We are often asked what we see coming down the road in the environmental and energy space. To say that change in the landscape is both surprisingly fast and tediously slow is likely obvious. But it’s an underlying truth that should be taken into account when considering how and when to respond to and proactively engage in change. We offer here some observations on expectations.
Corporate and personal understandings and actions are readily available to the general public and to interested-parties. We see all the tools in place today that allow virtually anyone anywhere to access environmental or social outcomes on most corporate and community actions in real time. We know folks working to make these kinds of data shares interactive, responsive and mobile. Data mining and the absence of data are being analyzed by artificial intelligence for screening, determinations and responses.
This level of transparency can be something that we attempt to either protect from or defend against, or we acknowledge the break in inertia and get ahead of it. Since this type of transparency is still being defined, there are elements of business processes and practices which can be improved upon today, giving those corporations a sustainable competitive advantage.
The green investor of 20 years ago looked very little like the equity investor of 20 years ago. Today, while they don’t mirror each other, these two investor groups have significant overlapping investment metrics and horizons. With upwards of 60% of impact investments coming from banks and private equity sources versus less than 10% two decades ago, the demand for seasoned management teams, improved financial rigor and returns and better defined exit paths have redefined the early years of green investing. Add to this the emphasis on social and/or governance metrics (environmental, social and governance – ES&G), and the impact investor has widened bandwidth influence.
Even with these increasingly stringent financial return demands, there appears to be no short supply of projects, processes and management teams pitching their capability to meet investor requirements. It is our observation that traditional tiered, risk-adjusted returns will continue (whether impact or non-impact investments) and that measured IRRs and ROIs will converge between the two investment groups, moreover we expect most project investors in both groups will demand some level of “doing good by doing well” ES&G investment performance.
Essentially, ES&G will become the norm, a part of investment-base case requirements. With this requirement, monitoring and measurement of ES&G to determine performance against assumptions will need to become standardized, which it presently is not. We expect this standardization to fully develop over the next five years, opening a number of opportunities for early investors to secure higher than expected standard minimums at no additional costs for the next several years.
Competitively advantaged products and services will continue to reflect environmental and socially sustainable products and services. This has been the trend for the last several years for advancing many business models, and we expect this trend to continue and to become more sophisticated.
We also expect that the pursuit of sustainable solutions may in some cases face economic barriers to full adoption. However, regardless of these economic barriers, cultural demands of environmental excellence (regulatory and social conscience) will maintain pressure for full adoption.
This is most obvious in the fossil fuels industry, which is under significant cultural pressure to quickly resolve the shortfall in low-carbon energy sources. Failing to do so has resulted in the birth and expansion of alternative low-carbon energy technologies; energy-efficient products and services; bio-energy and renewables, and other technologies.
A nuance to this corporate trend is the growth of sustainable personal lifestyles, which we expect will lead to products and services in the retail sector – from wearables to end-of-life services.
Other sub-industry, industry, market-based and culture-driven trends we expect to be substantial include: