By Matthew Fitzmaurice, CEO and Founder, EcoAlpha Asset Management
This post originally appeared at Ensia.
To say the world has changed a lot in the last century is a huge understatement. Industrial, medical and social progress has resulted in unprecedented growth in the world’s population and economy, and that growth has placed tremendous burdens on the planet’s resources. These burdens create problems — perhaps the most substantive problems we have faced as a species: from water scarcity and pollution to climate change, reliable access to nourishing food, and affordable energy.
Here’s the thing, though: where there are problems to be solved, there’s money to be made. And where there’s money to be made, we awaken one of the world’s most powerful forces for change: capitalism.
Sustainable or smart?
Of course capitalism has played a starring role in distressing the planet’s resources. Historically, the combination of unchecked industry, a readiness to externalize costs and a relentless thirst for growth have plundered and polluted the earth. It’s not a debate, but simple fact that our population size and economies cannot continue on their present trajectories without exhausting the world’s resources. Yet, a rapidly expanding global middle class — increasingly urbanized and hungry for protein — threatens further and accelerating distress.
The hopeful news is that businesses, with their almost singular focus on economic self-interest, and governments, motivated by a variety of interests, are beginning to recognize and address in earnest these inevitable problems.
Today, the businesses that develop practical and affordable solutions to burdened resource problems will end up being the world’s most profitable companies. No longer can they be considered “sustainability” businesses. They are everyday businesses with a long view, targeting problems that are not going away. That’s smart business. Burdened resources have become a strong economic driver for businesses of all sizes, in all industries everywhere to spend and change — and one that will only grow in scope and intensity over time.
Broaden your approach
The companies that provide effective solutions to burdened resources will provide superior risk-adjusted returns to their investors as business and governments accelerate their solutions spending out of their own economic self-interest. And because the products, technologies and services these companies provide are common solutions to global problems — and are therefore exponentially repeatable — these investments will have amplified positive impact on global resource scarcity issues.
Too often people have a narrow view of these solutions, thinking only of solar panels and windmills. But solutions are enormously diverse: They include, among many others, agricultural drones that monitor soil conditions, smart irrigation technology that delivers water only where and when it’s really needed, more efficient distributed energy generation and component suppliers that make cars use less gas.
As a whole, the human race has a poor track record when it comes to altruism. Although there are a great many saints among us who spend — and even sacrifice — their lives to help others, most of us are hard pressed to take care of ourselves and our families. We have a much better track record when it comes to investing money in our own self- interest, which has fueled the unprecedented innovation, economic and life-expectancy growth of the past century.
The bottom line.
In the past, many people who invested in sustainable solutions were motivated principally by conscience, willing to accept reduced returns in order to invest their money in a way that was consistent with their beliefs and convictions — be they religious, social or environmental. Now, however, we face a new reality in which our economic self-interest and the long-term well-being of the planet are coming into alignment. Because we have to face the reality of burdened resources, there’s money in it.
Recently, some asset managers have based investments on environmental, social and governance screening, betting that good corporate citizens are inherently better-managed companies, which will therefore be more profitable over time. Increasingly, however, ESG screening is becoming more pervasive and will likely over time become commonplace, robbing this sort of screening as a differentiator when making investment decisions.
The primary goal for investing in sustainable solutions is to achieve superior risk-adjusted returns. Companies that provide solutions to the issues of burdened resources will be the recipients of a massive global spend cycle, no matter one’s motivation. The fact that one’s investment is also part of the solution rather than the problem is worth getting excited about. Self-interest is what moves markets. According to McKinsey’s report, How to make Green Growth the new normal, “In order to mobilize the US$3 trillion a year that will be needed to build a resource-efficient growth model, investing in the markets of the future needs to be seen as possessing superior risk-return characteristics.”
No government subsidy or charity case can move the needle for long. Only capitalism has the power to retool industries, reshape economies and rebuild infrastructure across the planet. It’s a big part of what got us into this mess, but it’s also what will get us out.