A CALIFORNIA WINEMAKER CAME up with an ingenious way to shrink its carbon footprint: Use lighter bottles to reduce the weight of every case it ships. The company now burns less fuel distributing its merlots and chardonnays, cutting greenhouse gas emissions by an estimated 3,000 tons annually—the equivalent of taking 573 cars off the road for a year.
Meanwhile, one of the world's biggest retailers has announced that it intends to power all of its stores with renewable energy sources by 2020. As part of the initiative, the company contracted with several large solar companies to install systems at 400 of its U.S. facilities. Already, after just a few years, the retailer reports that it has saved $5 million in energy costs.
What might once have been a couple of unusual stories about companies with big hearts look today like examples of an American and global business phenomenon. Companies of all sizes, all around the world, are taking bolder steps to make their practices more sustainable. That means reducing the negative impact of their processes — from the raw materials and energy they consume, to the communities they operate in, to the waste they create.
“Clients have expressed an interest in impact investing. Industry research shows there is a big market for it, and in recent years, performance has historically been strong.”—Surya Kolluri,Managing director for Policy and Planning, Bank of America Merrill Lynch
Traditionally, people have associated sustainability with environmental issues. But a sustainable business model is much broader than just making responsible use of natural resources and protecting the environment. Increasingly, firms are also talking about the sustainability of their business practices: Does the company respect its workforce? Operate efficiently? Act as a responsible citizen, both locally and around the globe?
This sustainability revolution isn't happening just because these companies have started to care about the environment and society. It's also happening because sustainability, as many of these businesses are discovering, can be profitable—especially as increased efficiency and better resource management pay off over the long term. And this, in turn, is contributing to the rising popularity of so-called impact investing, which allows investors to pursue growth even as they help to make the world a better place.
Today, in fact, nearly six in ten high-net-worth investors, up from 51% just two years ago, agree that the social and environmental impact of a company is important when they’re deciding whether to invest in it,1 says Surya Kolluri, managing director for Policy and Market Planning at Bank of America Merrill Lynch. "Clients have expressed an interest in impact investing," he says. "Industry research shows there is a big market for it, and in recent years, performance has historically been strong. All of that makes for very attractive investment opportunities."
Below are a few areas where we believe the sustainability revolution is set to make a real impact.
A Call to Action on Climate Change
The warming of our planet is one of the defining issues of our time. In fact, 2015 was the earth’s hottest year since 1880, when records were first kept.2 Since the world became industrialized, global temperatures have risen by 1° C. Another degree hotter is seen by most climate scientists as the threshold of catastrophic climate change.3
Climate change—and our carbon-dependent economy—are already compromising the world’s financial stability. If action is not taken, the net cost of climate change could reach 3.2% of global GDP by 2030, with emerging markets and poor countries hit hardest.4 Investors will also be exposed to risk, especially in the sectors of agriculture, energy, financial services, insurance, and travel and tourism.
But there is some good news. Investments in clean technology have grown three-and-a-half times over the past decade, to between $300 and $350 billion annually.5 By 2030, low-carbon energy could account for roughly 60% of the global energy mix, with fossil fuels declining to around 40%.6 Within that same time frame, BofA Merrill Lynch Global Research forecasts at least $13.5 trillion in low-carbon energy investments in a number of areas, from wind and solar to next-generation vehicles, batteries and storage.7
Efficiency Is Helping to Fuel the Future
"Energy efficiency is absolutely key to controlling growing demand," says Sarbjit Nahal, head of thematic investing at BofA Merrill Lynch Global Research. He notes that, despite great improvements in fuel-efficient cars and energy saving appliances, "around two-thirds of the economic potential of improving energy efficiency remains untapped."
Innovation could play a big role here. "Smart" electrical grids, for example, reduce energy consumption by offering utilities real-time data on power usage, which allows them to fine-tune distribution and increase efficiency. The U.S. Department of Energy estimates that 65 million smart meters have already been installed in homes and businesses, accounting for one-third of all electricity customers.8
Similar technology will help drive more sustainable energy use across many industries, Nahal believes. For example, fuel accounts for about one-third of airlines' operating costs. Sensors added to jet engines can deliver vital data that helps the airlines increase fuel efficiency, and Nahal estimates that each 1% improvement could translate into industry savings of $30 billion over 15 years.
"Around two-thirds of the economic potential of improving energy efficiency remains untapped."—Sarbjit Nahal,Head of thematic investing, BofA Merrill Lynch Global Research
Yet as much as conservation can achieve, any plan for sustainable energy also needs to involve alternative, renewable sources. In the U.S., BofA Merrill Lynch Global Research estimates that the number of installed solar panels that convert the sun's rays into electricity increased by more than 700% between 2010 and 2015.
That increase came about, in large part, because "solar is getting more and more cost-effective," says Krish Sankar, semiconductor capital equipment & alternative energy analyst at BofA Merrill Lynch Global Research. A drop in materials costs for solar panels has coincided with a rise in rates for conventionally generated electricity, meaning that in many parts of the U.S., solar-generated electricity is now cheaper per kilowatt-hour than electricity purchased from a utility.
What to Do About Water and Waste?
Among the most pressing sustainability challenges is water. Some 750 million people worldwide lack clean drinking water. And the problem is getting worse—California, for instance, is experiencing its fifth consecutive year of drought. And while available water shrinks, waste is expected to double between 2005 and 2025, and double again by 2050. The market for companies addressing the world's water problems could top $1 trillion by 2020, Nahal estimates, with waste management potentially becoming a $2 trillion business.9
In this video, Arif Naqvi with The Abraaj Group, a leading global investment company, discusses how shareholders, employees and local communities can all benefit when companies embrace sustainable practices.
Transcript of Video
Short-term solutions, Nahal says, will focus on existing technologies that can be more widely applied. For example, China plans to spend $66 billion to upgrade pipes and water-treatment plants to deliver clean drinking water to more of its citizens.10 Next, the country will need to clean up its water sources (nearly half of which are polluted) and increase water recycling. Similarly, today's technologies offer potential to turn "trash to cash," according to Nahal. While three-quarters of all global waste is sent to landfills, some countries are changing that equation. Denmark, for example, buries only 4% of its refuse. Of the remainder, 42% is recycled and 54% is converted into energy.11 Although challenges remain in developing environmentally friendly methods to make that conversion, "waste-to-energy is going to be an evolving area, and is forecast to be as much as a $36 billion global market by 2024," says Nahal, who notes that one ton of waste can produce up to 750 kilowatt-hours of power.12
Creating More Equitable Communities
But sustainability is about more than environmental concerns such as energy use, water and waste. "More and more companies are beginning to realize that they need to think about giving back and creating a more equal playing field in the societies in which they operate," says Arif Naqvi, group chief executive of The Abraaj Group, a leading private equity investor. "Sustainable capitalism" is a corporate ethos his firm aims to build into the companies it acquires. "In order to be a great company, you have to be doing things the right way," Naqvi says, and that means focusing on governance, transparency, hiring women, doing things that are transformative in the workplace and doing them safely. "While our overriding ambition is to deliver economic returns to our investors, companies that are better in all of these ways tend to deliver better profits."
There is growing evidence to support that idea. A 2014 Gallup survey found that business units employing a balanced mix of women and men increase their net profits by an average of 19% percent compared with businesses that have traditional, male-dominated workforces.13
Or consider the maker of a popular brand of yogurt. After implementing a companywide sustainability program, which included teaching employees how to conserve water and adopting eco-friendly packaging, it achieved cost savings of more than $24 million over six years. The firm also reconfigured its supply chain to increase profit margins for banana farmers in Costa Rica—which will help the communities that are so integral to the creation of its product.
Different Approaches for Different Investors
One of the advantages of emphasizing sustainability is that it may let investors contribute to solving global problems while also focusing on industries that make products in great demand—in effect, "doing well by doing good."
"People take all of these things for granted: 'Air is free. Water is free. Spend it, use it all you want.' That's a huge mistake."—Henry Kravis,Co-founder, KKR
Thanks to the growing interest in impact investing in general, the universe of mutual funds and other products created around these themes is expanding. Some investors also take a more activist approach, joining with other shareholders to effect changes at the companies in which they hold substantial amounts of stock. "Companies aren't necessarily going to listen to one investor," says Fiona Reynolds, managing director of the United Nations–supported Principles for Responsible Investment (PRI) Initiative, which has more than 1,545 signatories around the world—including Bank of America—all of which have committed to considering environmental, social and governance issues when making investment decisions. "Companies find it harder to ignore a coalition of investors representing 60 trillion dollars, which is why it makes sense for investors to work together to try and effect change."
Is the sustainability revolution itself sustainable, or could it simply be a passing fad? While it may have emerged only recently as a broad concern across the business landscape, sustainability is unlikely to fade away anytime soon—in part because of the urgency of the issues at stake. "I know now that you have to pay a lot of attention to this. People take all of these things for granted: 'Air is free. Water is free. Spend it, use it all you want,'" reflects the legendary investor Henry Kravis, co-founder of KKR, one of the world's top investment firms. "That's a huge mistake, because if you do that, what you're going to find is that it isn't going to be there when you need it."
3 Questions to Ask Your Advisor
- How can I add "sustainable" investments to my portfolio?
- What investment choices focus on energy efficiency or helping address climate change?
- Could investments in waste or water treatment fit my goals?
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1 “U.S. Trust Insights on Wealth and Worth,” 2016.
2 National Oceanic and Atmospheric Administration, 2016.
3 World Meteorological Organization, 2016.
4 DARA, Climate Vulnerable Forum, 2012.
5 Bloomberg New Energy Finance, 2016.
6 BofA Merrill Lynch Global Research, “A Call to Action—Climate Change Solutions Primer,” 2015.
7 International Energy Agency, 2015.
8 U.S. Department of Energy, 2014.
9 BofA Merrill Lynch Global Research, “No Time to Waste–Global Waste Primer,” 2013.
10 "Public health: A sustainable plan for China’s drinking water," Nature, July 30, 2014. http://www.nature.com/news/public-health-a-sustainable-plan-for-china-s-drinking-water-1.15619
11 EPA, Eurostat, 2012.
12 BofA Merrill Lynch Global Research, “No Time to Waste–Global Waste Primer,” 2013.
13 "The Bottom-Line Impact of Gender Diversity and Engagement," Business Journal, Gallup, January 20, 2014. http://www.gallup.com/businessjournal/166220/business-benefits-gender-diversity.aspx
The material presented in this article is based on information obtained by BofA Merrill Lynch Global Research as of July 2015.
Energy and natural resources stocks have been volatile. They may be affected by rising interest rates and inflation and can also be affected by factors such as natural events (for example, earthquakes or fires) and international politics. Impact investing is a new and evolving investment opportunity which may involve a high degree of risk.
Any information presented in connection with BofA Merrill Lynch Global Research is general in nature and is not intended to provide personal investment advice. The information does not take into account the specific investment objectives, financial situation and particular needs of any specific person who may receive it. Investors should understand that statements regarding future prospects may not be realized.
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