Marilou van Golstein Brouwers, Chair of the Management Board of Triodos Investment Management, discusses the necessity of long-term investing and why it is better suited than a short-term approach to meeting today’s global challenges.
2015 was a turning point year, shaping the environment in which we, as an impact investor currently work. Last year, the whole world joined together, where 193 countries first agreed on the Sustainable Development Goals in September in New York, and then in December in Paris 195 countries agreed to reduce their carbon output to keep global warming to well below 2 degrees. It is the first time in human history that there is this joint sense of urgency and willingness to cooperate from all countries, whether they are developed or emerging and from all stakeholders including governments, NGOs, the private sector, academia, and citizens.
Last year also marked one of the first times that it became universally understood that alleviating poverty, tackling climate change, and protecting the environment are interlinked and can no longer be approached in silos. In 2016, the goal of Triodos Investment Management has been to continue the momentum set forth by the SDGs. In order to reach these SDGs and also the goals in the Paris agreement, there is an important role for private capital and for investors.
'Tragedy of the horizon'
More and more investors are aware of this. Over the last few years, there has been an accelerating movement to divest from fossil fuels, with investors like the Rockefeller Brothers Fund and other funds and individuals taking the lead – a movement which was originally started by college students who urged colleges like Harvard to stop investing millions in endowments in the fossil fuel industry.
But institutional investors are still lagging behind, despite calls for action also from regulators. In a speech given by Mark Carney, governor of the Bank of England in September last year at an international meeting for all major insurance companies, he questioned why so little action was taken by institutional investors to address climate change. He answers this by what he calls the 'tragedy of the horizon'. It’s well-acknowledged that climate change will cause terrible economic and ecological damage. Unfortunately these consequences will only be visible in the longer term, and current governance cycles, both in politics, institutions and companies are only focusing on the short-term.
This short-term focus is one of the main flaws in our current financial system. Another flaw is the disconnect between the financial products and the real economy.
Rethinking what generates return
Impact investing is different. It focuses on the real economy and looks more to the longer term. Impact investing goes back to the essence of investing; creating real value and contributing to the quality of life. I see impact investing not as a niche but as a transformative power to change investing.
The investment industry has gone off-track. With a dominating short-term focus, it has evolved more into trading and speculation. Most financial products lead a life of their own, disconnected from the real economy, disconnected from serving people. It is about financial gain, not about creating real value. For example, look at the dominant role of high-frequency trading in today’s investment markets. The European Securities and Markets Authority estimates that 24-43% of all trade on European markets concerns high-frequency trading. On the American markets, this percentage is even higher.
We need a paradigm shift in the investment industry from thinking in short-term financial gains to long-term investments, creating real value and adding to a better quality of life. Impact investing has the potential to be that paradigm shift. It is a different way of looking at value. It is about managing impact, risk and return.
Laying the groundwork
The SDGs and the Paris Climate Summit can both serve as a framework for the remainder of 2016 and beyond; an inspiration, giving context for impact investing. Impact investing is about bringing the soul back into money.
Institutional and private investors can connect to the many entrepreneurs all over the world who have set up their companies to contribute to positive change. Impact investors invest with a long-term intention and thus have the potential to lay the foundation for a future in which the quality of life comes first.
And that is something we very urgently need, given the enormous challenges we face. We need to do our utmost to safeguard a sustainable society, for ourselves and for the generations that come after us. How we invest our money now will determine what our future will look like.