̽��ֱ�� of Cambridge - Jake Reynolds

Virtual investment experiment indicates informed consumers choose sustainable funds even with reduced returns

Anonymous — Tue, 22 Oct 2019 08:27:08 +0000

Research by the ̽��ֱ�� of Cambridge Institute for Sustainability Leadership (CISL) simulated real-world investment scenarios in order to analyse the extent the investing public values sustainability.

̽��ֱ��‘virtual investment experiment’ offered a unique, science-based rating format developed by CISL to help people understand easily the sustainable performance of funds. ̽��ֱ��study found a strong preference for sustainable investing even with a 2-3 per cent sacrifice in returns.

̽��ֱ��study also found that participants under 35 and inexperienced savers had a stronger preference for sustainable investment; while income, gender and education had no effect on preference. It also showed there was stronger preference for avoiding funds rated poorly for sustainability than for actively choosing funds with high sustainability, indicating avoiding negative environmental and social impacts is more influential in decision-making than the pursuit of positive impacts.

“ ̽��ֱ��study shows that people want more from their capital than only financial returns,” said Dr Jake Reynolds, Executive Director, Sustainable Economy, CISL. “Given the right information, they will avoid investments which harm people or the environment.

“In the real world most savers are not provided with that information; meaning they are unable to make positive choices. Given what we know about climate change, destruction of nature and high levels of inequality, that needs to change.”

‘Walking the talk: Understanding consumer demand for sustainable investing’ is a collaboration between CISL, the Department of Psychology and the Psychometrics Centre, and was commissioned by the Investment Leaders Group (ILG), which is convened by CISL.

̽��ֱ��behaviour of a sample of 2,000 US citizens was analysed to reveal insights into how their decision-making was influenced by the availability of information on the environmental and social performance of funds alongside traditional financial data.

Participants were asked to choose between pairs of funds whose fund factsheets included additional information related to sustainability. In order to simulate real-world behaviours, participants knew they had a chance of receiving a financial investment of $1,000 in the fund of their choice.

̽��ֱ��typical fund factsheets’ additional clear social and environmental impact information was based on a unique rating format called the Investment Impact Framework developed by CISL for the ILG. ̽��ֱ��Framework applies sound science to the measurement and communication of social and environmental fund performance.

“Our findings pave the way for more informed and more effective dialogue between the finance sector and the public about how capital should be invested,” said John Belgrove, Chair of the ILG and Senior Partner at Aon. “This couldn’t come at a more significant or appropriate time - when the world is looking to financial institutions to work towards the systemic change needed to tackle environmental and social sustainability, and climate change.”

Originally published on the CISL website.

A new study has shown that when given clear social and environmental performance data, consumers display an appetite for sustainable investment, even with lower returns.

People want more from their capital than only financial returns

Jake Reynolds

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̽��ֱ��text in this work is licensed under a Creative Commons Attribution 4.0 International License. Images, including our videos, are Copyright © ̽��ֱ�� of Cambridge and licensors/contributors as identified. All rights reserved. We make our image and video content available in a number of ways – as here, on our main website under its Terms and conditions, and on a range of channels including social media that permit your use and sharing of our content under their respective Terms.

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Climate change sentiment could hit global investment portfolios in the short term

sc604 — Thu, 12 Nov 2015 14:50:34 +0000

̽��ֱ��report, “Unhedgeable Risk: How climate change sentiment impacts investment,” concluded that about half of this potential loss could be avoided through portfolio reallocation, while the other half is “unhedgeable”, meaning that investors cannot necessarily protect themselves from losses unless action on climate change is taken at a system level.

“This new research indicates that no investor is immune from the risks posed by climate change, even in the short run,” said Jake Reynolds, Director, Sustainable Economy at the Cambridge Institute for Sustainability Leadership. “However, it is surprisingly difficult to distinguish between risks that can be addressed by an individual investor through smart hedging strategies, and ones that are systemic and require much deeper transformations in the economy to deal with. That’s what this report attempts to do.”

While existing studies have analysed the direct, physical effects of climate change on long-term economic performance, this new report, commissioned by CISL and the Investment Leaders Group, looks at the short-term risks stemming from how investors react to climate-related information, from policy decisions and technology uptake, to market confidence and weather events.

Reynolds continued, “What’s new about this study is its focus on the potential short-term impacts which could surface at any time. Major events, such as the outcome of the upcoming United Nations climate talks in Paris in December, can send signals which drive market sentiment – sometimes slowly, sometimes rapidly – and this study allows us to model the implications.”

̽��ֱ��study modelled the impact of three sentiment scenarios on four typical investment portfolios.

̽��ֱ��scenarios tested were:

1. Two Degrees, limiting average temperature increase to two degrees Celsius (as recommended by the Intergovernmental Panel on Climate Change [IPCC]) and collectively making relatively good progress towards sustainability, and future socio-economic development goals.

2. Baseline, where past trends continue (i.e. the business-as-usual BAU scenario) and where there is no significant change in the willingness of governments to step up actions on climate change.

3. No Mitigation, oriented towards economic growth without any special consideration of environmental challenges, rather the hope that pursuing self-interest will allow adaptive responses to any climate change impacts as they arise.

̽��ֱ��portfolio structures modelled were:

1. High Fixed Income, comprising 84 per cent fixed income, 12 per cent equity, four per cent cash; mimicking the strategies of insurance companies.

2. Conservative, comprising 60 per cent sovereign and corporate bonds, 40 per cent equity; mimicking certain pension funds.

3. Balanced, comprising 50 per cent equity, 47 per cent fixed income, three per cent commodities; mimicking certain pension funds.

4. Aggressive, comprising 60 per cent equity, 35 per cent fixed income, five per cent commodities; mimicking certain pension funds.

Each scenario was linked to a series of economic and market confidence factors used to explore macroeconomic effects within a global economic model. In turn these were cascaded down to portfolio level through an industry sector analysis. ̽��ֱ��factors included alternative levels of carbon taxation, fossil energy investment, green investment, energy and food prices, energy demand, market confidence, and housing prices.

̽��ֱ��study found that shifts in climate change sentiment could cause global economic growth to reduce over a 5-10 year period in both the Two Degree and No Mitigation scenarios as a consequence of economic adjustment. In the longer-term, however, the study found that economic growth picks up most quickly along a Two Degrees (low carbon) pathway, with annual growth rates of 3.5 per cent not only exceeding the baseline (2.9 per cent), but significantly exceeding the No Mitigation scenario (2.0 per cent).

This is consistent with recent comments by the Governor of the Bank of England about the risk of “potentially huge” losses to financial markets due to climate change in the short term, and the “merit” of stress testing elements of the financial system to understand and deal with climate risks.

Urban Angehrn, Chief Investment Officer of Zurich Insurance Group and member of the Investment Leaders Group, echoed this view: “As an insurer we understand that the potential human impact and economic cost of extreme weather and climate events are vast. Multiplied by population growth, coastal migration and urbanisation, the threat seems even larger. We see it as our responsibility to help our customers and communities to build resilience against such events. As investors, the tools to help us translate that threat into investment decisions are - at present - limited. This report provides us with a meaningful basis to discuss investment strategies that tackle climate risk. It will help us go beyond the significant commitments that Zurich has already made.”

Under the Two Degrees scenario, the Aggressive portfolio suffers the largest loss in the short term, but it recovers relatively quickly and generates returns above and beyond the baseline projection levels by the end of the modelling period. In contrast, under a No Mitigation scenario, a

Conservative portfolio with a 40 per cent weighting to equities (typical of a pension fund) could suffer permanent losses of more than 25 per cent within five years after the shock is experienced.

“Far from being a lost cause, investors can ‘climate proof’ their investments to a significant extent by understanding how climate change sentiment could filter through to returns,” said Scott Kelly, research associate at the Centre for Risk Studies, ̽��ֱ�� of Cambridge Judge Business School, and one of the authors of the report. “However, almost half the risk is “unhedgeable” in the sense that it cannot be addressed by individual investors. System-wide action is necessary to deal with this in the long-term interests of savers.”

̽��ֱ��report offers a series of insights for investors, regulators and policy makers including:

Seeing climate change as a short-term financial risk as well as a long-term economic threat.
Recognising the value of “stress testing” investment portfolios for a wide range of sustainability risks (not only climate risks) to understand their financial impacts, and how to manage them.
Pinpointing areas of “unhedgeable” risk where system-wide action is required to address risks that cannot be escaped by individual investors.
̽��ֱ��importance of using capital flows to improve the resilience and carbon profile of the asset base, especially in emerging markets.
Identifying significant gaps in knowledge where new research is required, including of an interdisciplinary nature.

Originally published on the CISL website.

A new report by the ̽��ֱ�� of Cambridge Institute for Sustainability Leadership (CISL) reveals that global investment portfolios could lose up to 45 per cent as a consequence of short-term shifts in climate change sentiment.

No investor is immune from the risks posed by climate change, even in the short run

Jake Reynolds

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Putting a price on our future

lw355 — Mon, 07 Oct 2013 15:47:26 +0000

How can businesses value and manage their dependencies and impacts on the natural world? How can banks be encouraged to make clean energy investments? As sustainability moves up the agenda, the ̽��ֱ�� of Cambridge Programme for Sustainability Leadership (CPSL) is linking Cambridge academics with international businesses to help their leaders make responsible decisions for the long-term.

“Companies are starting to think about the ecological impact of their activities across their supply chain,” said Dr Bhaskar Vira, ̽��ֱ�� Senior Lecturer in the ̽��ֱ��’s Department of Geography. “We’re trying to put a real economic value on natural resources.” Production of many mass market consumables, from beer to chocolate, takes advantage of many natural resources that aren’t currently factored into operational costs.

“A global food manufacturer, for example, wants to be aware of all the ingredients that have gone into one of its flagship confectionary products, and the way in which they’ve been grown and sourced,” said Vira. “Throughout that supply chain there may be impacts on the environment that aren’t currently factored into the price of the product.” Similarly, an agribusiness giant depends on tomatoes supplied by farmers in California – a water-scarce region. Working with CPSL, we’re are asking whether there is something this company can do to encourage farmers to be more water efficient in their working practices.”

“If a company was asked to pay for the groundwater used in its factories, how much would it cost? Water use might be 10% of the overall operating budget, and that’s the kind of figure a company might start to take seriously. At the moment they don’t need to pay this cost, but if a government starts to regulate in the future they might need to. Similarly, if the government of California starts to regulate farming practices and the cost of tomatoes suddenly shoots up, certain companies need to factor this into their long-term business planning. It makes good strategic sense to anticipate some of these future changes.”

CPSL has drawn together a group of companies in the food, agriculture, and extractive industries, into a project called ‘Right Values for Externalities’, whose goal is to reflect the external costs incurred in product lifecycles on their balance sheets. “We created teams of one economist and one ecologist to work on case studies with companies, using company data to understand what its impact might be,” said Vira, who provided scientific guidance for this project, co-funded by the Natural Environment Research Council as part of the Valuing Nature Network (www.valuing-nature.net). ̽��ֱ��work has resulted in the creation of practical guidance for companies wishing to undertake an evaluation of external impacts associated with their activities, and to understand how these risks can be anticipated and prioritised in their decision-making.

̽��ֱ��project is one of many convened by CPSL, whose Director Polly Courtice said “we’re facing a perfect storm of having to provide food, energy and water for a population that’s growing from seven billion to nine billion, and the pressures this puts on society. CPSL is having a continuous series of conversations with businesses to work out how to respond to these challenges.

“We are driven by how we can help to promote change, and avert environmental and social crises that are much nearer to the present day than we used to think,” said Courtice. Vira added, “We want to use our case studies as examples of what other businesses should be thinking about. CPSL plays a key role in this as a trusted intermediary between the ̽��ֱ�� and businesses –that trust is developed through long term relationships.”

At a different level of engagement, Professor Danny Ralph, Academic Director of the Centre for Risk Studies at Cambridge Judge Business School, is involved in a CPSL project aimed at finding ways to unlock greater mainstream investment in clean energy. “ ̽��ֱ��Banking Environment Initiative is a means of tackling key sustainability issues,” he said. CPSL drew together six banks and six energy companies, and linked them with the Centre for Risk Studies, and with Dr Chi Kong Chyong and Dr David Reiner in the Judge’s Energy Policy Research Group, to investigate valuation models for clean energy investments.

“Banks want to invest in companies they believe will cope in the future. But green technologies are expensive, and energy companies making these investments are unlikely to recoup their costs. Should an institutional investor choose a company that appears to be very forward-looking in its R&D and is moving towards green technologies, but isn’t very ‘capital efficient’, over a more focused one?” asked Ralph. “A long-term investor needs to ask which companies are positioning themselves so they can adapt their basic products to a world we can’t even predict.”

Using a methodology called real options analysis, the Cambridge team showed the importance of building in a degree of flexibility, to account for decision-making around uncertain future market conditions. “In a standard banking valuation, a company would diversify its risks,” explained Ralph. “But climate change, for example, is affecting the whole world. You can’t diversify something we’re all going to face together. What we’ve done is highlight that investors need to stop thinking about diversification in terms of a portfolio where the risks are unrelated. This changes the nature of the uncertainty around investment risk.”

“Danny’s work is helping to drive a conversation in the industry about valuation methods, and is having a big impact on the thinking of these banks,” said Dr Jake Reynolds, CPSL’s Director of Business Platforms. “If we really want to effect change, we have to find a way to align sustainability with business models, and that means banks discussing this with their clients. This project has provided a brilliant platform for that - these conversations about clean energy were just not happening before.”

“We are working with people dealing with real problems that our research community may have a great deal to contribute to,” said Courtice. “We try to act as a bridge between the knowledge base in the ̽��ֱ�� and that in the business community, and create opportunities for them to interact. We’re looking for areas of mutual interest and we’re maintaining the engagement long enough for the issues to emerge.”

CPSL’s Executive Education programmes raise awareness of issues from climate change to resource scarcity to transport. Around 6,000 business leaders have now completed a programme, and on leaving have become part of CPSL’s global Sustainability Network.

A key focus of CPSL’s work now is to bring this network into closer contact with the ̽��ֱ��’s research. A series of business platforms have been set up, bringing together senior practitioners with shared interests in particular business problems from climate change and natural capital depletion, to responsible investment and product innovation. ̽��ֱ��aim is to help practitioners identify what needs to change, and to take practical action to achieve this with their peers.

“Leaders come on our Executive Education programmes and then ask what they can do to change their organisations,” said Reynolds. “They realise that even if they became the world’s most sustainable company that wouldn’t solve the problem because their peers may not be with them, or their suppliers, or their clients, or government policy might be tilting business the other way. So they start thinking about their industry and the wider influence it has over the economy. Many come to the conclusion that they have to work together on these big problems rather than go it alone.”

Helping big businesses consider their impact on the environment is leading to a re-evaluation of activities to combine profitability with sustainability.

If we really want to effect change, we have to find a way to align sustainability with business models

Jake Reynolds

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