Green investing is sometimes used as a catch-all phrase for investment disciplines that are closely related but not exactly the same. The word green automatically conjures up images of the environment and usually refers to alternative energy sources such as wind, solar, hydroelectric and biofuels.
Green investing is, however, a form of socially responsible investing (SRI), an investment discipline that takes into account investor concerns about issues such as climate change, renewable energy, human rights, diversity and communities. This is done by focusing on companies that are committed to environmental, social and governance (ESG) practices.
Socially responsible investing has experienced a dramatic increase in interest during the last two decades, flourishing into a $13.6 trillion industry, according to the Global Sustainable Investment Alliance. A 2012 report published by the World Economic Forum showed that global investment in renewable energy alone hit a record US$257 billion in 2011, a sixfold increase from 2004 and 93 percent higher than 2007, the year before the financial crisis.
Growing demand for green
Fortuitously the economic crisis has brought corporate governance issues to the forefront, resulting in an even further advancement of the industry. The growing client demand to incorporate green investment strategies within the investment process is primarily driven by endowments, foundations, nonprofit organizations, public and private pension plans, religious institutions and private clients.
Compared to a decade ago, we now have a plethora of SRI funds available, with Bloomberg LP listing over 400. Some funds employ exclusion criteria to generate their company selections and may therefore exclude companies that are engaged in objectionable practices that involve alcohol, tobacco and gambling, among others.
Alternatively, other funds apply positive screening criteria to construct the fund and would invest exclusively in companies that are leaders in sustainable development, such as waste management, renewable energy and community involvement. As renewed interest in SRI has emerged, the investment criteria have become more comprehensive and now include the full spectrum of ESG factors, sometimes referred to as the triple bottom line approach – planet, people and profit.
Whether you believe the impact of climate change is imminent, one cannot deny the demands placed on energy consumption and scarce resources like fresh water due to tremendous population growth. According to a survey of clients conducted by BNY Mellon in 2012, clients who did not incorporate green investment strategies in their investment process were either not interested or concerned there would be a performance trade–off.
Studies conducted by several institutions, including Mercer Consulting and BNY Mellon, suggest that the performance of SRI funds versus conventional index funds is not statistically different, and there is no evidence to suggest that investing in SRI funds automatically results in a performance trade-off. To the contrary, the longest-running SRI index, MSCI KLD Social index established in the 1990s and comprised of 400 companies, has delivered comparable results to date when compared to broader US equity markets.
Not limited to equity, funds markets
Green investing is not limited to the equity and funds markets. Debt capital markets now also provide opportunities for investors to lend capital to companies and governments seen to be environmentally and socially responsible. Referred to as green bonds or climate bonds, these debt instruments are primarily issued by AAA-rated supranationals, such as the Word Bank, International Finance Corporation and the European Investment Bank, among others.
The capital is ring-fenced for projects that contribute to specific environmental benefits. Investors therefore do not have to sacrifice credit quality for obtaining exposure to this specific segment of the market as the bonds carry the same rating as the issuer’s conventional paper. While SRI equity indexes have been around for some time, Barclays and MSCI have recently unveiled a family of eco-friendly bond indexes, providing institutional investors with the long-awaited means to benchmark SRI fixed-income performance.
Even if you haven’t yet mastered the industry jargon of ESG, triple bottom line, sustainable investing and green bonds, it should be clear that socially responsible investing is a growing and evolving industry that is here to stay. Compared to a decade ago, investors now have a myriad of investment products and educational resources at their disposal. There are a number of books written on the subject, but organizations like US SIF (The Forum for Sustainable and Responsible Investments) and SocialFunds.com are also a great starting point.
It was Albert Einstein who said:
“Today’s problems cannot be solved if we still think the way we thought when we created them.” Investors are becoming more conscious and aware of the impact corporations have on the environment, people and communities, and they are making their voices heard by “going green” in their investment portfolio.
Disclaimer: The views expressed are the opinions of the writer and while believed reliable may differ from the views of Butterfield Bank (Cayman) Limited. The bank accepts no liability for errors or actions taken on the basis of this information.