Opinion / 27 November 2019, 1:30pm / Hubert Keller
JOHANNESBURG - The world of finance needs to throw its weight behind the transition to renewable energy and combating climate change.
We see investors increasingly pursuing this goal, particularly given the potential for sustainability to become an extremely powerful driver of performance in the next three to five years, and possibly beyond.
Many of us experienced the internet revolution. It completely changed the way we live, transformed entire industries, brought to life new business models, and made others obsolete. It also created some of the most valuable companies in the world today. We believe sustainability has the potential to do the same, if not more, and could create unprecedented investment opportunities and risks.
We have all lived in the last few decades with a growth model that relies on ever more consumption, ever more resource extraction, ever more pollution, and lots of waste.
This model has not always fairly distributed the benefits of that growth and is a source of inequality in our economies today.
The complex interaction between economic growth, the planet and our social structures was manageable in 1970, when the global population was around three and a half billion. But today with eight - soon to be ten - billion people in the world, we believe this growth model simply doesn’t work anymore.
Africa, which is home to 17 percent of the global population making it the second most populated continent after Asia, is feeling the pressure for change. South Africa, for example, is already having to adapt to the worst drought in living memory.
Earth has already breached four of the nine planetary boundaries which are the thresholds that define the safe operating space for humanity. Crossing these limits leads to potentially irreversible change. If we do not tackle climate risk, for example, by achieving the goals set out in the Paris Agreement, then our society and the economic model we know will simply collapse.
Today, we are still a long way from achieving the goal of limiting global warming to “well below” 2 degrees centigrade. In addition, in the past few decades, the relationship between labour and capital has deteriorated substantially, the middle class has been severely squeezed, and social mobility has declined significantly.
South Africa stands out as one of the most unequal countries in the world as top earners have increased their share of income since the end of Apartheid in 1994 and race remains a key determinant of income levels, job opportunities and wealth.
Economic growth is essential in responding to the challenges facing our societies. But for this growth to be sustainable, it cannot leave a negative footprint on the environment or society. We need to move away from today’s “WILD” economy that is Wasteful, Idle, Lopsided and Dirty, towards a sustainable “CLIC” economic model that is Circular, Lean, Inclusive, and Clean.
The good news is this transition appears to be well under way. For example, most of our physical assets today are basically idle, and we are seeing the emergence of numerous business models based on the sharing economy, particularly in transport and accommodation.
In addition, although we still rely far too much on fossil fuels, the steep decline in the cost of renewable energy and batteries will fundamentally disrupt the traditional models of the energy industry.
The transition to a more sustainable economic model will accelerate because it’s being pushed by extremely powerful catalysts. In most of the world’s major regions, politicians are enacting policy changes and implementing new, often very restrictive, regulations.
Consumer behaviour is also changing rapidly towards a model that is more respectful of the planet and society, and people are ready to pay more for it. Last but not least, continual technological innovation is providing solutions that enable the development of more efficient, cleaner and often cheaper business models.
This transition will require us to completely rethink many established norms. We are going to need to rethink the way we feed ourselves, the way we plan and power our cities, and the way we produce and consume. We will need to completely overhaul how multiple sectors operate - healthcare, energy, food, mobility, and so on.
The impact on business from the transition will be substantial. For example, how will sectors such as transport, construction or aviation adapt to a decarbonised world? How would a company manufacturing gearboxes for the automotive industry adjust if the transition to electrical vehicles happens sooner than expected? How would a company selling bottled water globally adapt to more stringent regulation of plastic, or its prohibition?
As some companies prepare for the transition, we are at a crossroads, with some companies anticipating the profound changes ahead and others in denial. Companies in the former group have the vision and courage to reassess their business models to ensure they are fit for the reality of this far-reaching economic shift.
The latter continue to ignore the inescapable forces of change and are at risk of becoming obsolete. They could lose their customers, innovation could render them obsolete, or regulation could severely constrain their business and starve it of capital.
To use an analogy from the animal world, we believe the business world is bifurcating, with Eagles on one hand, and Ostriches on the other. We believe the Eagles will emerge triumphant from this transition, while the Ostriches - with their heads firmly buried in the sand - risk disappearing altogether. This presents a unique opportunity for investors.
Selecting companies that will be winners in the future has always been a major source of performance. This differentiation could become even more pronounced, enabling asset managers to deliver very attractive performance.
Moral and ethical considerations naturally lead us towards sustainable investment, but the arithmetic is also very important for investment professionals, like us, who have fiduciary duties. We believe sustainability will be a major source of return in the years to come.
Hubert Keller is the managing partner of the Lombard Odier Group.