Friday, June 12, 2015

Drivers of Green Investment Growth

Investors have a critical role to play in advancing the green economy and combating climate change. Responding to the challenge of the social and environmental challenges we face affords investment opportunities in many different forms and across all asset classes.

A socially responsible investment (SRI) also known as sustainable, green or ethical investing, is premised on an investment strategy that seeks both financial gain and social good. Such investors scrutinize prospective investments focusing on social and environmental impacts. SRI commonly focuses on environmental sustainability, including clean technology. They avoid harmful products like fossil fuels, alcohol, gambling and tobacco. Impact investing is a subset of SRI and it measures both financial and social merits.

While social and environmental investments are still young, they are growing quickly. Once a fringe investment activity SRI is increasingly garnering capital from mainstream investors, investment funds, sovereign wealth funds, university endowments, insurance and pension funds, foundations, and others.

According to PricewaterhouseCoopers' (PwC) Sustainability Investor Survey, sustainability issues are increasingly relevant to investors. Some 82 percent of respondents considered climate change and/or resource scarcity in future investment decisions, while 79 percent of investors considered social responsibility and/or good citizenship. A total of 84 percent of investors expect to consider climate change and/or resource scarcity over the next three years. More than half of respondents indicated that that they avoiding firms with unethical conduct

Another earlier PwC report titled 10 Minutes on Integrated Reporting, found that investors are increasingly considering non-financial factors such as resource scarcity. Investors are looking at environmental, social and governance (ESG) factors due in part to public interest, especially the Millennial cohort. Consumers are demanding smarter, healthier and greener solutions. In response, corporations are greening their products and services and looking for sustainable investment opportunities like those that reduce environmental pollution.

As evidence of the growing interest, there is widespread investors demand for more sustainability data. Global investment in clean energy was $254 billion in 2013. Impact Investments are projected to be worth more than $1 trillion by 2020. From 2001 to 2010, assets in SRI investment portfolios grew 32 percent while overall investment assets grew 27 percent.

Another 2014 report highlights a number of investor groups that are taking action to combat climate change. Recent years have seen the proliferation of socially responsible investment firms such as Trillium Asset Management and Generation Investment Management, which was founded by noted environmentalist Al Gore. These firms are acting to increase environmentally friendly investments.

Gore's firm values environmental, social and governance criteria (“ESG”) and long-term time horizons. These investments concern themselves with things like water, carbon and working conditions throughout the supply chain. These firms are performing very well. According to a Bloomberg news investigation, in the period between 2008 and 2011, Gore's firm made $218 million in profits.

According to a 2013 UN Global Compact Survey, of one thousand CEOs representing 27 industries in 103 countries, 93 percent viewed sustainability performance as important to their company’s future success. This is corroborated by another 2013 survey, where 9 out of 10 investors, analysts, and portfolio managers around the world stated that non-financial performance had played a pivotal role in their investment decision-making in the past 12 months.

In the five year period from 2009 to 2013, conservation impact investing totaled approximately $23 billion. During the same five year period, private investments accounted for almost $2 billion of this market — an amount that is growing at an average of 26 percent annually, and is expected to reach more than $5.6 billion by 2018. The total market for conservation investment is expected to increase to $37.1 billion over the next few years.

According to US SIF (The Forum for Sustainable and Responsible Investment), at the beginning of 2014, approximately $6.57 trillion in assets under management was engaged in sustainable, responsible, and impact investing. This amount represents about 18 percent of the $36.8 trillion in total assets under management in the United States. The amount invested in sustainable investing practices increased 76 percent from $3.74 trillion in 2012. Since 1995, when US SIF first began tracking sustainable, responsible, and impact investing, the amount of assets engaged in this investment approach has increased over 900 percent from about $600 billion.

Need is another factor driving the uptake of environmentally responsible investing. A Global Canopy Program report estimates that we will need $300 billion annually to meet the world’s conservation challenges. The International Energy Agency says the world must invest an additional $1 trillion per year into clean energy by 2050 in order to limit global warming to 2 degrees Celsius.

The International Energy Agency estimates that an additional $36 trillion in clean energy investment is needed through 2050 — an average of $500 billion per year by 2020, ramping up to $1 trillion per year by 2030. This so-called clean trillion target has helped bring the power of finance to clean energy and energy-efficiency solutions.

Investors are increasingly putting pressure on governments to act. Last year, 22 US investment firms with about $240 billion in assets under management, signed the Climate Declaration, calling upon 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, in backing the Ceres-led initiative that asks lawmakers to draft legislation and regulatory initiatives to reduce carbon emissions and incentivize renewable energy development.

The United Nations Principles for Responsible Investment (PRI) has doubled in the last five years. In 2009, PRI had a total of 560 institutional investors with $18 trillion in assets under management. By 2014, that number had doubled to over 1,200 investors with $34 trillion in assets under management. Some of these firms have signed on to the Montreal Pledge and Portfolio Decarbonization Coalition (PDC).

In 2014, PRI and Ceres’ Investor Network on Climate Risk, in partnership with the UN Environment Programme Finance Initiative, drafted an open letter to the International Organization of Securities Commissions, in which they are demanding more environmental, social and governance (ESG) information.

The increased investor interest in responsible investing has been made possible in part by the growing availability of sustainability data. There are now a number of resources to help with responsible investing.

The number of corporate sustainability reports has grown from 644 in 1999 to 7,445 in 2013. Investor demand, activism, and regulations have fueled greater transparency resulting in increased sustainability disclosures and metrics. There are a wide range of financial instruments focused on sustainability, especially as far as solar is concerned.

According to a March 5, 2015 Proxy Review report, investors filed a record breaking 433 social and environmental shareholder resolutions in the first two months of this year. This includes more than 90 environmental resolutions, 22 of which were focused on greenhouse gas emissions targets.

Other factors driving the growth of responsible investments include emerging sustainability accounting standards, risk mitigation, efficiency gains and reputational considerations. Perhaps most importantly, investing in sustainability offers an excellent return on investment. For corporate brands, this can involve increasing market share and for all investors, this translates to higher profits.

Responsible investing provides long-term value creation and increases shareholder returns while contributing to societal betterment.

Related
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Green Bonds Emerging as a Major Force in Green Finance
The Green Climate Fund Comes of Age
The Climate Investment Fund's Low Carbon Development
IDB to Double Climate Related Projects
World Bank to Finance More Renewables in the Developing World
Innovative Solar Financing Instruments
New Sustainability Focused Finance Instruments
Opportunities in Sustainability Finance Highlighting Renewables & Energy Efficiency
The Panama Papers Highlight the Need for Sustainability
A World Bank Action Plan to Combat Climate Change
European Commissioner for Climate Action Urges Development Banks to Divest from Fossil Fuels
A Large and Growing Chorus is Calling for an End to Fossil Fuel Subsidies

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