Ecological debt may add to global financial burden

21 Oct 2011 | 09:45
Charlie Walker
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General Electric wind turbine

Henderson head of SRI George Latham believes we are building up ecological debt just as we accumulated financial debt in the past.

The global economy is in danger of adding an ‘ecological debt’ to its financial burden, according to George Latham, head of sustainable and responsible investment (SRI) funds at Henderson Global Investors.

Latham said SRI-type products are an underinvested part of the marketplace, despite the growth potential they offer, as well as a lower risk profile today than in recent years.

He warned: “Just as we were building up financial debt when we were running down the savings ratio in the US, we are building up ecological debt today.
“We do not know what the catalyst is going to be for the crystallisation of this debt”.

Latham said in the future, non-SRI will become largely uninvestable as companies such as oil majors find their finite resources exhausted. This ‘tipping point’ at which SRI will come to the fore is unpredictable, however, and the ‘trigger’ will only become clear after the event, he said. Consequently, Latham said sustainability concerns should have a real impact on the way investors choose funds today.

SRI only occupies a niche part of the investment market, about 2%-3%, according to Latham, suggesting there is huge potential for growth in this sector. A report from Accenture earlier this year suggested European governments would need to spend €2.9trn on low-carbon technologies before 2020 to meet the need for sustainable fuel. 

In the UK, the National Grid is also committed to investing £25bn in infrastructure over the next 10 years to improve efficiency, said John Dawson, head of investor relations at National Grid.

Despite underinvestment in these areas, Latham believes risk within the sector has fallen over the last couple of years.

He said: “Three or four years ago, when cleaner energy stocks were trading at 50 or 60 times earnings, there was clearly the making of a bubble in that market.”

Vestas Wind Systems, for example, saw its share price peak on 22 May 2009 at €423, compared to 12 October this year where its shares were valued at €95.65.   
Latham continued: “We were able to sell down our exposure there and implement some more defensive themes.”

Mark Hoskin, of Worldwise Investor, an investment fund performance database, said there has been a move away from the more “traditional” areas of sustainable investments such as clean energy as other sub-sectors have begun to outperform.

Worldwise Investor benchmarks, produced by averaging the various returns of funds categorised by theme, show the clean energy sector fell 28.93% over three years and 22.67% over five years.

The agriculture sector delivered a positive return of 29.43% over three years and 28.12% over five years, but it remains a volatile market, Hoskin said. Other sectors such as forestry and water, both of which have produced good returns over the last three years, are far more stable sustainable investments options, he added.

Hoskin suggested IFAs’ lack of support for SRI investment, and in particular ethical funds, might account for the underinvestment in the sector. He said there is a high demand for ethical investment in the market, but this has not been translated into actual investment in ethical opportunities.

Categories: SRI

Topics: DebtEthicalHenderson

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