Back in the dark days before Blue Planet II and beeswax sandwich wrappers, there was plastic. And diesel cars. And the use of resources – by households, businesses, charities and government – as if we had an infinite supply.
No more. The latest eco-drive has taken hold in middle class heartlands in a way that this time it might just mean widespread, permanent changes to the ways we live and consume are afoot. Not just in the UK but across the world. And financially, the implications are significant.
On a national level, the Paris Climate Accord, which every country in the world except the US has committed to and which aims to limit climate change to an increase of 2C, means CO2 emissions have to fall by 70 per cent by 2050.
That means a drop of 85 per cent in CO2 emissions from power production, 73 per cent for buildings, 70 per cent for transport and 56 per cent for industry according to the International Energy Association. And that requires staggering investment in alternative production and new processes.
Down here in everyday life, meanwhile, the plastic bottles containing water from the other side of the world have become passé. Walking along the street with a throwaway coffee cup is now the greatest of social faux pas.
Suddenly the light has gone on above our heads and it has cast the sharpest of illuminations on the relationships between and the direct effects of, our lifestyle habits and consuming choices. So far it hasn’t been a pretty picture.
Though the jury still seems out on whether going plastic-free or zero waste or just a bit more re-usable will save us money or cost us more in everyday spending, the possibilities for investors keen to support or cash in on the green machine seem endless.
“The rise in popularity in green stocks is part of a wider interest in responsible business. Consumers are increasingly drawn to businesses who demonstrate environmental and social responsibility and this green trend is also being reflected in their investment choices,” says Udit Garg, head of wealth management at Sun Global Investments.
“Investors are conscious to seek opportunities in sustainability-oriented and/or fair trade companies and the demand for such conscious investing has risen considerably over the last couple of years.
“Interest in the sector is not just from the investor’s side. With governments including the UK, France and India increasingly pledging to ban the sale of fossil fuel vehicles and single use plastics in the next 25 years, investments in green stocks such as electric cars and alternative plastics make very prudent decisions with those industries set to grow over the next decade, whilst traditional consumables begin to decline.”
Gone are the days of social, ethical or green banking and investing as a sideline product for enviro-geeks with a woolly grasp of performance expectation and management charges.
Tomorrow’s investors in particular aren’t afraid to turn their back on big names in their pursuit of investments that aren’t simply ticking the latest regulatory boxes, but backing real businesses riding the green wave – hopefully to significant long term growth and investment returns.
“Millennial investors will inherit trillions in the coming years and they want a place to put it,” notes Debbie Ryan, CEO of the Impact Investor Network which manages accreditation for London’s Social Stock Exchange – a traditional stock exchange set up, but dealing with businesses and investors seeking to achieve a positive social and environmental impact through their activities.
“Impact investment and grass roots stocks will continue to grow to meet this demand. Beginning with quirky start-up and growth companies, the market is shifting and we’re seeing less mainstream investment across the board.”
But with every business jumping on the eco bandwagon, what kinds of companies are worth a closer look?
Energy and transport
“Eco-awareness isn’t just about solar and wind power producers like Good Energy or ITM Power who are UK pioneers when it comes to hydrogen fuel cells,” says Mark Ackred, CEO at mobile investment platform Dabbl.
“Yes there are the obvious picks like Elon Musk’s Tesla who arguably sit at the forefront of battery powered cars, but Volvo has committed to only producing e-cars or hybrids after next year. VW is also making bold steps to clean up after its diesel emissions cheating scandal and the other big car manufacturers are universally exploring how to green their vehicles.
“On top of this there’s a plethora of firms who sit behind the scenes supplying vital components for the emerging green industries. FMC is a big producer of lithium – an essential component of rechargeable batteries – whilst each electric car is reported to have as much as six kilometres of copper wire installed in it.
“With production of e-cars set to explode over the next decade, this is seen as driving annual demand for copper by as much as 7 per cent. It might seem counterintuitive, but metal miners could also be winners from the desire to go green.”
Plastics and materials
“Thanks to the BBC documentary series Blue Planet II the ‘war on plastics’ is squarely in the public consciousness. But it isn’t the only catalyst behind this investment story,” says Jon Foster, co-manager of Impax Environmental Markets Plc, an investment trust investing in sustainable assets.
“Bans and restrictions on plastic by governments around the world are also making their mark and the economic drivers behind the development of new materials is now far more compelling.
The changing use of and attitude to plastics is an investment theme we like a lot. Our preference has been to explore businesses that provide collection services or other recycling solutions, such as reverse vending machines. We also find companies that are developing new, sustainable ways of packaging food using new bioplastic compounds and other technologies interesting.”
Audrey Ryan manager of the Kames Ethical Equity Fund, likes DS Smith, a manufacturer of corrugated packaging made from recycled materials.
“It has a strong presence in Europe and a growing position in the US,” she says. From an ethical perspective, she cites its expertise in paper packaging, use of recycled corrugated cardboard and its focus on using less raw material through efficient design. “DS Smith provides these benefits while delivering good growth and returns to shareholders,” she adds.
Taking a step back
All this is great if you’re a bit of an expert in each or any of these fields, with the time and resources to do some really good digging before putting your hard earned cash into individual stocks. In other words, you’re an investment analyst.
For those of us without an encyclopedic knowledge of the components of a lithium battery and with other things going on, like jobs, families, lives in general, the better plan has always been to spread the risk and responsibility of investing by investing in a fund.
But once you step away from the shop floor full of recycled cardboard and solar panels on the roof things get a little more opaque.
“Whilst sustainable investing has come a long way, it is just as guilty of using too much jargon as the wider investment industry, ironically given its credentials,” warns Camilla Ritchie, senior investment manager, Seven Investment Management (7IM).
“Many investors are likely to have their head spinning with acronyms – ESG, SRI and SDGs are just a few. And then there’s the seemingly interchangeable labels like ‘sustainable’, ‘responsible’ and ‘impact’ investing, all with important distinctions which are in danger of being lost on the many.
“There are other pitfalls for the unwary, too: ‘greenbonds’, for example, are not always issued by ‘green’ companies and it’s really important that investors are able to make sense of these distinctions. We have a long way to go.”
What’s in a (green) name?
Keen to invest responsibly? Here are the terms to have in your arsenal.
ESG – environmental, social and governance
ESG criteria is a set of standards by which to judge a company’s operations. Environmental criteria are used to gauge the impact of the firm’s operations on the environment. Social criteria are open to greater interpretation, but include sensitivity towards the communities in which the business operates, from human rights to responsible employment practices. Lastly, governance criteria refers to a company’s best practice, such as its internal controls, leadership, executive pay and shareholder rights.
SRI – socially responsible investing
Whether an investment is considered socially responsible depends on the nature of the business. For example, those who invest on an SRI basis will exclude companies involved in unacceptable business areas. The approach also actively seeks out companies who are engaged in positive social policies. There are no specific guidelines, but fund managers who focus on SRI tend to lay out a set of relevant criteria, which can usually be found in the fund prospectus.
SDGs – sustainable development goals
These are a collection of 17 goals set by the United Nations in September 2015. Although interrelated, each goal has specific targets to be achieved over the next 15 years. These are:
This is a form of investing which tends to use the sustainable development goals as a base. The idea is to invest in companies which have a positive impact on society pointing to one or more of the sustainable development goals – eg quality education – or by serving a need which is not currently met. Unlike environmental, social and governance goals, however, which focus on a company’s operations, impact investing looks to the goods and services that the company provides. The aim is to generate both a social and a financial return.
These are tax efficient bonds that companies issue to finance sustainable projects. If a company is undertaking a project aimed at energy efficiency, for example, it has access to a cheaper source of financing. The aim is to make such projects more attractive for companies to undertake. It’s worth being aware though that just because a company issues a green bond it doesn’t mean that the business as a whole is green. Theoretically, a company could have poor employment practices, but still issue a green bond to finance a renewable energy project.
Courtesy of 7IM
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