2013 will see an acceleration in the investing attractiveness of companies embracing sustainability. The three drivers behind this investment trend are:
Emerging sustainability accounting standards. The world’s 3000 largest companies face over $2 trillion in liabilities created by their environmental impacts. This is equal to 50 percent of their EBITA profits. The accounting industry is now exploring how to instruct corporations to report this off-balance sheet liability in their 10K. The growing awareness of this accounting change has begun to influence equity investment analysis.
C-suite engagement. There is growing awareness among CEOs, COOs and CFOs on how the solving of root cause problems with sustainable best practices will grow profits through lower costs and increased competitiveness. The result is the greening of the global supply chain and a focus upon product designs that “cost less, mean more.”
The consumer search for “In me, on me and around me” solutions. Consumers are increasingly focused upon being smarter, healthier and greener. Consumers are moving past endearing ads about polar bears. They are increasing their focus upon how a product impacts their lives.
Based on these drivers, here are five industry megatrends that every investor should consider running from, running toward or embracing:
Run from coal
Coal is a fuel that the world increasingly cannot afford. Coal’s appeal is its price competitiveness on a therm-per-pound basis. That is a false cost analysis based on coal’s significant externality costs. I have shoveled coal. It is dirty. The cost to clean coal is high and climbing higher. Coal is also on a collision course with water. Producing electricity from coal takes a tremendous amount of water and last summer’s drought brought a curtailment of coal-fired power production due to a lack of water or because water supplies were too warm for effective cooling. China, which now accounts for half of the world’s coal consumption, is confronting a water choke point to its expansion of coal-fired power plants. In a not too distant future, China will have to choose between using water to support coal-fired electricity generation or for the production of food and the servicing of urban citizens. This also applies to U.S. states like Georgia, Alabama and Arizona that use a higher percentage of coal for electricity production and are increasingly confronting water supply constraints. Investors beware! Bottom-fishing for coal companies, or companies that rely upon cheap coal-fired electricity for their competitive advantage, have risks similar to attempting to catch a falling knife.
Run toward natural gas
Hydraulic fracturing has upended the energy industry. Natural gas’ growing supply and price competiveness is stealing market share from coal. It is blunting the growth of renewable energy. It is poised for global revenue growth. A telling example is the recent milestone shipment of LNG from Norway to Japan through an Arctic shipping-lane emerging due to global warming. The only potential overhype for natural gas is its potential growth in vehicle transportation because a gaseous fuel is typically not competitive against liquid fuels’ energy density. While the evidence is still emerging on how hydraulic fracturing might be a long-term risk to water supplies, the natural gas industry has been effective in adopting technologies, operating practices and lobbying that is limiting its current exposure to the type of constraining regulation now confronting coal. Sempra is an example of a company positioned to realize revenue growth from generating electricity with natural gas and delivering its through pipelines and LNG ports.
Run toward LED
Lighting is a significant cost because it accounts for approximately 20 percent of U.S. commercial and residential electricity consumption. LED is a technology solution that cuts electricity costs by using one-tenth the electricity of an incandescent lightbulb. LEDs have a much lower heat signature that reduces the cooling load of a building further saving energy and money. The auto industry has fallen in love with LED lights for their looks and most especially because of their limited energy requirements on a car’s battery. LED technologies are benefiting from Moore’s Law that is pushing production costs toward price competitiveness against all other lighting technologies. Winners in this space include the LED lighting manufacturers plus lighting contractors, building owners and cities that benefit from lower operating costs due to LED street and signal lighting.
Run toward car companies
The car industry has embraced sustainability based upon their analysis that the price of gasoline is not going to go down and stay down, no matter how much we drill. Their 2013 strategy is to redefine a “fun” car as being turbo-charged and digitally connected while also introducing fun-to-drive hybrid and hybrid-electric cars that are becoming affordable. Their challenge is the Millennial generation that is increasingly viewing car ownership as a cost to them and their environment that should be minimized. For the Millennial generation, it is Apple’s “Think Different” mentality that drives their car purchase behaviors compared to their parents’ “See The USA In Your Chevrolet.” 2013 should see continued record-breaking car sales assuming gasoline prices continue to remain in the $4+ per gallon range and the Fed’s monetary-easing policy continues to make car-financing almost cost-free.
Sustainability’s underlying investment appeal is its ability to deliver profits by solving root cause environmental and social problems. Apple and its superior product designs are the poster child for how investors and consumers are focusing upon results. Apple products just work. Apple’s shift to the cloud is reducing costs and waste streams. Apple has become a revenue-generating machine because its digital products, apps and software are just darn cheap, have no consumer waste stream and often are free through seamless updates to an owner’s iPhone, iPad and computers. Apple’s continued results-based success with consumers is setting the performance bar for all businesses. Yes, Apple needs to improve its fair labor practices. Yes, they need to incorporate recycling more aggressively into their product designs. But the great news for Apple, and every other business that seeks to copy Apple’s results-focused strategy, is that consumers are rewarding companies with purchases if they see evidence of “mean more and cost less” results.
The final article in this series to be posted tomorrow is on Sustainable Economics in 2013.
Bill Roth is an economist and the Founder of Earth 2017 He coaches business owners and leaders on proven best practices in pricing, marketing and operations that make money and create a positive difference. His book, The Secret Green Sauce, profiles business case studies of pioneering best practices that are proven to win customers and grow product revenues.