Greener finance: ‘The tectonic plates are shifting in investing’

The European Green Deal, the EU’s flagship initiative on climate action, has set an ambitious goal of zero net carbon emissions by 2050. The investment pillar of the plan, the European Green Deal Investment Plan (EGDIP) will see hundreds of millions of euro of investment going into projects that are deemed to be environmentally sound. Meanwhile, driven by consumer demand, many of the world’s leading companies have set targets to become carbon neutral or even carbon negative by 2030. So why should investors be thinking green?

Investment markets are already being affected by the wider shift towards environmentally sound commerce, says Ian Quigley, investment strategist Brewin Dolphin. “Green finance” may be a nascent area, but Quigley believes it will endure and continue to grow in popularity over the next decade. It has also been “catalysed by Covid”, he says.

There's a growing realisation that the world has exhausted the old business model

“We’ve seen that a certain type of business model has been more resilient and more adaptable during the pandemic,” Quigley explains. “These are business models that don’t require heavy capital investment and instead are based on intangible capital like research and development and those building on technological platforms.”

Hints that the age of carbon may be over can no longer be ignored when the performance of the equity market in 2020 is considered. “Those businesses built off a 20th-century mass consumption, more capital-intensive business model are really beginning to struggle and are underperforming. There’s a growing realisation that the world has exhausted that business model,” he says.

And according to Quigley, the Green Deal is much further-reaching than simply offering subsidies to renewables – “it’s a way of having a smarter economy and increasing the transition towards a knowledge-based economy, one that isn’t drawing down heavily on physical resources,” he says.

Tipping point

It may be an emerging area but Marie Gillespie of Davy’s believes green finance and sustainable investing is at a tipping point. The senior equity analyst was recently certified in sustainable investment and finance, and she says that what was once a niche area in finance has now gone mainstream.

There is a growing awareness in business that people on the planet matter every bit as much as profit

“The difference now is that it reflects the mood in society,” she says. “There is a growing awareness in business that people on the planet matter every bit as much as profit, and consumers are voting with their feet.”

ESG (environmental, societal and governance) investing has been around for years. Gillespie explains that the original driver of this would have been charities and religious institutions focusing on ethical investments – eschewing profitable but unpalatable industries such as tobacco and alcohol.

“Now the average punter on the street wants their investment decisions to reflect what their values are. It’s not just about recycling your coffee cup, but people are thinking about making green choices in their investment decisions. There is a growing awareness and there are going to be implications for macroeconomics and monetary policy going forward.”

“The tectonic plates are shifting in investing,” agrees Quigley. “There has been an explosion in demand for ESG investing and sustainability to the point where companies in the equity market that aren’t making those changes and not doing business in a more sustainable way are getting punished.”

Green finance has evolved in recent years to encompass a huge system with diversified markets and a broad offering of new financial products and services geared towards supporting environmental sustainability, says Carolina Angarita, head of sustainability and responsible investing at Cantor Fitzgerald.

“Green finance is now one of the most important tools we have to address the pressing environmental, social and economic challenges of our time,” Angarita says.

“When the CEO of the world’s largest asset manager, Blackrock, says ‘Climate is reshaping finance’, it’s because it has already happened. Climate change poses insidious social, economic and environmental risks. The physical manifestations are ubiquitous – we see increasing wildfires and floods threaten property owners, banks and insurance companies.”

Risk exposure

And this is quantifiable: data by Munich Re shows that weather-related insured losses have increased from an average of about $10 billion US per annum in the 1980s to an average of about $58 billion per annum so far this decade. Unsurprisingly, financial risk assessment that can identify the climate-related financial risk of an investment portfolio is becoming an intrinsic aspect of the investment process, notes Angarita.

“New EU regulation on sustainability-related disclosure will ensure investors have full visibility of their potential risk exposure in these matters, while the upcoming EU taxonomy of environmentally sustainable activities will help investors identify which economic activities are more likely to thrive in a low-carbon economy and therefore less exposed to climate-related risks,” she adds.

She says Cantor Fitzgerald has been focused on the renewables space as part of its investment strategy, as the move away from fossil fuels is imperative to meet emission reduction targets, which are expected to be legally binding under proposed climate law.

With regard to the EU Green Deal, Gillespie agrees the accompanying legislation and increased regulation will transform the investment industry. “There will be winners and losers,” Gillespie says. “Companies that can be proactive and acknowledge this is happening and they’re going to have to deal with it will have an advantage over companies that think it doesn’t affect them. Whether you believe in climate change or not, the legislation is coming.”

But investors shouldn’t feel that a focus on green finance will come at the expense of returns. Gillespie says research has consistently shown that ESG investing is correlated with positive investment performance. “Nothing stays the same but certainly in recent years that has been the case.”

Quigley offers similar advice. “The fund management industry is responding to that increased appetite in sustainable investing. It’s the only area of active management that’s really showing growth.”