With so many now options available for sustainable investors, the prospect of actually choosing a strategy can seem daunting. So what makes impact investing a path truly worth pursuing?
With the energy sector representing the single largest source of global greenhouse gas emissions, transitioning from fossil fuels to renewable energy is arguably the most important thing we can do for our planet today. Or, as the United Nations’ top climate change official puts it: “Energy is at the heart of the climate change emergency and it must be at the heart of its solution.”
In response to that mandate, investors are reportedly putting more money into the energy sector than any other. According to Harbour Asset Management, this shows the power of impact investing to not just avoid companies that are contributing to climate change, but actively supporting those responding to the global crisis.
The transition away from fossil fuels won’t be easy, but a few businesses have shown it can be done, such as Danish power company Ørsted – one of the companies included in Harbour Asset Management’s Sustainable Impact Fund.
For years, Ørsted was one of the most coal-intensive companies in the world. With the vast majority of its energy derived from fossil fuels, the state-owned firm (aptly known as Danish Oil and Natural Gas, or Dong Energy until relatively recently) was labelled Denmark’s “dirty secret” – the black cloud hanging over the nation’s seemingly clean, green image.
In 2009, however, the company announced it was officially going to clean up its act, pledging that by 2040, 85% of its energy would be derived not from fossil fuels but renewable sources instead. Immediately, it ditched its plans to open two new coal-fired plants across Europe and, over the next few years, accelerated its transformation by divesting from its oil and gas assets to invest in renewables like wind and solar instead.
Today, Ørsted is the leading offshore-wind power producer in the world with control of almost a third of the global market. And since 2019, Ørsted confirmed its fossil fuel firm-turned-clean energy giant status when it announced more than 85% of its energy was now being sourced from renewables – a whopping 20 years ahead of its own transition schedule.
“We really want to invest in the agents that are actually going to make a difference,” says Chris Di Leva, portfolio manager at Harbour Asset Management. “That means you can’t ignore companies just because they weren’t sustainable or impactful in the past. Some of these companies have adapted quickly to the changing world and have gone on to do some amazing things, with Ørsted being a great example of this.”
“We think you’ve got to have an open mind and look across the entire market. If you turn your back on companies because you don’t like one part of their business, as opposed to getting to know them and taking a closer look at what they’re doing, you’re potentially turning your back on companies that are making a massive change for the better.”
As well as looking at companies successfully taking part in the global energy transition, many impact investors are also turning their attention to the startups creating new and innovative ways to tackle our most pressing social and environmental issues. In New Zealand, a startup that’s attracted investment within the Sustainable Impact Fund is Nilo – an Auckland-based startup offering a solution to the world’s ever-growing reservoir of plastic waste.
With much confusion and inefficiency around recycling in New Zealand, Nilo uses a process that allows waste to be converted into new industrial products, such as commercial resins to replace the use of formaldehyde – a harmful chemical still commonly used in the timber industry today. It’s also currently working to create an alternative to bitumen (aka asphalt) to help make our roads less fossil fuel intensive to produce.
“On the one hand, what Nilo is doing is taking something that was going to be thrown away and creating something useful with it,” says Di Leva. “On the other hand, what it’s creating is replacing something that’s highly greenhouse gas-intensive to produce, and that’s really exciting because its products are a part of so many of the things that we use every single day.”
However, investing in companies via equity and bonds aren’t the only ways to support organisations actively looking to address global issues like climate change. As a diversified growth fund, the Sustainable Impact Fund also invests in bonds issued by the International Financial Corporation (IFC), a subsidiary of the World Bank focused on encouraging the growth of the private sector in developing nations. According to Di Leva, one of the bonds the fund invests in has financed projects building tram cars in Ukraine, helping to build infrastructure supporting the country to shift to a more low carbon future.
“Having finance available for these developing countries so they can get infrastructure that allows them to be lighter emitters is really important, but of course, no one really wants to finance that. That’s why it’s up to the likes of the IFC to help,” says Di Leva.
“It’s a great example of taking what’s typically a more stable – even boring – part of the portfolio but still making sure we’re allocating capital to projects that are doing good things.”
The Sustainable Impact Fund recognises that not every opportunity is going to be found within a single market. It’s a key reason why the fund partners with global experts (Mirova and T. Rowe Price) and startup specialists (Icehouse Ventures) to ensure investors receive not just a competitive financial return, but also an assurance that their wealth is being used to help influence positive social and environmental change, with every investment made within the fund measured against the UNs’ 17 Sustainable Development Goals.
“The world’s a big place and the universe of companies you can invest in is in the thousands, and to find the right ones, you really need to know their ins and outs,” says Di Leva. “That’s why we believe you need a bunch of different specialists looking in the different areas of the market to find these opportunities. We don’t think any single fund manager can do it alone.”
Those opportunities also involve creating change. Harbour Asset Management believes impact investors have the power to use their capital to push companies, which may be less than perfect, to an improved and more sustainable future.
“Just by turning your back on a company doesn’t make a difference because there’s always going to be someone out there that cares less than you that’s going to buy those shares instead. That’s why we’d rather invest in these companies and back them to make the change.”
And they’re not just backing them to make change. Di Leva says because of the work they’re doing they’re also going to be great long term investments for customers.
“These companies are solving massive global problems, disrupting existing industries, and therefore in our view will likely deliver superior returns over time.”