Sustainable Investing and the Developing World

How Sustainable Investing Will Lead to Developing World Success

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Most conversations about investing with environmental, social and governance considerations in mind tend to end up focusing on the usual S&P 500 or large European companies that most people recognize.

However, the US and European economies both appear to be challenged for significant further growth, with many such as Bill Gross calling for an end to the long bull market the West has enjoyed over the past few decades.

 

Perhaps the immediate growth opportunities will come from the developing world then. This makes sense in an age where technology makes location unimportant while globalization continues to gradually level the playing field. And what will put the developing world over the top is a successful focus on sustainable investing, which can allow them to overcome their environmental and social challenges, turning them into opportunities.

How can investors best take advantage of these trends?  Here are five ways:

1)   When looking across all asset classes, Infrastructure Investment stands out as a key expected driver of future revenue.  Five years ago, KPMG forecast an additional $40 Trillion of spending in this regard through 2050, or an average of $1 Trillion per year.  

Some forecasts see an additional $50-100 Trillion of new investment forthcoming, much of this will come in the developing world.

There are a number of ways to take advantage of this.  Longer term companies such as Boeing and Airbus have seen record levels of planes on order mostly from Asia.  As we wrote in this case study, Boeing has been succeeding partly through sustainability efforts with their plane designs being increasingly fuel efficient over time, and the company is +143% over the last five years.

Boeing's Market Outlook report looks forward twenty years, and sees over 36,000 new planes forthcoming and is a fascinating read.  

GE, Siemens, Ingersoll-Rand and other industrial companies are all focusing their efforts in these regions.  Siemens seeks an infrastructure investment future in the Middle East, including the complete rebuilding of major cities such as Cairo.

Suffice it to say, how this $50 or so Trillion Dollars is spent will go a long way towards determining both the success of large companies providing such services, but also to what degree the future global economy is sustainable as globalization continues to take hold.  

Investors are advised to look for the union of sustainable infrastructure and the developing world, which is the focus of many large companies who know that the developing world is or will soon become more resource constrained, and as our Value Driver Model work showed.

Companies who focused on this union outperformed the last five years versus markets overall.

2)  Sustainable Investing in the Islamic World tends to play out as so-called Sharia Investing.  In many ways, this in practice is a form of negative screening, but by original design was more of what is now known as Shared Value or Impact Investing.

 Mujtaba Wani, Associate Editor of the Journal of Environmental Investing provides a vision of how to truly implement Sharia into investing for best success, which creates a myriad of opportunities especially for financial service firms as the IMF and World Bank focus on this area.  This creates opportunities for large publicly traded banks and smaller new providers as well.

3)  These same so-called development banks are increasingly forming public-private partnerships or PPPs to scale infrastructure investment.  An example is today's announcement by the Asian Development Bank (or ADB) of a new partnership with large global banks.  $8 Trillion of investment is expected through 2020, or over $1 Trillion per year.  This is significant new business for banks and industry alike.  Watch for large industrial companies to benefit directly from this.

4)   Much of the developing world is in hotter climates and relies on coal for cheap energy.  At the same time, there is a growing drive to lower global carbon emissions, resulting in great momentum for solar and storage solutions.  Tesla's new storage systems are a first step in truly enabling solar at scale.  Distributed energy and local grids are a source of great potential, and larger utilities such as NRG are seeing this as their own opportunity and on a global basis. Solar markets are booming in India, and growth and interest will only rise as Pope Francis releases his climate change encyclical over the summer.

Whoever can best help leapfrog the developing world to lower carbon energy will likely be a very big winner indeed.

5)   Underpinning it all is a need for a sustainable financial system as well, as we wrote about is starting to happen in China.  If China can thrive going forward, it can perhaps only do so through fixing their environmental problems or that will remain a heavy burden.  Indonesia is another country to watch in a series of rapidly growing developing world markets. This new report shows how Indonesia can best succeed through a transition to a greener economy and a sustainable financial system.

Many other countries can learn from this one single country example, and future financial success is likely to flow from a combination of seeking better environmental and social conditions combined with growing financial strength.

That is the kind of shared value that would be best for the environment and the value of your investments at the same time.  Perhaps this will be Sustainable Investing at its finest, and the biggest opportunity of all.