Wednesday, August 27, 2014

Lucrative Investment Opportunities are Driving the Growth of Sustainability

Climate change mitigation and adaptation efforts are helping to fuel the growth of stock markets. Investors are increasingly seeing the wisdom of factoring sustainability into their investment equations. The S&P 500 recently surpassed the 2000 level and surveys indicate that companies on this index are mindful of climate change.

According to a 2012 report from the Center for Climate and Energy Solutions, almost 90 percent of S&P Global 100 Index companies identified climate change and extreme weather as current or future business risks. The growth of S&P mirrors the growth of the American stock market as a whole. One of the factors driving this growth is the increasing interest in sustainable investing.

While some suggest that we need to move away from market driven solutions to climate change, this well intentioned effort to expedite action fails to appreciate the power of investors to effectuate change. Governments clearly have a leadership role to play, but market driven approaches are critical to the widespread adoption of sustainability in a timely and efficient fashion.

Climate change was already part of the calculus of investors back in 2011. This was the conclusion of research conducted by conducted by Mercer and commissioned by the Institutional Investors Group on Climate Change (IIGCC), the Investor Network on Climate Risk (INCR) and Investor Group on Climate Change (IGCC). The survey of 44 asset owners and 46 asset managers with collective assets totaling more than $12 trillion, found that 87 percent of asset managers and 98 percent of asset owners were already incorporating climate change risk assessments into their investment processes.

Driven by risk mitigation, investors realize that investing in sustainability is a proven money maker. This is advancing sustainability at an unprecedented pace. In 2012, the median return on green funds was 28 percent. According to a 2013 analysis, companies considered "Meaningful Brands" outperformed the stock market by 120 percent.

The growth of more responsible investing is also a function of growing consumer demand for healthy green solutions. This trend is being supported by emerging sustainability accounting standards that are also helping to drive responsible investing. Put simply linking sustainability to value creation is the new imperative for business leaders. Value-adding sustainability investments protect, strengthen and/or advance business endeavors while simultaneously improving the environment and society’s well-being.

The trend has been born out in numerous studies which show that sustainability issues are increasingly relevant to investors. As indicated by PricewaterhouseCoopers research, sustainability has gone mainstream as investors seek to integrate environmental and corporate responsibility factors in both current and future investment practices.

Investor interest in sustainability can be measured in a number of ways including resolutions by shareholders. A record number of environmental resolutions have been filed this year. As reported by the Proxy Review 2014 report from As You Sow, in the first quarter of this year shareholders filed 417 social and environmental shareholder resolutions. This is at least 50 more than the same time in 2013 and 20 percent more than in February 2012. Resolutions concerning environmental issues like climate, energy and sustainable governance make up 39 percent of the total. A total of 22 proposals demanded greenhouse gas emissions reduction targets.

Investors are not only pouring money into responsible investments they are also driving pervasive change by calling for legislation. In 2013 Environmental Leader reported that 22 US investment firms with about $240 billion in assets signed the Climate Declaration, which calls on federal policymakers to address climate change as an economic opportunity. These financial firms join more than 150 other US businesses, including General Motors, Intel and Nike and more than 100 ski areas, in backing the Ceres-led initiative that asks lawmakers to draft legislation and regulatory initiatives to reduce carbon emissions and incentivize renewable energy development.

Currently impact investing, which measures both the financial and social merits of investments is estimated to be worth $36 billion. However it is projected to be worth as much as $1 trillion by 2020.

Businesses and governments are transitioning towards a more sustainable economy that incorporates both social and environmental factors. As this megatrend grows, investors are coming to the realization that the time is ripe to take advantage of these tremendous investment opportunities.

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Financing the Low Carbon Economy: The 2014 Clean Trillion Report
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