The sustainable revolution marches on

rethink sustainability

The sustainable revolution marches on

The global move toward sustainability — and tackling challenges such as climate change, inequality and demographic shift — continues apace but there is a marked contrast in approach from the world's superpowers.

While the Chinese government under Xi Jingping has embraced sustainability, Donald Trump's administration has pledged to withdraw the U.S. from the 2015 Paris Accord on climate control.

But are the two sides really that different?


Sustainability efforts at different levels of government

In its Five-Year Plan for 2016-20, China is targeting an 18% reduction in carbon dioxide emissions by 2020, a 15% decrease in energy usage and the creation of a national carbon trading program. When it comes to pollution, the plan mandates a 15% reduction in sulfur dioxide and nitrogen oxide levels. And it requires air quality to be “good" or “excellent" 80% of the time in all major cities.

In the US meanwhile, there remains a strong commitment to "tackling" climate change outside the federal government. At state level, some governments are working effectively to propel the trend toward sustainability. That includes states with large populations such as New York and California. The United States Climate Alliance, a coalition of 16 states and Puerto Rico, is committed to holding up the Paris Agreement and accounts for just under half of the US economy. Meanwhile, the “We Are Still In" campaign, which pledges to meet the goals of the Paris agreement, has got the backing of over 1,000 governors, mayors, companies and investors, amongst others.

California has maintained its auto emission rules, even as the administration is rolling back standards at the federal level. In New York, Governor Andrew Cuomo has proposeda law to ban hydrocarbon infrastructure from being built on New York's shoreline, in response to the Trump administration announcing a plan to open federal waters to oil drilling.

While Trump has attempted to boost the coal industry, market forces are causing it to shrink. Six plants were shuttered last year, and experts expect more closures in the future. In addition to being a pollutant, coal has proved to be uneconomical as a source of energy. About 4% of US coal factories are expected to be unplugged this year.

In the event Trump leaves office after one term, his successor may adopt a more friendly approach toward sustainability. The U.S. can't officially exit the Paris Accord until Nov. 4, 2020, one day after the next presidential election. And if a new president is elected, the U.S. could re-enter the agreement 30 days after the new president takes office.
 

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Renewable energy has become competitive

The private sector, meanwhile, isn't waiting for the federal government to take the initiative, illustrating how it is economic tailwinds that are driving competitiveness in the sector and not just policy. According to the latest data from the International Energy Agency, $297 billion was spent in 2016 on renewable sources of energy production, more than double the $143 billion spent on nuclear, coal, gas and fuel-oil plants.
In the past, governments had to grant incentives to push adoption of alternative sources of energy. But now costs for solar and wind power have dropped enough to make them competitive with other sources of fuel. Francis O'Sullivan, research director of Massachusetts Institute of Technology's Energy Initiative told The Wall Street Journal: “Wind and solar now represent the lowest-cost option for generating electricity." The cost of generating power from onshore wind has dropped about 23% since 2010, while the cost of solar photovoltaic (PV) electricity has plummeted 73%, according to the International Renewable Energy Agency (IRENA). The agency expects all renewable energy sources will be price-competitive with fossil fuels by 2020.

In the past, governments had to grant incentives to push adoption of alternative sources of energy. But now costs for solar and wind power have dropped enough to make them competitive with other sources of fuel.

Future trends affecting sustainability

Several issues will dominate public and private sector efforts on sustainability in coming years. On the environmental front, challenges that need to be addressed include climate change and the depletion of natural resources in the context of a growing population.

On the human side, there are the demographics: an expanding population, which is growing older and becoming more mobile. That population growth and increased migration could lead to a strain on resources. Responding to demographic changes is also an investment opportunity — firms that successfully cater to the "silver" generation have the potential to deliver above-market growth rates and excess economic returns.

Technological advances and trends are also disrupting traditional governance, social and consumption models. For example, US consumers may purchase $100 billion of their groceries online by 2022, according to the Food Marketing Institute/Nielsen, up from $14.2bn last year. An increase in online grocery purchases can mean fewer auto trips to supermarkets, which would reduce carbon emissions and further impact the future of the high street retail sector.

Sustainability is a good bet for investors

Given the strong movement toward sustainability, it is no wonder that investors are increasingly taking notice. A recent study by McKinsey & Co. found that more than 25% of global assets are now invested according to environmental, social and governance (ESG) principles. And returns have begun to follow. MCSI reported that its All-World index, which includes ESG principles, outperformed its index, which excludes ESG, over the five years to June 2017.

An increase in online grocery purchases can mean fewer auto trips to supermarkets, which would reduce carbon emissions and further impact the future of the high street retail sector.

As we can already see with the investments and the returns generated worldwide related to sustainability, ESG investing seems to be a smart choice for the planet but also from a business point of view. The impact of a such investment could be positive for governments, corporations and citizens alike.

Important information

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.

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