carbon heavy economy to a net zero economy. We can’t do that by throwing lots of Aberdeen oil workers out of work. What we need to do is provide work for them. This requires government support for the new industries targeted on Aberdeen. It has got to be joined up thinking and the government seems receptive to that message.
Who invests in sustainable funding?
Our opinion polling shows that – it’s everybody. There is an increasing argument that there are financial risks in being unsustainable, which is what people like me in the sector have spent years making the case to the insurance companies and the pension funds. We have won that argument; they now recognise it and now the regulators recognise it. We’ve now got large investors asking their fund managers for increased sustainability. We’ve also got the regulators changing the rules to force the consideration of these issues. There is talk of independent financial advisers being made to ask a client about their values as part of the onboarding process – the adviser will ask the client about these issues. The feedback from our adviser members in UKSIF is that this is a really good process. The client talks about the things that is important to them and they realise that it’s possible to have that belief and for the money to follow that belief. This is great news, as the client is happier that the advisor is able to add value. I think it’s really exciting that things are happening at the individual investor level, with the big pension funds like NEST, the national DC pension scheme that millions will be investing in, they have a very strong sustainability policy. There are other large employers like BT, the University Superannuation Scheme, the railways pensions, these are the leaders in this kind of thinking. Lots of people are doing this and lots of the big insurers, like Aviva, are beginning to implement this kind of thinking.
What do you know about sustainable investments in the construction industry?
I know about the cement industry, which is currently painted as one of the bad guys because of its CO2 emissions. It involves mining, it involves transport and involves use of a lot of heat, so it is a problem industry. I’m aware of initiatives in the industry to try and reduce the impact, but I think the pressure is going to be on cement going forward. It is up to the industry to decide which is the best course to take. What I would say to the industry is that you have to react. If you don’t react, you will lose your licence to operate and eventually the government and the regulators will come after you. It’s what’s happened to the oil and coal industry, if you don’t react, if you don’t adjust, you will be forced to. I think this is the threat to the construction industry. It needs to move to using more sustainable materials and, it’s just got to get better. This is the warning. If you don’t do it, someone will come after you.
How are the insurance and financial sector addressing climate change?
There are two elements to insurance. There are the risks that they insure and there is what they do with their investment portfolios and they have these investment portfolios to pay out on the claims. Their thinking, in terms of the investment portfolios, is pretty advanced. They recognise the risk. They recognise that if they put their money into a coal company, in particular, it’s probably going to be shut down within a decade or two, no matter where it is in the world. We’ve stopped mining coal in the UK recently and it’s my belief that it will shrink to a fraction of what it is within two decades. Insurers recognise the investment risk in things such as coal and oil in their portfolios and they’re seeking to mitigate these risks. The interesting bit is what they do in their main business streams. Do they offer lower premiums to industries and to companies which are behaving more sustainably because there’s less chance of those companies being sued? It is this kind of thinking that we’re beginning to see. The kind of thinking in how they underwrite in the insurance products they offer. Although, it is very early days and there is more insurers could do, but I think that this will be the trend we see going forward. It’s thinking about sustainability and how they actually do the business of insurance as opposed to the business of investment. That is where I think the opportunities lie for the construction industry going forwards. If it shifts to a more sustainable model I think, in time, insurers will recognise this and hopefully the financial benefits will flow.
What do you think are the consequences if we don’t invest in a sustainable future?
The science on climate is overwhelming. I used to meet a lot of climate deniers 8-10 years ago. Now I meet relatively few and I think we have won the argument based on science. If we don’t address CO2, we are going to change the climate with serious social, health and serious economic problems. We just have to do climate. It’s not just climate, its resource depletion as well. We’re using far more of the world’s resource than we should be. This will have to be addressed, we’re going to have to have less impact. In construction we have to use more recycled materials, we have to use more sustainable materials. We have to use more timber. We have to find ways of proving it’s safe to address concerns on the part of the insurers. Construction is a big industry in the UK, so it should be possible. Work with universities, work with engineers and make the case and you will be listened to. If we don’t address all of these issues, our grandchildren are going to hate us. It’s going to make Christmas 2050 pretty painful isn’t it? You might get your 13-year old granddaughter beating you up over the fact that the weather is unpredictable and we’ve run out of food! So we just have to get it right and it’s down to the people engaging in this campaign, executives in decision making roles. You know you have to act.