Call it what you like, but in the world of investing, “green is the new black”.
Yes, there is scientific consensus on climate change. We face a growing incidence and severity of natural disasters. Russia’s invasion of Ukraine has certainly highlighted the strategic risks of U.S. and European reliance on fossil fuels.
But what green investors already know is that the world’s economic prosperity and advancement are at risk if we fail to embrace the ‘green’ economy wholeheartedly. Fortunately, there is a growing commitment among nations, non-profits, corporations, and consumers to do just that.
Effectively combatting climate change demands substantial funding. This presents an opportunity for investors to contribute to our progress and profit from the development of a lucrative market in green tech.
When it comes to green tech investing and the variety of options available, it can be difficult to know where to begin. An investment’s type, risk factors, tax implications, and long-term effects are all factors that need to be considered. By researching and understanding the different options, you can make informed decisions that can lead to successful green tech investments.
Investors increasingly prioritize green tech investing in the investment decision-making process. Many investors are now increasingly concerned with the long-term impacts of their investments. Over the past two years, green sustainable investments have grown by more than 15% in value, accounting for 33% of U.S. assets under management.
Among the world’s largest institutional investors practicing sustainable green investing are the Government Pension Investment Fund (GPIF) of Japan, the Norwegian Government Pension Fund Global, and the Dutch Pension Fund ABP. These funds are recognizing the long-term benefits of sustainable investing, such as improved shareholder value, reduced volatility, and better risk-adjusted returns.
Institutional investors now incorporate environmental criteria into their investment decisions, strengthening their commitment to sustainability. They understand the importance of green investing in advancing positive social and environmental changes as well as generating strong financial returns.
Though the economic impact of the pandemic was inarguably negative, the correlated environmental impacts influenced subsequent conversations – especially for investors.
By the end of 2021, 66% of investors reported a feeling of responsibility to better society through investing, with the environment playing a key role in that calculus. 88% of investors felt that the environmental component of ESG is the most important consideration for them in making allocations.
This attitudinal trajectory is directly reflected in realized global green investment allocations. That investors remain focused on sustainability during a major crisis suggests they view sustainability as a necessity rather than a luxury good.
As part of the 2015 Paris Agreement, 196 parties affirmed their commitment to “making finance flows consistent with a pathway to low greenhouse gas (GHG) emissions and climate-resilient development.” These parameters were primarily considered by investors and professionals when considering green allocations.
Sustainable finance and transition finance are typically analyzed separately. The former aims to capitalize entities and efforts that are already sustainable. The latter seeks to support the process of becoming sustainable.
Since economic pressures have pushed environmental concerns to the forefront, transition finance has become increasingly important. In the next few years, 94% of companies expect to move away from environmentally challenged business models, while 70% intend to increase or initiate environmental activities.
Investor concerns have contributed to the rise of transition finance. Climate change impacts are expected to cost companies more than $1 trillion by 2024, making transition plans vital to a healthy bottom line.
For example, the revolts of shareholders at companies like ExxonMobil and Chevron are pushing them toward a more sustainable development model. Amazon and IKEA are also among the major companies pushing the ocean shipping industry to adopt zero-carbon fuel sources for vessels by 2040.
Almost $2 trillion is invested in funds that are partly devoted to the environment globally, a three-fold increase since the first quarter of 2012. These funds are attracting $3 billion in investments a day, with more than $5 billion in green bonds and loans issued to fund green initiatives. Over the next decade, the two biggest U.S. banks will commit $4 trillion to climate-related financing in different ways.
In a continuance of a trend and a sharp increase from 2021, investments in decarbonizing energy surpassed $1 trillion for the first time ever in 2022. Investing in low-carbon technologies has reached parity with capital supporting fossil fuel supply – yet another first.
There was also a record level of investment across nearly every green sector in 2022, though. This includes renewable energy, energy storage, electric transport, electric heat, carbon capture and storage (CCS), hydrogen, and sustainable materials. The unprecedented allocations signal a concerted investor focus on the transition to green energy, ensuring a future that is more sustainable and resilient in the coming years.
With $495 billion committed in 2022, renewable energy stayed the largest green investment sector in terms of investment, up 17% from the previous year. But electric vehicles and associated infrastructure came close to overtaking renewables in 2022. In an impressive 54% increase over last year, $466 billion was spent on electrified transport. This surge in investment demonstrates the growing perception of electric vehicles as a viable and future-proof way to power the world.
In 2022, climate-tech corporate finance totaled $119 billion. Investments in this category are not included in the $1.1 trillion referenced above but refer to new equity funds raised by companies in the climate-tech sector from public or private investors. Despite challenges in the global equity markets, venture capital and private equity financings grow by 3% each year.
In spite of the impressive results from 2022, climate change investments remain woefully short. Experts argue that green investments must immediately triple if the world is to achieve “net-zero” emissions by 2050. BloombergNEF estimates we need to invest an annual average of $4.55 trillion globally by 2030 to stay on track.
It is too early to know if green tech investments will prove profitable in the long run. Like every industry, there will be winners and losers. After all, for every Apple Computer in 1980, there were probably a hundred other start-up home computer companies that failed.
But a growing number of studies do show the payoff from focusing on long-term value and green investments to be substantial. Research from McKinsey Global Institute and FCLTGlobal showed that companies operating with such a long-term mindset made critical decisions like investing more in R&D, resulting in 47% higher revenue growth and faster-growing market caps.
Driven by extremes and the climate devastation of this new era, this market segment – once a niche practice – has evolved into a gold rush. The unprecedented levels of investment needed to achieve net-zero emissions present an opportunity for investors to build on innovation and become leaders in emerging green markets while yielding a potentially sizeable return.
Microsoft President Brad Smith summed it up perfectly:
This is where the world is going. It’s where regulators are going. It’s where customers and investors are going.
Check out the upcoming Earning Green by Investing Green event on April 27, 2023. A one-day event featuring experts from across the green economy, this symposium on navigating the green economy seeks to provide investors, asset managers, advisors, and other professionals with the information and perspectives they need to make smart, ethical, and lucrative choices in their portfolios. Attend in person or stream the event live, but don’t miss out!
©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Hajar Jouglaf is an attorney with Much Shelist, P.C. where she is a corporate attorney who represents clients throughout the business lifecycle. She counsels both healthy and distressed businesses as they pursue new goals and overcome unexpected obstacles. Share this article:
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