Download UBS ‒ Smith School Essay Competition 2016 Aven Satre

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UBS – Smith School Essay Competition 2016
Aven Satre-Meloy – Award Recipient
June 2016
Aven Satre-Meloy
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UBS-Smith School – 3rd Annual Essay Competition 2016
Wednesday 9th May 2016
Winner:
Aven Satre-Meloy (USA)
MPhil Candidate, School of Geography and the Environment
University of Oxford
Question 1:
‘Investors have taken an increasing interest in assets that yield a sustainability, as well as a financial, dividend.
Can such ‘impact investing’ provide an adequate supplement to the financing of public goods such as renewable
energy, infrastructure and habitat conservation?’
Thesis:
Impact investing can adequately supplement financing renewable energy, infrastructure, and habitat
conservation by being a vehicle for growth in these industries, which is necessary to solve vastly difficult
challenges facing people and climate.
Essay:
The financing of public goods such as renewable energy, infrastructure, and habitat conservation is
perhaps the most daunting challenge facing the world and its governments as they try to meet
ambitious carbon reduction targets during this century. When nearly 200 nations came together to
sign the historic Paris Declaration agreed upon at COP21 this spring, they committed to a global target
at “well below” 2°C with efforts to limit warming to 1.5°C compared to pre-industrial levels by the
end of the century. These pledges are very ambitious, and they will no doubt require a massive
mobilisation of investments to develop the necessary technologies and deploy them at scale in order
to stand a chance of limiting warming to these levels. There is no question that private finance will
have to be a substantial part of facilitating this transition, and as an increasing number of investors are
noting the need to invest in assets that generate sustainability benefits as well as financial ones, there
are reasons to remain optimistic that this ‘impact investing’ can indeed provide an adequate
supplement to the public provision of renewable energy, infrastructure and habitat conservation,
among other sustainable public goods.
This essay argues that impact investing can be a vehicle for growth in “sustainability” industries while
also generating competitive financial returns for shareholders. It will help public governments meet
ambitious carbon mitigation targets by accelerating the pace of technological and infrastructural
development, especially in the areas of renewable energies and clean tech infrastructure. The question
of whether or not this financing can adequately supplement public provision of these goods will be
debated, along with questions of whether ‘impact investing’ requires significant trade-offs between
sustainability and financial returns. The essay will also discuss concerns around the commodification
of environmental or sustainability aims and will debate whether or not there are ethical objections to
the growing area of impact investing. Finally, the essay will address an important question of how
‘impact investing’ can help with ongoing initiatives around net zero investment and how an
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increasingly climate-concerned investor class may have the added benefit of putting pressure on firms
to set in place a plan for reaching net zero. The essay concludes with some remaining questions about
the role of impact investing in supplementing financing of public goods to achieve carbon reduction
targets.
Though a relatively new phenomenon, ‘impact investing’ is becoming an increasingly attractive
method of generating both sustainability and financial yields while reducing risk for investors. For
this reason, especially in the areas of energy finance, ‘impact investing’ is gaining a larger foothold in
the market. Examples of successful ‘impact investing’ firms abound. In California, a company called
Solar Mosaic was one of the first companies to allow investors to invest directly in renewable energy
tangible (or real) assets-namely home and commercial solar systems. Average internal rates of return
for projects ranged from 4.0 – 7.0%, which made these investments competitive with some index funds
and far outmatched U.S. Treasury Bonds, which were generally considered comparable in terms of
length of the investment and risk profile. While Solar Mosaic has since moved business focus more to
residential home solar loans, there are plenty of similar firms now, and that’s just in the area of clean
tech and renewables. A result of the increased private finance for renewables through impact
investing has been the continued growth of the renewables market in California. Of course, much of
California’s success is due to a favourable policy environment, but impact investing has certainly
supplemented the financing of renewable energies in the state.
It remains to be seen whether the kind of growth in both renewable energy and impact investing can
be sustained on the scale it has been in California, but what was once a niche market for investments
is rapidly replacing more antiquated investment strategies. And as more provision is made for growth
of renewable energies through policy frameworks that are targeting 2 °C reduction mitigation
pathways, there are reasons to believe that impact investing will play an even larger role in these
transitions. There may be less evidence of the impact of socially responsible investing in infrastructure
and habitat conservation. (If we are limiting our definition of infrastructure to building or transportbecause clearly there has been an impact on energy infrastructure), but there is no reason why
infrastructure in particular, shouldn’t benefit as much as renewable energy has from impact investing.
Infrastructural upgrades, especially in transport, will be required for many countries that aim to
reduce emissions significantly this century. Especially for countries that have outdated public
transport infrastructure, such as the U.S., public financing alone likely won’t be able to finance the
changes needed. And given the ascendance of companies such as Tesla that are re-invisioning
transport, this area will clearly be an attractive option for investors 1 who want to yield financial as
well as sustainability benefits. Habitat conservation is potentially a trickier area for impact investing
to supplement because there generally aren’t as clear ways to generate strong enough financial returns
in conservation, but in the event that country governments pursue habitat conservation for the bio
sequestration potential that it has, then possibly this, too, will be an area where impact investing can
adequately supplement public provision of this important service.
The author acknowledges that Tesla is not yet profitable but is optimistic about the company’s outlook once a
mass-market vehicle is available, which will likely be within the next 5 years.
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Two relevant debates regarding the role of impact investing centre on the questions of how
adequately it can supplement financing of public goods as well as what are the primary trade-offs
between impact and traditional investing. These two debates will be discussed here. The first debate,
whether impact investing can adequately supplement financing for public goods, is one that likely
won’t be concluded any time soon. Because impact investing is a relatively new investment strategy
(albeit one that is quickly growing), it is likely too soon to say how much it will be able to supplement
more traditional methods of financing public goods. While I have shown that impact investing is no
longer on the fringes and now presents a competitive strategy (for traditional investment strategies)
for many investors with different objectives, the scale of what could properly be called “impact
investing” is still small in comparison to other types of investment - in other words, investing only for
financial yields. The question of “adequacy” does not seem like an appropriate question to ask at this
point because the scale of investment that is needed is incredibly large, and impact investing hasn’t
likely ‘supplemented’ financing of public goods on that scale, but that doesn’t mean it won’t be an
adequate supplement in the future. Returning to earlier arguments, because of both the enormous
financial requirement for countries to hit their carbon mitigation targets, as well as the potential that
impact investing has already shown in financing for renewable energy and infrastructure, it would be
foolish to think impact investing won’t provide a significant share of the necessary capital – especially
if enough public finance is not mobilised to transition energy and infrastructural systems in the time
required.
Another important debate regarding the extent to which impact investing will be a large part of
financing energy/infrastructure transitions is on the trade-offs of investing in assets that yield
sustainability as well as financial dividends. An important question to ask is whether or not the
growth of investing is being driven by a more socially and environmentally responsible class of
investors or instead by the competitive financial returns that these investments yield. If the answer is
the latter rather than the former, then a second question is whether investments in “sustainability”
assets will decrease if the assets are not yielding competitive returns. Solar Mosaic was transparent
about projected returns for all its investment products, and the offerings on projects with a 3.0 – 7.0%
IRR remained unfunded for longer on average than projects with 4.5 – 6.0% IRR. Though much of the
rhetoric surrounding Solar Mosaic investments equally highlighted both sustainability and financial
dividends, it was clear which of these the priority was for the average investor. So, will a lesscompetitive investment financially be sustained on its sustainability merits alone? Many who don’t
believe impact investing is a mainstream investment strategy will point to this important question in
arguing that impact investing will ever truly and adequately supplement other forms of financing
renewable energy (among other public goods). This is an important argument and is certainly one that
points to an ongoing debate about the viability of impact investing over the long term. Still, the
growth of renewable energy and sustainable infrastructure industries is strong and getting stronger,
and given the overarching policy implications (which will place increasing emphasis on the financing
of sustainable public goods to meet carbon reduction targets), it is reasonable to argue in response that
the growth projections for these industries is reason enough why impact investing will be a
competitive strategy financially for many “sustainable” industries in the future.
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A tangential concern related to the question of whether or not impact investing will adequately
supplement the financing of renewable energy and infrastructure regards the ethical issues prevalent
in advocating for pursuing “sustainability” aims because of the financial benefits that are generated.
This concern- put more plainly, valuing natural capital (or sustainability) for the sake of money – is a
legitimate concern that is not often discussed as much as it should be on the topic of socially
responsible investing. In his seminal work, A Sand County Almanac, Aldo Leopold (1949) makes the
case for inherently valuing nature rather than valuing it for the benefits it provides. Leopold wrote
that our principle ethical aim is to preserve the integrity and stability of the biotic community. When
this is not our aim, then our aim is immoral. Clearly a far cry from less emotionally-evocative
discussion of the financial benefits of impact investing, it is not surprising that a discussion of the
ethics of impact investing is not a common one heard around sustainable investment management
companies (Al Gore and David Blood’s Generation Investment Management comes to mind). This is
especially the case because impact investing is often heralded as a much more ethical approach to
investing than traditional strategies that place returns as the top objective for a portfolio. But should
we still object on an ethical basis to the commodification of “sustainability”? Is it a practical debate to
have or one for eco-cities to more about from an Ivory Tower? In practical terms, it is certainly more
beneficial for environmental progress to shift global investment toward assets that yield sustainability
as well as financial gains, but an important question to ask is whether or not by valuing
“sustainability” we are dooming it when it is no longer turns a profit. Returning to the debate about
trade-offs, it would seem that we are risking the proliferation of environmental stewardship on
unpredictable fluctuations in global finance and investment. Perhaps this is a worthwhile risk that
could put us on a path to a clearer, greener world. But perhaps Leopold is right, and by
commodifying or monetising sustainability, we are sending ourselves further down the path to
destruction. This debate will rage on, and no definitive stance will be taken in this essay, but this is
surely an important consideration when thinking about the future of impact investing.
Returning from the more colourful debate of environmental ethics, this essay now discusses a
particularly beneficial outcome from an increased adoption of impact investing by a growing number
of investors. As Allen (2016) and others have shown, the problems of climate change will only be
addressed if we are able to limit cumulative emissions in line with a 2°C scenario and this will
undoubtedly require most developed countries to reach net zero carbon emissions by the end of the
century. Indeed, as Pfeiffer et al (2016) have shown, the electricity generating “capital stock” on target
for 2°C will be a massive ‘stranding’ of energy assets that cannot operate or carbon capture and
storage technologies will have to become adopted at a constant pace during this century. What this
means in relation to impact investing is not only that investing in assets that yield sustainability
benefits will become increasingly attractive but also that investing for ‘net zero’ will be a major
component of companies investment strategies. The Oxford Martin Initiative on Net Zero Investment
is an academic research programme seeking to ask important questions about how companies all over
the world plan to get to net zero. The programme aims to educate shareholders so that they can hold
companies accountable for putting forth a plan to reach net zero. Impact investing will aid in this goal,
as investors who are conscious of climate and environment concerns will surely be more likely to hold
companies accountable to net zero initiatives. This is an important benefit of increasing the market
share of investment that could be considered “impact” because it could pressure industries to make
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sure they are in line with net zero emission plans by mid-century, which could limit cumulative
carbon emissions and provide a better chance of reaching 2°C or even 1.5°C.
This essay has argued that impact investing is an important and increasingly viable (both in
sustainability and finance terms) component of global investment and that it will remain an integral
way to supplement the financing of public goods such as renewable energy and infrastructure.
Though not as strong in this area, impact investing can also supplement financing for habitat
conservation. There exist myriad debates about the benefits and trade-offs of impact investing, and
while many of these are not yet finished, they will be important to consider as impact investing
becomes a more popular and common strategy for investors. What is clear is that impact investing
provides benefits for investors, for countries (governments) trying to limit carbon emissions, and for
the planet. Though some questions remain about whether impact investing will be sustained
throughout this century, there are many reason to be optimistic that impact investing will more than
adequately supplement financing for public goods that help countries meet ambitious mitigation
targets this century.
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