The evolving paradigm shift towards green and sustainable investments across the finance world is getting more pronounced.
The US companies most evidently embracing green technology are outperforming every broad measure of the stock market, delivering a greater return last year than all but two of the world’s 94 leading equity indexes.
These 92 publicly traded firms have at least 10% of their revenues derived from clean energy, energy efficiency or clean technology, according to data compiled by Bloomberg New Energy Finance.
Not since 2013 has there been a year when the S&P 500 Index and Russell 3000 gained 31%. This exceptional feat, however, didn’t come close to the performance of the clean companies, with their combined total return of 40%.
Together they were worth $946bn last year, more than triple their market capitalisation at the end of 2010. Whether the investment period is 2, 5 or 10 years, the return is superior by margins of 12%, 37% and 112% for clean companies, according to Bloomberg column.
By contrast, revenues for the 28 companies in the S&P Energy Index, a mostly fossil-fuel crowd, declined 5% in 2019 and are forecast to grow 4% in each of the next two years.
The healthiest investment is turning out to be among the most lucrative.
Assets under management at 644 funds focused on environmentally friendly investments tracked by Bloomberg now stand at more than $220bn, compared with around $80bn at the end of 2014.
In 2015, France became the first country to require institutional investors to report how they consider environmental factors. The European Union is likely to encourage asset managers across the bloc to integrate sustainability requirements into investment decisions as part of its work on the Green Bond Standard.
And the returns?
The vast majority of green bonds are investment grade and they are priced similarly to conventional debt at issuance. Growing investor demand and relative scarcity could also help boost secondary market prices.
In the euro market, green bonds returned 0.34% in 2018, while the overall investment-grade market returned 0.41%, based on Bloomberg Barclay indexes.
Green bonds are used solely for environmental goals, while sustainable bonds combine both environmental and social objectives.
In the world of investing, asset managers are increasingly incorporating environmental, social, and governance (ESG) metrics into investment decisions.
Last September, 12 of the world’s largest investors — including Allianz SE, Swiss Re AG, and Zurich Insurance Group — committed to making their investment portfolios carbon-neutral as part of the Net-Zero Asset Owner Alliance convened by the UN.
A recent analysis by Moody’s Investors Service suggested social considerations posed “high credit risk” to $8tn of debt that it assesses.
More than 1,500 investment managers have signed up to the UN Principles for Responsible Investment and the ESG sector is now the fastest-growing part of the market.
The bottom line: The threat of climate change is also an investor’s opportunity.
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