August Theme: FINANCE

by Katrin Scholz-Barth, President, SustainableQATAR

Make Money Matter

This month, we’ll tackle money – a truly global issue with consequences for Qatar and the planet, especially when current trends and future opportunities go unnoticed!

Reflecting on the 2008 financial crisis, many individuals and regular people lost their entire life-savings. Retirement and pensions funds were wiped out. Gone! People were forced to continue to work and delay retirement. A great number of people still suffer financial hardship and the global economy is still recovering. Will you want to end up like this?

We dedicate this monthly blog and four weekly challenges to Green Finance. Our goal is to build financial literacy as it relates to global warming and shed light on under-explored green financial opportunities to maximize our returns while making our money matter.

So, join us as we uncover new trends in finance and challenge long-held beliefs about money management. We’ll debunk some myths and learn about:

Green Investment – Building future-proof Investment Portfolios for College/Retirement/Pension/Sovereign Funds
Green Banking – Understanding financial products and services (loans and bonds) for impact and driving market demand toward climate solutions
Value-based Spending – Buying products and services from companies that commit to people, planet, profit (B-Corps)
Fintech and Crypto Currencies – Restoring trust in the financial sector through transparency.

Investing and managing money to build a financially secure and comfortable future by itself is a challenge for most people. There are so many uncertainties. Combining our financial goals AND our personal values like climate action seemed counterintuitive at best, like a contradiction in terms and definitely impossible in the past. Who hasn’t tried and gave up, demoralized?

Well, green finance and green investing are quickly becoming a reality because maximizing returns is all about reducing risks. Full stop. And the finance industry, including banks, insurance and investment companies, are catching on fast because this is where it hurts. Risking and losing money hurts!

We aim to raise awareness about how global warming affects climate, supply chains, industries, economies, societies, and our physical and financial well-being – and ultimately, how global warming puts our assets and investments at great risk of potential loss.

We can take climate action with our money! At no cost. We only need an open mindset and willingness to test our own assumptions, accept realities, build awareness, share knowledge, and use our money to financially secure our future, whether for college, retirement or anything in between that requires reliable returns and profit optimization in a changing global economy.

An increasing number of studies by Goldman Sachs, Harvard Business School, MIT, and all big consulting firms confirm the value of the business case for sustainability, and show that companies with good Environmental, Social, and Governance practices enjoy:

25% higher stock value
fastest growing stock value
more productive workforce
better protection against value erosion even in a down economy
fewer risks
higher profitability

based on sound environmental performance, including innovation in process engineering, increased efficiencies using limited natural resources like water, energy, and turning waste into raw materials. All of this results in reduced operating costs and increased profits.

“Environmental, social, and governance (ESG) factors relevant to a company’s [core] business can provide essential insights into management effectiveness and thus a company’s long-term prospects.”
Laurence D. Fink, Chairman and CEO of BlackRock (the world’s largest asset management corporation with $6.84 trillion in assets under management as of June 2019) in his annual letter to CEOs already in January 2017.

Why green finance?

Why does it matter, and why is it so important to understand where our money goes? Well, for starters, our personal financial gain depends on what industries and activities our money funds. As informed individual investors we can take an active role in directing our money to where we want it to go to work without risking losses.

All climate actions are important and rewarding, no matter how big or small they may feel. And that’s particularly true for spending money. Every riyal counts, because every riyal can be a VOTE for better products and services for climate solutions. When everyone understands the Power-of-One in spending money, then individual actions are infinitely scalable and compound positive impact for win-win-win-situations.

The long held belief was that capitalism is good for the economy, as expressed in Gross Domestic Product (GDP). But GDP only measures the flow of stuff in and out of an economy and is like a company that only counts the assets, not the liabilities, on its balance sheet. So, by only looking at one side of the balance sheet, we can’t calculate the true net-worth of an economy. We need the whole equation to calculate true net-worth and values, including liabilities, like life and life-sustaining. No business CEO would run a company just counting cash flow. We have to count profit AND loss; count all aspects of a balance sheet.

Some examples

Let’s take a quick look at three specific examples where environmental performance is becoming a driver for financial returns:

In China, as a result from burning coal and oil, air pollution kills approximately 350-500,000 people every year. That is half a million people – more than all Qatar nationals together. A study commissioned by the China Environmental Minister revealed that China’s real GDP was probably negative. These findings were unacceptable to the Central Committee and the study disappeared. After a period of time, continuing the trend of poor air quality and deaths, China decided to bring it back and analyze its entire economic activity. With new commitment, Circular Economy is now the basis of Chinese Development Policy with energy efficiency being a key component of it as a way to reduce air pollution from coal burning with a goal to increase human health in the country as measured in a new metric, the Well-Being Index. The Chinese Central Government can implement such significant shifts by changing the five-year plans of its centrally planned economy! That is massive risk reduction on several fronts including energy, air, water, health, and insurance to secure economic and financial stability.

Another example is Palm Oil, a $8 billion per year industry. Why is palm oil receiving such bad press from investors? Because the palm oil industry erodes its own underlying natural resources by $12 billion per year, accounting for a total loss or net-negative value of $4 billion. Palm oil plantations destroy the natural environment on which it is based, and thereby destroy the ecosystem services that these natural environments deliver. Rainforests produce oxygen and clean air, sequester carbon, filter water and provide habitat to indigenous people and wildlife. Why has the Palm Oil Industry gotten away with this? Because no value is assigned to ecosystem services. Nature does this for free, at no cost to us. But we do start to pay for the loss of ecosystem services. The world as we knew it, changes. Crazy new weather patterns wipe out soil and plants in flash floods and dry out otherwise fertile soil during droughts. People start to lose jobs, income and livelihoods. People become vulnerable and get sick and lose their securities. So not even the industry’s promise of creating jobs holds true for long. As a consequence, investors have started to divest from palm oil in a move to protect the assets and value of its investor base.

With regards to energy, over the last years Germany has installed 25-times more solar panels than California because Germany changed its laws. Germany pays a fair price for solar energy generation to anyone who installs solar panels. The commitment to renewable energy meant that rates went up by $2-3 per month or $50 per year. Deutsche Bank estimated that altogether the investment in solar energy generation was about 8.6 billion per year. However Deutsche Bank also found that had Germany NOT invested in solar, and kept burning coal, the rates would have gone up 9.4 billion more per year. So, the investment in policy changes paid off, because it accounted for the liabilities (air pollution, health, wellbeing) as well as the assets (generating energy).

The energy market is interesting because the cost of wind and solar is falling dramatically while the cost of building new coal plants is rising. Nuclear energy plants are off-the-chart expensive, even without counting all the externalities like safety, security and waste disposal, the real cost.

Considering the energy options purely from an investment perspective, renewable energy alternatives are simply less risky and promise a less volatile, more secure return on investment.

What needs to happen to transition to a low-carbon and climate resilient global economy?

Changing from a traditional risk assessment to counting assets AND liabilities
Shifting from a traditional short-term fixation on Return on Investment (ROI) to Return on Capital Employed (ROCE), accounting for all natural resources
Transitioning from the traditional short-term thinking that ignited the 2008 financial crisis to a regenerative economy and shared value.

“Investment in the green economy needs to take place on a far greater scale over the coming decades if we are to achieve the Sustainable Development Goals (SDGs) and the ambition of the Paris Agreement. In 2016, the Organisation for Economic Cooperation and Development (OECD) took a major step to support these objectives by establishing a Centre on Green Finance and Investment.”
OECD

In October 2019 leading experts across the green finance community will convene at the annual Forum on Green Finance and Investment in Paris to help catalyze and support the transition to a green, low-emissions and climate-resilient global economy.

Capitalism is still a very powerful tool to measure profit if we do it right. Capitalism is not just the flow of money and stuff. The true value of Capitalism is about all forms of capital, including intact human communities and intact ecosystems on which basis we exist.

When we understand how investors value companies and assets, intellectual property, long-term strategies; and when we understand the structure and expectations of pension funds, private equity investors, and government agencies as sources of funds – than, as empowered individuals, we can exercise our spending & purchase powers. We are better prepared to accept new trends toward risk reduction including divesting from fossil fuels and purchasing greater efficiencies in appliances, cars, and homes. Applying this knowledge in investments will increase our asset value and reduce risks to our security.

As informed investors we can take charge, change our behavior and put our money into investment portfolios of our choice. We can actively participate in funding companies that commit to people, planet, profit. In doing so, we take climate action with our money and enable a low-carbon and circular economy for climate solutions, turning what used to be considered only a moral imperative on its head and calling it our financial survival strategy.

Photo by Jp Valery on Unsplash