Big investors can’t ignore demand

This article is part of
Sustainable Investing - October 2015

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 from fossil fuels 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 of ‘the man on the street’ 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 institutional investors to follow.

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With high net worth individuals such as Bill Gates pledging their fortunes to help the world transition to energy sources beyond 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 Nicholas 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.

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 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. 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.