Green and Sustainable Investing
Climate change and increased global awareness of the issue have popularised a more sustainable and environmentally friendly type of investment in recent years. But what do we mean by sustainable investing? Are you familiar with what green investments are?
In this article we will discuss the meaning of sustainable and green investments, highlight the various financial products available for making sustainable investments and much more!
What Is Sustainable Investing?
Sustainable investing aims to direct money towards companies or specific projects that are committed to benefiting society, minimising pollution or promoting the progress of new technologies which focus on the transition to clean energy, sustainable agriculture or pollution prevention.
Although many people initially thought that this would merely be a fad, exploited by certain companies seeking to improve their image, over time this environmentally friendly way of thinking has become an important element in the strategic planning of many companies.
So much so that in June 2012, at the Rio + 20 conference, world leaders agreed that more sustainable business practices were an indispensable tool for global development.
Many investors and traders have been inspired by this socially responsible movement and prioritise their portfolios of financial products towards projects that try to improve the lives of others, either through active or passive investment.
Green investments, although falling under the category of sustainable investing, focus entirely on companies and projects which are devoted to environmentally responsible business practices, such as the search for alternative energy sources and clean water projects.
Awareness of climate change has been growing steadily since the 1990s and in recent years has become a mass movement, as demonstrated recently by the worldwide "Extinction Rebellion" protests. This greater social awareness has led to large multinational companies devoting greater efforts to the fight against pollution, either through social funds or in the way they go about achieving their more commercial objectives..
There are two general types of green investment:
- Direct green investments. These are investments whose profits are obtained directly from companies devoted to environmentally friendly activities.
- Indirect investments. The capital that the trader invests is directed to companies whose main business is not devoted to sustainable practices but which has a product line, or a project directed to green activities.
Finding out if a company really is "green" requires exhaustive research of the company, their practices and their fundamentals.
Different people will have different opinions over what truly is a green investment. There are those who consider investing in a company who is traditionally non-environmentally friendly but with some environmentally conscious business practices to be a green investment, while others do not. For example, there are many oil or gas companies, such as Shell or BP, who devote resources to exploring and developing alternative energy resources. However, many people would be of the opinion that these companies' investments in green energy does not compensate for the pollution caused by their core business.
Sustainable Financial Products
The allure of sustainable investments lies in the fact that they not only have the potential to be profitable, but also contribute towards the sustainability and welfare of our planet.
For those who are looking to invest in green and sustainable assets, there are two means of doing so:
- Choose eco-friendly listed companies and buy some of their shares directly
- Find investment vehicles which are based on 'green' underlying assets.
Below we have listed some of the top financial instruments for sustainable investing:
This type of investment belongs to the first category above, direct investment in the equity markets. In order to choose a 'green' company, a thorough analysis of the company must be carried out to ensure that it is truly eco-friendly. Many traders or investors do not have the time to do this analysis or do not know how to do it and so they opt for passive management, leaving their portfolio in the hands of a manager.
Exchange Traded Funds (ETFs)
ETFs are listed investment funds. Unlike trading in stocks or other assets, an ETF can encompass a wide range of markets in which the trader can invest their money. There are many ETFs that follow environmental and sustainable criteria, such as the UBS ETF (LU) MSCI World Socially Responsible UCITS ETF, which in the summer of 2019 became the first sustainable fund to exceed EUR 1 billion.
Listed funds that focus on investments with Environmental, Social and Governance (ESG) criteria are mostly directed towards equity instruments.
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Traditional Investment Funds
These are a very popular instrument among smaller investors, because they are more simple and diversified than others and investors need not worry about analysing individual companies. Instead, investors can choose a fund which specialises in sustainable or green investments and the investment choices are made by a third party. This is one of the most readily available options and often includes both equities and bonds.
Sustainable pension plans, which direct investment only to socially responsible companies, have emerged to meet a rising demand that requires a social or environmental commitment. Through this instrument, investors achieve savings for retirement and at the same time contribute to a sustainable future.
Green bonds are a type of fixed-income security which earmarks their raised capital solely for projects seeking to benefit the environment.
The market for these bonds has grown exponentially in the last decade since the World Bank issued the first one in 2008. In 2010, around $3.5 billion worth of green bonds were issued. Compare this with the $185.6 billion worth of green bonds issued in 2019, with some sources, such as the Climate Bonds Initiative, claiming that the figure is actually closer to $255 billion. These numbers are forecast to continue growing in 2020 and beyond.
Dow Jones Sustainability Indices
The Dow Jones Sustainability Indices (DJSI) evaluate the sustainability of various listed companies worldwide and have become the global benchmark for good practice in sustainable investment and social commitment. The DJSI was created in 1999 by RobecoSAM and maintains very strict criteria for inclusion in this club of sustainable companies.
To enter this select group RobecoSAM makes a rigorous analysis (Corporate Sustainability Assessment or CSA) based on the following criteria:
- Environmental: environmental policy, eco-efficiency
- Economic: issues such as risk management or the business itself
- Social: human resources and social commitment.
Source: S&P Dow Jones Indices. Weight of each sector in the Dow Jones Sustainability Europe Index.
Each year, RobecoSAM invites around three thousand listed companies worldwide to participate in the analysis, which is becoming increasingly demanding. In fact, the methodology is revised every year to update the criteria for good governance, environmental and social sustainability.
Tesla - An Example of Green Shares
One of today's leading companies in terms of environmental criteria is Tesla, with its electronic car technologies. Founded in 2003 by Martin Eberhard and Marc Tarpenning, Tesla is one of the pioneers in the development of electric cars. It became better known to the general public when Elon Musk took over as CEO in 2008.
Tesla began trading on the stock market in 2010. From the beginning it was met with doubt by people who didn't believe it had potential in a market that lacks the necessary infrastructure for full development of the electric car.
In early 2013, the company began to take off on the stock market, with a bullish streak that took it from $40 per share to nearly $300 in early 2017. In September 2017, it reached $390 per share and until April 2019 the stock continued its long-term upward trend line.
However, the company's poor financial results in the first quarter of 2019 sparked a downward trend culminating in a low of $177 in May 2019. After this low, and sparked by improvements in production figures, the share prices started to recover, before shooting up at the beginning of 2020 closing at $960 on 4 February 2020.
Source: Admiral Markets MetaTrader 5 with MT5SE Add-on Tesla Daily Chart. Data Range: 23 April 2019 - 3 July 2020. Accessed on 3 July 2020 at 14:15 GMT. Please note: Past performance is not a reliable indicator of future results, or future performance.
Source: Admiral Markets MetaTrader 5 with MT5SE Add-on Tesla Weekly Chart. Data Range: 24 August 2014 - 3 July 2020. Accessed on 3 July 2020 at 14:15 GMT. Please note: Past performance is not a reliable indicator of future results, or future performance.
As we can see from the first graph, after starting the year strongly with an almost vertical price line, Tesla's price began to fall again at the same time the first coronavirus-caused deaths were recorded in Europe, reaching a low of $350.30 in mid March.
However, ever since, the share prices have been on an upward trend and on 10 June, share prices closed at $1021.32 surpassing all previous highs. Tesla share prices have continued to grow and at the time of writing are trading at $1209.50.
This rise in share price has recently seen Tesla surpass Toyota as the most valuable auto manufacturer in the world. Despite lockdowns in the US restricting production, Tesla has ramped up manufacturing in their new Shanghai based factory which allows them to sell to the largest electric car market in the world without needing to pay expensive import duties.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.