Wars and regional conflicts are rarely the result of one driving factor but rather a series of inter-related, complex issues arising, often in a disarrayed manner, that traditional investment models find difficult to predict. With the causes and consequences so tricky to identify, insurers, pension plans and other asset owners need to factor sustainability risks into investment risk models on the same level as economic and business perils, to not just hedge the downside but provide exposure to emerging upside to. Adding an additional ‘S’ into ‘ESG’ will ensure Sustainability is given the prominence it needs.
The war and conflict in Syria has been a depressing story of population displacement, leading hundreds of thousands to flee their homes in the search of safe harbour. Coverage of the civil war has largely focussed on the desire for political change, religious matters and if the war is a new proxy conflict between Russia and the West. Little has been said about water scarcity.
A savvy portfolio manager would have learnt a lot should he or she been exploring the issue of drought in the Middle East in the late part of 21 century’s first decade. From 1950 to 2012, Syria’s population increased over 730%, leading to a decrease in the country’s total renewable water of 5500m3 per person, per year to under 760, a level categorised as ‘‘scarce’’.
This is not the first time that water has played a role in contributing to violent conflict in the MENA or Levant regions. In fact, the earliest recorded conflict over water in the region occurred over 4,500 years ago, when a dispute over access to irrigation water led Urlama, king of the city-state of Lagash in ancient Mesopotamia, to cut off water to deprive neighbouring Umma.
When competition for resources arise, the basic ‘fight or flight’ instinct becomes more obvious, but the anticipation of such events occurring is difficult to model unless they are directly being sought out or at least factored into an overall risk analysis.
The term itself – ‘fight or flight’ – clearly tell us a lot about how quickly such issues materialise from a population unrest to all-out war or desertion, as individuals feel the need to react fast to survive.
Sustainability as part of the investment mix is therefore about always keeping one eye on the long term, potentially marginal issues initially but ones with the potential to explode into all-consuming factors. After all, over the longer-term, historic behaviour is and will be exposed.
So, what exactly is and what best defines Sustainable investing?
Summary answers from several portfolio managers I asked for input on this question were:
- Long-term sustainability of returns is based on recognising changing societal concerns, planetary shifts and boundaries of human behaviour
- Responsible investment is a first step to sustainable investment
- Sustainability is about wider, unseen connotations that take account of negative events that other risk models may not (risk of famine and competition for resources being one).
- Engagement that promotes sustainability is being pushed by changing legal and regulatory frameworks, for example, the Senior Managers and Certification Regime that legally ties senior managers to the fact that anything that happens on their watch they will be held liable for. Ensuring good practise, continually, will make for more sustainable financial institutions.
- Consumers awareness of ESG issues means that businesses will be impacted through access to finance as banks and other lenders question the future of those with poor environmental, societal and governance records.
- The emergence of the sharing economy and recycling of goods. As the sharing economy (one where no money for goods or services is swapped) enters the mainstream, businesses being substituted for free transactions will be impacted.
The reality of everyday activities is that such long-term and difficult to model issues often get pushed down the road. In investment committee and trustee meetings, hard pressed for time as they are, such discussions do simply gets moved to next week when no immediate, obvious threats to the portfolio are apparent.
Certain (less devastating than Syria) sustainability linked trends that are widely reported and are being responded to by many asset owners:
Each of the above could arguably fall under the category of good risk assessment. However, each goes beyond the short-term and considers. What effect will these factors have 5 – 10 years from now?
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