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“Change is the only constant”. So reads the phrase synonymous with human ingenuity and desire for progress. Knowing change will come is one thing, but understanding how to adapt to it – and further still – how it might impact your financial independence and standard of living is quite another.

The capitalist free market is an efficient mechanism for achieving profit, regardless of cost. But progress in the current market framework is inhibited by outdated perceptions and archaic ideas of what is needed to make a financial return, whilst profit-maximisation has led to corner cutting and negative externalities many times in the past. This ‘boom and bust’ story has been central to economic prosperity for most of the post-war era, resulting in a huge advance in living standards. The issue we face now – arguably the defining issue of our species – is that this has compromised the nature around us, the air we breathe and the food and water we consume.

For humans to thrive on this planet – remember, it will exist after we are gone, so survival is not merely the aim – the view that profit and positive externalities are mutually exclusive must be challenged, and an alternative pursued.

If the scale of the change required seems unsurmountable, we must still understand why it is necessary and inevitable. Let’s look at just one area – fossil fuels. A company extracting fossil fuels will one day have nothing to extract. This is not a subjective view, because hydrocarbon resources are finite, and we extract too much of it. But before that moment comes companies, governments, and the general population will realise that hydrocarbons can no longer reliably provide for them. Shareholders in a fossil fuel extracting company will find they do not have a willing buyer, any physical assets already extracted will be deemed stranded. Given there will be no financial benefit from the asset after that date, it will turn into a terrible investment (recent research has highlighted how Big Tech pension funds could have improved their employee’s pension pots by up to $5.1 billion, if they had moved the pension fund assets out of fossil fuels 10 years ago[1]).

This inevitable outcome is the free-market in action. We argue that we still need the free-market – just one with sustainability and the vision of a prosperous world at its core – and are excited that that the problems we face are merely the start of a new beginning. Al Gore, former US vice president and Nobel Price-winning environmentalist, called climate change “the biggest investment opportunity in history” (among other things). It is hard to disagree, especially in the energy sector where the technology to replace fossil fuels already exists. What it needs is further momentum and investment, to embed the infrastructure and efficiencies.

The benefit to you, as an investor, is primarily that you are still early enough to the party. Granted, climate change and a more ‘conscious capitalism’ are not new topics, but most people have not yet considered how this shift will impact their financial lives; their pensions and investments, and thereby their standard of living, let alone taken action to accommodate this shift. By making a change now, you will be ahead of the early majority, and perfectly positioned to catch increased capital flows. We have a recent real-life example of this. In March 2020, investment markets dropped precipitously because of Covid lockdown mandates and the economic and humanitarian consequences of the virus becoming very real. With a laser-sharp consideration of the world around us, money flooded to investments which promised more sustainable products and services. To not be invested in such companies meant sub-par returns. Since then, an important consolidation has taken place (including a clamp down on ‘greenwashing’) but when the chips were down, it was the concept and hope of sustainability to which investors turned. When we look back, this should prove to have been an important ripple before the coming wave.

With the “tech revolution” over 20 years old, and AI poised to change our lives further still in the coming years, what chances the likelihood of an ‘impact revolution’? Without the desire and ability to change, economies will stagnate. Far from being a distant concept, the opportunity is more immediate. The last year has seen a seminal collaboration between The Natural History Museum, and Bloomberg (the world leader in investment market data and analytics), in releasing a Biodiversity Intactness Index, linked to 50,000 global companies. This insight into Biodiversity impact of business activities is a world first for the investment industry, so the wheels are turning even for the most ardent supporters of old economy practices. Let’s get ahead of it.

The argument extends beyond environmental concerns. Externalities are generated by business activities across all sectors and products – any companies that do not keep up with the changing world inevitably fall away. This is why companies have always innovated – American Express was founded based on express mail delivery, and Amazon started life with the physical delivery of books. As such, whilst the biggest companies today may remain so, what chances would you give the next big opportunity joining them being a company that prioritises not just profit, but beneficial social outcomes in a globalised, connected world. In the finance sector, instead of exposure to behemoth financial institutions (themselves heavily embedded in lending to ‘old-economy’ companies) what about the opportunity in supporting smaller financial institutions providing micro-finance to entrepreneurs in emerging economies; this not only helps lift the floor of living standards to that region, but provides the opportunity for less economically developed regions to compete on a bigger scale, creating a further investment opportunity at an attractive price for an investor.

Central to this coming change, is the challenge it presents to the incumbent risk/reward relationship.