According to the Global Sustainable Investment Alliance, sustainable investing is on the rise with sustainable assets under management growing to a global $35.3T in 2020, rising 15 per cent from 2018.
By Harry Mulholland
This rise has been even higher in Australia with the GSIA reporting a 25 per cent surge within the Australasian region, and the US has seen even larger growth recording an increase of 42 per cent since 2018.
Australian investment guides The Motley Fool says the Green Revolution has begun with mining and rare earth stocks booming due to high demand for materials used to build electric and hybrid vehicles.
The Motley Fool also reports more green investment options, such as VanEyk’s CLNE and BetaShares’ ERTH ETFs, are popping up and more superannuation providers around Australia are offering sustainable options which have started to outperform the standard balanced options across rolling five-year periods.
What is green investing?
According to Investopedia, green investing seeks to support business practices that have a favourable impact on the natural environment and is often grouped with socially responsible investing or environmental, social and governance criteria (ESG).
Green investing focuses on companies or projects committed to the conservation of natural resources, pollution reduction, or other environmentally conscious business practices, and may fit under the umbrella of socially responsible investing but is more specific.
Investopedia say some investors buy green bonds, green exchange traded funds, green index funds, green mutual funds or hold stock in environmentally friendly companies to support green initiatives, which they say may mimic or beat the returns of more traditional assets.
Pure play green investments are those that derive all of most of their revenues and profits from green business activities.
Green investment can refer to companies that have other lines of business but focus on green-based initiatives or product lines.
Investopedia advises there are many potential avenues for businesses seeking to improve the environment.
Some green companies are engaged in renewable energy research or developing eco-friendly alternatives to plastics and other materials, and other may seek to reduce the pollution or other environmental impacts from their product lines.
As there is no firm definition of the term “green”, what qualifies as a green investment is open to interpretation.
Some investors want only pure play options like renewable fuels and energy saving technology, while other investors put money behind companies that have good business practices in relation to how they use natural resources and manage waste, but also draw their revenue from multiple sources.
The simplest type of green investment is green equities or listed companies.
Investing involves buying stocks in companies with strong environmental commitments, and many new startups are seeking to develop alternative energies and materials.
The second method is investing in green bonds, which are fixed income securities that help banks, companies, and governments finance projects with a positive impact on the environment.
These bonds may come with tax incentives making them more attractive than traditional bonds.
According to the Climate Bonds Initiative, $1.1T in new green bonds were issued in 2021.
The third method for green investing is green funds, in which investors buy units in a mutual fund, ETF or index fund that provides a wider exposure to green companies.
These green funds invest in a basket of promising securities, allowing investors to spread their money on a diversified range of environmental projects rather than a single stock or bond.
Is it too good to be true?
While green investing is a great way for the public to help steer the economy towards net zero and sustainable business practices, some critics say more government intervention is needed to reduce the impacts of climate change rather than leaving it to the free market.
Former Chief Investment Officer for Sustainable Investing at US based investment firm BlackRock, Tariq Fancy, told The Guardian the climate crisis can never be solved by today’s free markets.
“It’s not because they are evil, it’s because the system is built to extract profits. Investors have a fiduciary duty to maximise returns to their clients and as long as there is money to be made in activities that contribute to global warming, no amount of rhetoric about the need for sustainable investing will change that.
“In many cases it’s cheaper and easier to market yourself as green rather than doing to the long tail work of actually improving your sustainability profile.”
Fancy also compared the business community’s response to the COVID-19 pandemic to its views on climate change, he said the redefined relationship between governments and the economy could provide a roadmap for an effective strategy to combat the climate crisis through financial interests.
Investopedia defines greenwashing as the act of providing the public or investors with misleading or outright false information about the environmental impact of a company’s products and operations.
They say greenwashing is an attempt to capitalise on the growing demand for environmental products, and that genuinely green products back up their claims with facts and details.
S&P Global Ratings report green bonds collectively exceeded $1T globally, but a lack of consistency in instrument labelling and post-assurance disclosure has raised investor fears that sustainability claims made by issuers might be overstated or unreliable.
S&P Global Ratings’ Global Head of Sustainable Finance Business and Innovation, Susan Gray, said the market needs better ESG regulation, and investors are looking for more transparency.
“In an increasingly complex capital markets environment, issuers are looking for informed and respected opinions on their green financing and ESG strategies that help them communicate clearly with investors.
“At the same time, the investing community is expecting more transparency and better analysis of the green and ESG attributes of their investments.
“We believe the market’s appetite for framework alignment opinions demonstrates a greater commitment to sustainable finance,” Gray said.
One of the most high-profile examples of greenwashing in recent years is the 2015 Dieselgate scandal, which resulted in Volkswagen stocks plummeting nearly 39 per cent, and the company spending $7.3B to rectify the situation.
Dieselgate traces its roots back to 2008 when Volkswagen announced their line of ‘Clean Diesel’ vehicles which claimed to meet Euro 5 emissions targets and won several environmental awards and tax breaks for their low emissions technologies.
However, in 2014 the US Environmental Protection Agency (EPA) discovered discrepancies between the emissions of real world driving and emissions testing of these diesel engines and reached out to Volkswagen to explain the situation.
In 2015, Volkswagen admitted they had been using software built into the engine’s computers to cheat their emissions tests, and it was found their diesel-powered vehicles were emitting up to 40 times more nitrogen oxide in real world driving.
Volkswagen stated that 11.5 million vehicles sold worldwide were affected by the scandal.
Research into the scandal concluded 59 premature deaths were caused by the excess pollution between 2008 and 2015, and it may have resulted in higher rates of asthma, bronchitis, and emphysema.
This scandal also sparked investigations into other auto manufacturers which revealed other companies were similarly cheating on emissions testing, which resulted in the United Nations Sanctioning a harmonised vehicle emissions testing protocol.
The regulator is watching
The Australian Securities and Investment Commission (ASIC’s) recently released Corporate Plan outlines how they will be prioritising supervision of claims about sustainable financial products and net-zero in the coming years.
Speaking to the Committee for Economic Development of Australia on August 23, ASIC Chair, Joseph Longo, said they will remain responsive to new trends and issues, and the four external strategic priorities they will focus on include product design and distribution, sustainable finance, retirement decision making and technology risks.
“Why are these areas important to us?
“Each responds to a key emerging challenge that we face, each is focused on protecting people participating in the financial system and each is an explicit enforcement priority to us.
“As climate change and sustainability become the dominant themes of our times, we are seeing investment increasingly being driven by values-based decisions.
“In response, there has been a proliferation of investment products and companies appealing to consumers with sustainable or green investments and net zero emission promises.
“A core part of ASIC business is to ensure that firms comply with disclosure requirements and do not mislead investors.
“It follows that improving climate-related governance and disclosure are key priorities for ASIC.
“Regulation of climate and sustainability promises is a global issue.
“Australia relies on more than $4.1T in foreign investment to help power our industries, fund our services and create jobs.
“As more Australian firms release financial reports and disclose climate risks, we need to speak the same language as our global peers.
“ASIC strongly supports the development of globally comparable standards. We cannot go it alone, with our own language or our own standards.
“Our fellow regulators agree, and that’s why we lodged a joint submission to the International Sustainability Standards Board on its proposed standards. We will continue to engage with peer regulators here and overseas to ensure we are all aligned on this.
“Half of the ASX 200 companies are already voluntarily reporting against global benchmarks, but our surveillance shows more needs to be done.
“Of course, climate-related disclosure must comply with the law. Crucially, the information must be useful and accurate for investors/
“If you make net zero claims, you must have substance behind those claims.
“Aspiration on its own is not enough… the bar is set much higher. We want to ensure that firms moving towards net zero do so with integrity, fostering trust and practicing transparency.
“Through our supervisory work, we’re testing green investment offers and targeting false claims by firms. Labels or headline statements about a product’s green credentials cannot be misleading.
“If a product issuer promotes an investment opportunity and states they will take sustainability into account as part of their strategy, but doesn’t explain how, this simply isn’t enough.
“How is this going to help investors understand the product’s investment strategy?
“Firms are expected to explain how they will take sustainability into account, using specific and clear language. We are actively monitoring the market, looking for dubious claims.
“Serious breaches will fall foul of the misleading and deceptive disclosure provisions in the Corporations Act, and we will take enforcement action,” Longo said.
WHAT YOU CAN DO
Investors looking to go green can start with the process called negative screening, which Commonwealth Bank (CommBank) describe as looking at your options and electing not to invest in certain companies or sectors because you do not want to support the products or practices involved.
Negative screening can take environmental, social, humanitarian or animal cruelty points of view into account, which leaves the investor to choose what matters most to them.
Positive screening, which is where the investor actively allocates money to areas they wish to support and believe will provide a positive financial return is another option available to investors.
This can encompass investing in sustainable energy, healthcare, and social advocacy.
Investors can also find financial advisers who specialise in providing research to help make informed decisions about what options work best in a financial and ethical sense, and these can be found locally or online.
Investors looking to do it themselves can use many different research tools online to find appropriate investment options that align with their financial and ethical stance, but CommBank are warning DIYers that a lot of environmental, social, and corporate governance issues do not show up on financial statements, making it harder to ascertain whether a company is being honest with their green claims.
The Dow Jones Sustainability Australia Index and MSCI Australia ESG Index are both great online services to find environmentally and socially responsible companies to invest in.
The Dow Jones Sustainability Australia Index, which was introduced in 2005 represent the top 30 percent of companies in the ASX 200 based on long-term economic, environmental, and social criteria.
Companies listed are assessed based on their long-term economic, environmental, and social record, and all industry groups are considered including mining and gaming.
Other criteria reviewed by this index is climate change strategies, energy consumption, human resources development, knowledge management, stakeholder relations and corporate governance.
The MSCI Australia ESG Index provides exposure to companies with high environmental, social and governance performance relative to their sector peers, and it is made up of large and mid-cap companies in the Australian market.
It aims to offer investors a broad, diversified sustainability benchmark and the companies selected are based of research conducted by MSCI.
There are also green labelled exchange traded bonds on the ASX, which commits the issuer to use the funds for purposes that meet the requirements of the Climate Bonds International Standards and Certification Scheme.