First published in Investment Adviser magazine – original article titled “Big investors can’t ignore demand – What is driving the interest in a greener economy?” can be viewed here
Nigel Labram, investment strategist at Low Carbon, on how the movement towards divestment and sustainable investment is changing the renewable energy investor landscape
It is hard to ignore the widespread recognition and attention that the ‘divestment’ movement is gathering with many high-profile individuals, institutions and even nation states pledging to move fossil fuel investment to renewable energy. Reducing carbon emissions and mitigating the negative effects of climate change is a cause close to many people’s hearts, and the power that ‘the man on the street’ has to influence sustainable change, should not be underestimated.
It is undoubtedly a welcome shift for the renewable energy industry with the retail investor leading the charge and setting the agenda for the institutional investors to follow. With high-net worth individuals including Bill Gates pledging to divest their fortunes from fossil fuels, it is only a matter of time before institutions respond to public pressure and take similar sustainable action.
London School of Economics Professor, Lord Stern, recently called for the younger generation to hold their parents accountable on where exactly their money is going. Armed with a thorough understanding of what is meaningful to them and ready to stand up for their values, it is the next generation that may truly hold the ‘pester power’. The young, savvy investors of today are more likely to consider how their investment decisions affect future generations, and indeed how they underpin their beliefs and values.
Divestment: the new era of responsibility?
With the groundswell of support for divestment, it is important to define its terminology. At its core, a ‘sustainable’ or ‘responsible’ investment or re-investment into renewable energy, is one that continues to add value and generate stable, fixed returns over time. These investments are unique– they are not just about making returns, but they ultimately help to reduce carbon emissions.
The retail investor may be more incentivised to make a sustainable investment if renewable energy technology features in their daily life. For example, if you can see the tangible financial returns that are to be had from installing solar photovoltaic panels (PV) on your roof, you may then be more likely to invest greater sums of money into renewable energy equity as part of a sustainable pension plan.
Institutional investors on the other hand, can certainly learn from the retail investor. But the difference is that they cannot act with such speed and freedom due to regulation and the need for thorough planning with their advisory boards. This often means that any commitment to a long-term sustainable investment plan could take five years, or even longer, to come into full effect. This, however, should not act as a barrier for inaction in divesting from fossil fuels.
The power to invest
Institutional investors have the resources to make a significant contribution in the fight against climate change. They must first fully understand their energy footprint and the complex characteristics of their investments to then make truly sustainable divestment and re-investment decisions in the future.
Pension schemes have tremendous power, influence and the potential to invest capital into renewable energy schemes on behalf of their membership. There is positive momentum building with three major pension funds announcing plans to boost investments in low carbon industries by more than $31bn by 2020. It is more likely that they will act from pressure from their membership – in particular by listening to pension pester power from the climate aware generation of today.
Climate change is important to so many people – we can see the negative effects of climate change and pollution all around us. Having this evidence, this incentive, is already spurring individuals into action – from making the most basic of lifestyle changes to investing in renewable energy. Today’s divestment movement is largely led, and has been championed by, the man on the street (the retail investor).There may be a lag, it may take time, but the institutional investor cannot help but listen up.