Attenborough factor pushes oceans on to SRI agenda

The public is increasingly conscious of environmental challenges facing the ocean economy, and the capital markets are taking note. Industries using the oceans are numerous and fragmented, making allocating money in a sustainable way challenging. But some routes are open for investors looking to improve activities involving plastics, shipping and fishing. Jasper Cox reports.

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One of the obstacles to tackling global environmental problems like climate change is the disconnect between localities: it is a global problem, but tackling it involves lots of changes at the local level, which individually have little demonstrable effect.

Nowhere is this challenge better encapsulated than through the swathes of the earth covered in water: how can drops in the ocean make a difference?

The United Nations’ sustainable development goals focus on the oceans through Goal 14, which concentrates on pollution, acidification and fishing.

“There are different ways to think about how companies can help with SDG 14,” says Jessica Alsford, head of the global sustainability research team at Morgan Stanley based in London. “Some companies can adapt to reduce the potentially negative impact of their products on the oceans — that’s what we’ve seen a lot with the consumer goods companies for example with plastic packaging.”

She adds: “Then there are companies providing solutions for oceans, but we found this to be quite complex.”

In terms of what role investors can play, Alsford distinguishes between allocating capital towards firms offering a solution, and engaging with firms to shift their business models away from destructive practices. Of course, investors could also simply stop offering capital to the latter.

With the help of UK television presenter David Attenborough, who tackled it in his Blue Planet programmes, the issue of plastic waste has rocketed to the forefront of the world’s attention.

This has not escaped capital markets participants. Alsford says plastics was the topic she was most frequently asked about last year. According to MSCI, the number of earnings calls mentioning “plastic waste” last year increased by 340%, versus 2017.

It is not just about tugging on heartstrings: caring about plastics has a commercial logic.

“It’s almost a virtuous circle: the theme was capturing the media and people’s imaginations, and from an investor point of view you could see how consumer behaviour and regulation might change and therefore this could have material consequences for companies,” says Alsford.

Governments are certainly taking a keener interest. The EU wants 90% of plastic bottles to be recycled by 2029.

“Investors are seeing the general trend of governments ensuring that the full cost of plastics sits on the balance sheet of business, not the taxpayer,” says Felix Gummer, a director at Sancroft in London and a member of the UN Principles for Responsible Investment’s plastic investor working group.

The topic might also be a proxy for management quality. “Investors are increasingly using plastics as a barometer for a company’s ESG [environmental, social and governance] performance,” says Gummer. “If a company doesn’t have a ready answer on a subject that has been on the front pages for the last two years, investors will rightly look very closely at its governance.”

While consumer goods companies might lose market share if their customers and the state get annoyed with their plastic waste, other firms may benefit from investing in recycling infrastructure. If others follow China in banning imports of waste plastic, countries will face more pressure to process their own rubbish.

But the recycling sector may need government support via regulation to ensure demand is steady enough, as its economics depend on bulk and the cost of oil. A decade ago, UK investors were burnt by the oil price crash, which made virgin resin much cheaper than recycled material.

“Enough investors caught a cold to create real reticence to re-enter this space,” says Gummer.

One plastics company keen to show action on waste is LyondellBasell, the listed Dutch firm familiar to bond investors. It has a project with Finnish firm Neste to produce plastics from renewable sources and a recycling venture with Suez.

SRI


Shipping: the fuel challenge

Meanwhile, the shipping industry is grappling with a push to make its emissions cleaner: both for the planet and for the local environment.

“We know a lot of coastal areas are looking very closely at ships’ diesel emissions and the impacts on their air quality,” says Gummer.

From the perspective of reducing carbon emissions, shipping may face more scrutiny as other sectors clamp down. “It is going to come into much sharper focus,” says Gummer. “As we remove petrol and disease road vehicles, the much dirtier marine engines and their effect on coastal air quality are going to find themselves in the crosshairs.”

From 2020, ships will face a stricter limit on sulphur in fuel oil under the International Maritime Organization’s regulations. Firms will either have to retrofit scrubbing technology on to vessels, or buy low sulphur fuel.

Two companies, Wärtsilä and Alfa Laval, offer the scrubbing technology. Both are listed, and Alfa Laval is a bond issuer. For pure green investors, though, neither is perfect, with Alfa Laval making fossil-fuel-burning products like heaters and boilers, and Wärtsilä providing technology and services in natural gas distribution.

The Sustainable Shipping Initiative (SSI), which focuses on reshaping shipping, produced a report last year on low emission vessels. It said biofuels can be used through internal combustion, mirroring current technology and reducing implementation costs compared with other alternative power options. But, it warns that due to its large demands, the industry will need biofuels that are not derived from food, to avoid weighing on global food production. Hydrogen fuel cells are another option, but could hit profits.

The SSI said: “The technological maturity” of these options was a concern, and that achieving the required development by 2030 requires “the most ambitious members of the industry to challenge the status quo”.

Alsford says investors are also interested in whether firms can ensure ships are decommissioned responsibly, even if they have only been leasing them: rather like how other firms might be asked to have responsibility for their whole supply chain.


Fishing: profit with purpose

When it comes to fishing, more sustainability would have a particular benefit: it would provide an environmentally-friendly alternative to land-based meat.

“There’s a move away from beef and a move towards healthier, more sustainable protein from a health and wellness perspective but also from a sustainability, climate, water use perspective,” says Jason Scott, co-managing partner at Encourage Capital in New York.

Encourage Capital is an investor looking to tackle environmental and social problems. It has invested in sustainable fishing and aquaculture, alongside other organisations like Rare, Althelia and Aqua-Spark.

A problem for any investor looking to boost sustainable fishing on a large scale is the fragmentation of the market, particularly along the supply chain: fish take a circuitous route from the sea to the plate. Encourage Capital has invested in two seafood companies that are vertically integrated, giving them more control over the sustainability of the supply chain.

Scott says many investors in the seafood industry are not interested in providing capital to get firms to be sustainable. But he believes the picture is changing, as capital matches consumer demand and sustainability goals.

Sustainable investment does not have to go into vertically integrated firms. SafetyNet Technologies creates devices to make catching fish more efficient and sustainable, particularly through reducing unwanted catch. It responds to tougher regulations on those fishing.

The firm has found investment from an ocean-focused fund, a conservation organisation and a social impact venture capital firm. “It feels like investors are more willing to talk with companies like ours about supporting our growth,” says Dan Watson, founder and CEO in London. “This idea of profit with purpose is becoming more palatable.”

Watson’s business, designed to be profitable in its own right, not reliant on grants, is a good example of the confluence of investor interest in sustainability and the regulatory push, both of which are propelled by public concern.

SafetyNet is a small fish in the ocean economy. But while Alsford of Morgan Stanley is right to point to the complexity of finding firms providing oceans solutions, Watson’s company is a sign that it can be done.

A different colour of bond

Accompanying the surge in interest in green bonds, some borrowers have turn to themed “blue bonds”, focusing on financing sustainable activities related to water. The Seychelles issued a $15m deal last year to improve the sustainability of fishing and marine tourism, for example, that was called a blue bond.

Nordic Investment Bank followed earlier this year with a Skr2bn ($221m) blue bond of its own. It has a broad environmental bond framework where water management and protection is one of six categories, and for the first and only time it decided to issue a more specific themed bond under that framework.

“We have the green bond programme but there were some investors who wanted to target something related explicitly to  water,” says Jens Hellerup, head of funding and investor relations in Helsinki.

“Many of the investors were Swedish. They are facing out to the Baltic Sea and see what is happening there. The Baltic Sea is still a little bit polluted so there is a lot to be done.”

Eligible projects included wastewater treatment, prevention of water pollution and water-related climate change adaptation. One adaptation project is the redevelopment of the Slussen water locks in Stockholm, increasing drainage capacity and allowing higher floodgates.

Hellerup says that NIB does not yet have the assets to issue another blue bond, but it could issue one again at some point in the future.

“There is big competition to finance blue assets among our peers, banks or even by the capital market itself,” he says.