Investing in the Transition to a More Sustainable Economy by Joe Keefe

The Next 30 Years: Investing in the Transition to a More Sustainable Economy

By Joe Keefe, Impax Asset Management

Joe Keefe - IMPAX Asset MgmtThe next 30 years will require an epochal transition from an industrial-age economy where negative long-term environmental and social externalities are ignored to a sustainable economy where future growth is accompanied by dramatically improved environmental and social outcomes. The future of human civilization as well as countless species, and indeed of nature itself, depends on it.

The transition to a more sustainable economy will require far more intentionality than we see today, in the sense that businesses, capital markets, civil society and governments will need to reach a broad consensus on goals and set a course to reach them. We should not underestimate the immensity of this challenge. Moving to a “sustainable economy” goes beyond achieving net zero emissions by midcentury to avert a climate catastrophe – an ambitious agenda in and of itself – but to a much broader transition from a depletive economic model to a more circular, restorative economic model.

Not only are global temperatures rising but oceans and marine life are choking to death on plastic. Not only are polar ice caps melting but clean water, wetlands, fisheries and natural food systems are endangered. Not only are biblical storms, fires and floods becoming everyday news events but habitat destruction, biodiversity loss and species extinctions are proceeding at alarming rates. Planet Earth is remarkably resilient, but climate change is only the most prominent among a growing, interrelated matrix of environmental disruptions that is truly existential.

To complicate matters further, we need to understand that the task before us is not confined to environmental challenges; the transition to a more sustainable economy must be accompanied by a transition to a more equitable society. This will require repairing and strengthening the social fabric across a range of issues including pay equity and fairness, worker health and safety, paid leave and flexible work, improved access to health care, nutrition, child and elder care, education and finance as well as a host of demographic and human capital issues such as diversity, inclusion and gender equity. Growing inequality, exclusion, marginalization and oppression in a world of haves and have-nots is quite simply not a foundation on which to build a sustainable future.

In essence, what we need is a sustainability revolution equal in significance to the industrial revolution that ushered in the modern period. And in a historic moment beset by pessimism – stemming from a global pandemic, war, economic woes and social divisions – there is the added challenge of summoning the will and marshalling the resources to move forward. The task before us is enormous.

Foundations for the Transition Have Been Laid

Yet there are reasons to be hopeful – even confident and optimistic. We can be encouraged not only by what we have already accomplished but by the rich tableau of opportunity before us. Investors have been and must continue to be at the forefront of this historic transition.

Thirty years ago, few if any companies were issuing corporate responsibility or sustainability reports. Today more than 5,000 do so and many countries are about to require such reporting. Back then, there were but a handful of corporations that had embraced diversity on their boards or in senior leadership. In 2021, by contrast, 45% of Fortune 500 board appointments went to women and 41% to non-whites. Thirty years ago, there was no Institutional Investor Group on Climate Change, with members representing over $4 trillion in assets; no UN Principles on Responsible Investment, with signatories representing more than $100 trillion; no Paris Agreement; no Carbon Disclosure Project; no Investor Alliance for Human Rights; no Thirty Percent Coalition advancing corporate diversity; no Global Impact Investing Network; no Ceres; no Net Zero Asset Managers Initiative; no Task Force on Climate-Related Disclosure; no proposed SEC Rules on corporate climate disclosure.

You get the picture.

Suffice it to say that we have traveled some distance and are already witnessing the early stages of the transition to a sustainable economy. We have a lot of work to do, and clearly need to move at a faster pace, but it has begun.

Investors’ Key Role in Driving Change

Importantly, none of this would have happened had it not been for engaged, sustainability-focused investors making the case that businesses and capital markets must begin accounting for material risks and opportunities associated with the transition. Over the past few decades, we have articulated a compelling investment rationale for more corporate disclosure, improved policies and practices, and a longer-term outlook that is in the best interest of corporate shareholders as well as other stakeholders. Investors have made the business case for corporate responsibility, for environmental stewardship, for gender and racial equality and inclusion; we have made the investment case for capital markets to hasten the transition to a more sustainable economy.

As a result of this work, we have witnessed the decline of the shareholder model of the corporation, famously captured by economist Milton Friedman’s dictum that the only duty of a business is to make a profit. In its place, a more expansive view of the modern corporation has emerged where a company’s duties are not only to its shareholders but to all stakeholders, including employees, customers, the communities where it does business, the natural environment, and indeed, the public interest. The significance of this shift cannot be overstated.

Over the coming decades, businesses and capital markets will be profoundly re-shaped by global sustainability challenges. Some parts of the global economy, including certain sectors and industries, will face headwinds while others will enjoy tailwinds. Some companies will be well-positioned to benefit from the sustainability transition while laggards that fail to adjust will be left behind. There will be clear investment risks but also enormous investment opportunities.

For example, G7 countries and the EU have committed to largely de-carbonize their electricity sectors during the 2030s, while policy commitments to phase out vehicles with internal combustion engines (ICEs) have prompted major carmakers such as Ford, General Motors, Volvo and Mercedes-Benz to sunset the manufacture of ICE vehicles worldwide. The accelerating shift to electric vehicles will create significant opportunities for long-term investors.

G7 countries and the EU have committed to largely de-carbonize their electricity sectors during the 2030s - by Joe Keefe Impax Asset Mgmt

More than 100 countries have pledged to cut methane emissions by 30% by 2030. Another 50+ countries have pledged to phase down coal power generation as we continue the transition to renewables, which are on the verge of surpassing coal as an energy source. A global treaty to curb further biodiversity loss is in the works under the auspices of the UN Biodiversity Conference. For long-term investors, there seems little doubt that investment in renewables, zero-emissions transportation, water stewardship and conservation, resource efficiency and climate and ecosystem resilience will continue to grow. These investment themes and emergent industries will enjoy tailwinds while taking market share from legacy sectors.   

Political Challenges Must Be Overcome

One challenge, clearly, is that public policy advances will be needed to facilitate and enable this transition, and some of the investment opportunities mentioned above are in fact being driven by public policy choices. Just as clearly, in the United States, the largest economy in the world, there is no public policy consensus at the moment. In fact, there are deep political divisions over whether human activity even causes climate change or that it need be addressed. To compound matters, a rear-guard campaign against “woke” corporations endeavoring to align their business strategies with certain sustainability – or ESG-related goals is currently underway and perhaps gathering momentum.

What we might call the politicization of the marketplace is not likely to fade away quickly. Legacy sectors such as the fossil fuel industry will not go gently into the night. Not coincidentally, disruptions associated with globalization have already given rise to various “populist” movements and autocratic impulses around the globe, including in the US. These trends will likely intensify over the near term, posing profound challenges.

My own view is that the transition to a more sustainable economy and a more equitable society will require a renewed commitment to the values of the enlightenment and the liberal idea: individual liberty, democratic self-governance, free markets, the rule of law, equality of opportunity, respect for human rights.

The next three decades will be fraught with risk and instability as these battles play out. But they are also brimming with opportunity and promise. All periods of historic transformation are disruptive. Change never comes in a straight line, nor is it inevitable. We must bring it into being.

But investors have 30 years of experience and accomplishment under our belt. This should give us confidence that we can successfully shape and manage the next 30. I believe we will.

  

Article by Joe Keefe, President of Impax Asset Management LLC, the North American division of Impax Asset Management Group and investment adviser to Pax World Funds. He is responsible for the distribution of Impax’s full capabilities across North America. 

Prior to joining the firm in May 2005, Joe was President of NewCircle Communications, a strategic consulting and communications firm specializing in corporate social responsibility and public policy communications. He served as Senior Advisor for Strategic Social Policy at Calvert Group from 2003-2005 and as Executive Vice President and General Counsel of Citizens Advisers from 1997-2000. He is a former member of the Board of Directors (2000-2006) of US SIF, the trade association representing asset managers and investors engaged in sustainable investing throughout the United States. Before entering the investment management industry, Joe worked in private law practice for 16 years.

 Joe holds a Juris Doctor from the University of Virginia School of Law and a Bachelor of Arts in philosophy from the College of the Holy Cross.

Energy & Climate, Featured Articles, Impact Investing, Sustainable Business

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