He says issues such as the need for electrification and decarbonization, which in turn rely on more efficient car batteries and greater scale in renewable energy, will provide immense investment opportunities.
“Innovation is the key thing that will take sustainable investing to the next level, and determine who are the winners and who are the losers,” says Schoenmaker, Professor of Banking and Finance at the Rotterdam School of Management, Erasmus University.
“This can be seen in the electric car industry. You don’t only need to change the factory to make electric cars; you need to retrain the workforce from traditional engineers into software engineers. And you may not be able to retrain some of them, which means you need to hire new staff.”
“Germany, for example does not have enough electrical engineering students. So it is behind companies in the US and Japan that saw this coming many years ago and have invested in the right people and technology.”
Then there is the issue of being able to mass produce the cars. “The will to make them is certainly there, but currently there isn’t enough cadmium and lithium in the world to make the batteries that could replace all petrol-driven cars,” Schoenmaker says. “And many cars don’t have the range needed for long-distance trips.”
“However, advances in battery technology are moving very fast. Spintronics can improve capacity through spinning electrons that creates magnetism. You just change the way these batteries are structured to get far more capacity without generating too much heat.”
“This kind of innovation will make batteries more efficient – there are people are out there at technical universities and in car factories working to solve it. Again, this goes back to innovation.”
He says it’s a similar story with solving the coronavirus pandemic. “The solution to Covid-19 is the vaccine. Governments are not producing vaccines; it is innovative companies who are doing that.”
“Governments can help out with smart R&D subsidies, but innovation only happens in the world of entrepreneurs and companies that want to gain market share.”
“When they first started building the Channel Tunnel, they didn't know at the time what the type of train was going through it – but they built it anyway. That takes vision.”
Renewable energy is an industry that has the vision but lacks the scale, he says. “The renewable network currently doesn’t have the capacity to handle times when the wind isn’t blowing, or the sun isn’t shining. It doesn’t have enough slack yet to handle a shock.”
“If we are to move society to renewable thinking, we must become more resilient to the shocks. A bank has enough capital to absorb a shock, and manufacturing has enough inventory to absorb a shock, but renewable energy doesn’t. It’s just a matter of scale.”
Schoenmaker says there is also an important shift away from making money for a select few shareholders to long-term value creation that benefits everyone – the move from creating only wealth, to targeting wealth and well-being.
“In the capitalist system, we are used to listed companies being required to create value for their shareholders,” he says. “The purpose of shareholder value is to create financial capital using financial capital. They just want to make a profit.”
“Long-term value creation argues that we need to create social, human and natural capital as well. Society is moving towards using sustainable development to reap future profits by integrating this idea that by investing in society, you create economic value in the future.”
“Much of it relies on human capital, particularly in emerging markets, where there is so much untapped potential. We’re often dealing with entire communities, and society does not accept negative natural capital investments anymore.”
Much of this can be achieved through impact investing, which is doing as its name suggests and making an impact in moving sustainable investing into a more dynamic direction, Schoenmaker says.
“What I see is a shift from ESG investing, which is basically done from a risk perspective trying to avoid harm, towards impact investing driven by things like the Sustainable Development Goals,” he says.
“That shift is extremely important, because we are not going to get sustainable development by risk avoidance. We need to grasp the opportunities of making a positive impact.”
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