TBLI Weekly - June 6th, 2023


TBLI Weekly - June 6th 2023

Your weekly guide to Sustainable Investment

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Affordable housing and environmental sustainability: Building a greener future

by Avneesh Sood

In the realm of real estate, two key concerns have emerged as critical factors for the future: affordable housing and environmental sustainability. With increasing urbanization and the pressing need for environmentally conscious practices, it has become imperative to explore the intersection between affordability and eco-friendly living. As we strive to create thriving communities and a better future, the significance of affordable housing and environmental sustainability cannot be overstated.

Affordable housing is a pressing issue globally, with millions of people struggling to find adequate and affordable shelter. The demand for affordable housing continues to escalate, particularly in rapidly growing urban areas. Housing affordability affects not only the socio-economic well-being of individuals but also the overall stability and inclusivity of communities.

Simultaneously, environmental sustainability has taken center stage in the quest for a greener future. The real estate industry, responsible for a significant portion of global energy consumption and greenhouse gas emissions, plays a pivotal role in addressing environmental challenges.

Environmental Sustainability in Housing

Environmental sustainability in housing revolves around principles such as energy efficiency, water conservation, waste management, and the use of eco-friendly materials. By adopting these principles, the real estate sector can significantly reduce its carbon footprint, contribute to a healthier ecosystem, and mitigate the impact of climate change.

The advantages of sustainable housing are manifold. Firstly, it promotes energy efficiency, resulting in reduced energy consumption and lower utility bills for homeowners. According to recent reports, energy-efficient buildings in India have witnessed energy savings of up to 30%. Secondly, sustainable housing improves indoor air quality, creating healthier living environments and reducing health risks associated with pollutants. Additionally, these eco-friendly homes offer long-term cost savings through efficient water management systems and reduced maintenance expenses.

To achieve sustainable housing, the industry is embracing green building practices and technologies. This includes the utilization of renewable energy sources such as solar power, installation of rainwater harvesting systems, implementation of effective waste management strategies, and the use of eco-friendly building materials like recycled or locally sourced products. Furthermore, green building certifications like the Indian Green Building Council’s (IGBC) Green Homes rating system are gaining prominence, encouraging developers to adopt sustainable practices.

The Intersection of Affordable Housing and Environmental Sustainability

The affordability and sustainability gap can be addressed by incorporating innovative design strategies that optimize resource utilization and minimize energy consumption. Recent reports indicate that energy-efficient affordable homes have witnessed significant reductions in energy costs, resulting in long-term savings for residents. Moreover, the adoption of sustainable building materials, such as recycled or locally sourced products, helps lower construction costs while minimizing environmental impact.

Promoting energy-efficient and eco-friendly designs is crucial in achieving the affordability-sustainability balance. Integration of renewable energy sources like solar power not only reduces reliance on traditional energy grids but also cuts down electricity bills for residents. Additionally, the implementation of water conservation measures, such as rainwater harvesting systems, not only ensures a sustainable water supply but also reduces water expenses for homeowners.

Read full article

Spotlight on long-term trends: Themes for yield

The UBS Chief Investment Office (CIO) discusses how fixed income can play a role in thematic investing. Given their current preference for fixed income over US equities, they review thematic investments in the context of municipal and emerging market bonds.

Municipal bonds

Investors may be interested in a longer-term investment theme but lack the risk appetite to allocate significant capital to thematic equities. For these investors, municipals offer a direct way to lend capital to companies operating in industries undergoing transformation, with the added bonus of being tax-exempt. The taxable equivalent yields for longer-dated AA rated munis can exceed 7.5% in states that impose income taxes at high marginal rates. On a risk-adjusted basis, that is arguably superior to other fixed income asset classes. In the near term, we’re encouraging investors seeking income to view the recent decline in municipals as an opportunity to buy tax-exempt bonds at attractive yields in advance of the heavy summer redemption season. We currently prefer municipal sectors that should exhibit credit quality resilience in an uncertain economic environment. Several of these sectors align with areas of opportunity that we’ve identified in our suite of longer-term investment themes, including bonds issued by water and sewer (W&S) enterprises and public power agencies.

Municipal water and sewer utilities

There are over 100,000 water and sewer providers in the US, the majority of which are publicly owned. They are typically owned by state and local governments or a public service authority and serve about 88% of the US population. Drought conditions had been acute in the western region for the past several years before a series of atmospheric rivers brought much need relief to the region this past winter. The drought, however, challenged water supplies and raised questions about utilities’ capacity to function effectively in a demanding operating environment. Scientists believe the western region in particular, will continue to experience abnormally dry periods and suffer through cycles of extreme heat and drought, which will continue to test the region’s water supply and dictate how utilities manage, obtain, use, store, recycle, and conserve water. Capital-intensive projects such as aqueducts, desalination plants, and water storage projects will strain some issuers' credit profiles.

The good news is that large municipal W&S issuers are generally well positioned to meet today's challenges. They tend to maintain strong levels of liquidity and low-to-modest leverage. W&S issuers possess key attributes, including monopolistic service territories and independent rate-setting authority, which enhances credit quality.

In CIO’s opinion, W&S issuers are well positioned to handle the challenges facing the sector; however, not all issuers are created equal, and we recommend large well-established issuers that have a diverse client base, strong reserves, and adequate water rights.

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Opinion: ESG doesn’t care about politics

Imagine you’re buying a home. You research mortgage interest rates, comparable prices in the area and your Realtor walks you through a home you’re interested in. But only half the doors are open.

Are you willing to buy it? For most, the answer is no. You want to see the rest of the rooms, check out the décor, lighting and layout. Make sure there isn’t mold, leaky pipes or other skeletons hiding behind those doors. All of these factors are essential to assessing the value of that house for you and your family.

Investors should do the same thing—consider as much information as possible—when they buy and sell other assets. If you are looking at buying stock in a soda company, for example, last year’s sales and the company’s debt load are important information to consider. However, the company’s future profits and stock prices can also be impacted by how much water that company uses and if it comes from water-stressed areas. Similarly, if you’re looking to buy an internet stock, you would want to know if the company has ever been found guilty of misusing personal information, because any potential fines may impact their bottom line.

These examples use environmental, social or governance (ESG) data points that are material to a company’s overall financial performance to make investment decisions. Unfortunately, misinformation around what ESG is has sparked increased politicization that could ultimately limit investors’ choices on how they construct their portfolio.

What’s in a name?

So why is there so much uncertainty around ESG? The short answer: When people talk about ESG, they most likely mean different things.

Investors, journalists and politicians use that one broad term—ESG—to mean different ways to apply environmental, social or governance data in investing. That confusion has sparked legislation in several states and even Congress to ban ESG use in investments, making the investment strategy even more polarizing in the public’s eye.

It doesn’t need to be that way.

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Carbon financing in action: Restoring peatlands in Indonesia

As founder and CEO of PT Rimba Makmur Utama, Dharsono Hartono was early to carbon financing. He says building trust, social capital, and community buy-in are critical for success.

Back in 2007, Dharsono Hartono ran into a friend, Rezal Kusumaatmadja, while attending a palm oil conference. Kusumaatmadja proposed they start a business together to help combat climate change in their homeland of Indonesia. For Hartono, who had recently returned to Indonesia after studying engineering and then working in the United States, the idea struck a chord. “We were just two young entrepreneurs looking to make a change, and we now manage one of the largest emission reduction and forest restoration projects of its kind in the world,” says Hartono.1

The friends founded PT Rimba Makmur Utama with the idea of using carbon financing to preserve and restore peatland ecosystems in Central Kalimantan. The region had been seriously damaged by fires since the early 1990s. PT Rimba Makmur Utama launched the Katingan Mentaya Project to deliver on these goals, including providing sustainable livelihoods to local communities. Today, the Katingan Mentaya Project manages 157,000 hectares of land, encompassing 35 villages. It issues approximately 7.5 million metric tons of emissions reductions per year, which is, by its own calculations, the equivalent of taking two million cars off the road.2

Hartono sat down with McKinsey partner Josh Katz to discuss the Katingan Mentaya Project, how it has evolved over time, what he’s learned about nature-based solutions, and why he’s optimistic about the future. An edited version of their conversation follows.

McKinsey: What challenges did you face in the early days of the Katingan Mentaya Project?

Dharsono Hartono: Initially, people said our idea was too crazy. It took us six years [from 2007 to 2013] to secure a concession license, which gave us the legal rights to manage the land. In the meantime, we were asking local villages to imagine a business—using carbon credits to protect the environment and produce a benefit for them—that didn’t yet exist; there was no precedent. But our good intentions were clear, and that helped us slowly build social capital, one town hall meeting at a time. From the start, we treated the community as our shareholders, not just stakeholders, with a focus on collaboration, transparency, and accountability. After securing the license in 2013, it took us another five years to get certified and verified to sell carbon credits. Throughout that decade, we received a lot of support from NGOs [nongovernmental organizations], the US Forest Service, the Japanese government, the scientific community, academia, and the financial sector, among others.

Read the full interview

Microplastics found in every sample of water taken during Ocean Race

Concentrations of plastics in round-the-world race through remote ocean environments found to be up to 18 times higher than during previous event in 2017-18

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