While green investing has often been treated as a niche concept, it is gaining steam. As we discussed in a previous research note, asset managers are rapidly becoming major advocates of conscientious responses to climate change. That changing sentiment has trickled out across the entire financial industry, even affecting central bank policy.
Asset managers with a long-term view have two core objectives: preserving capital and growing wealth. Climate implications are gaining increasing consideration in terms of both risk management and capital appreciation, and a number of opportunities are beginning to emerge that might be worth investors' attention.
Derisking from climate impact
Many investors are considering green investments, as well as avoiding those that could prove susceptible to climate change, as a means of preserving and growing capital. These investors are certainly not acting solely out of the goodness of their hearts alone, as a recent report by The Financial Times readily demonstrates:
“For larger investors, there is also the potential for collateral damage: the behavior of the oil and gas groups they invest in could hit other parts of their portfolios, from agri-food stocks suffering if crops fail to the falling share prices of companies that operate coastal infrastructure.”
With the impact of climate change being felt more broadly, investors cannot ignore the challenges such environmental shifts can present to their bottom lines. For large private asset managers, public and private pension funds, sovereign wealth funds and others, the decision to go green is not so much a compromise on profit, but rather a means of ensuring sustainable profits over the long run.
Green utilities pay off in Europe
Investors and asset managers are not simply playing defense when it comes to climate change. Indeed, many are making aggressive plays on companies and assets that should see significant gains in light of a changing climate. While the opportunities will undoubtedly shift and evolve over time, one asset class that has done very well recently is green utilities. This is especially true of Europe, as Elchin Mammadov, a utilities analyst for Bloomberg Intelligence, recently reported:
“Green utilities are well placed to generate long-term shareholder returns amid windfall profits from higher carbon prices and ample growth opportunities in Europe and abroad. They also don’t have to worry about dealing with legacy coal and gas assets.”
These new energy and climate-conscious utilities have enjoyed economic tailwinds from government policy, as well as broad shifts in consumer behavior. In 2019, this asset class should offer further opportunities, barring a tectonic shift in government policies across Europe’s major economies (not terribly likely, though perhaps not impossible in these troubled times).
ESG takes root in real estate
If European utilities are too niche for you, there are other opportunities. The biggest asset class of all, real estate, has not been immune to the impact of the green shift. Indeed, environmental, social and government (ESG) factors are becoming increasingly important in the industry, as PricewaterhouseCoopers’ latest report on emerging trends in real estate details:
“In a period when transaction velocity is easing and when owners worry about reinvestment risk in the event of a sale, the ability to extract additional value from their existing portfolio is an important way to tick yields in the right direction. Moreover, with intensely competitive conditions prevailing in the field of capital raising, evidence of astute asset management is a key point in attracting future investment. A sophisticated approach to ESG practices can be critical for efforts to attract and retain capital resources, especially from institutional and international investors as well as in the world of public REITs.”
Real estate investment trusts, property managers and other real estate investors are engaged in an ever-intensifying fight for allocator capital. ESG factors appear to be increasingly decisive factors in allocator decisions. It may be affecting things at the margins now, but it could well have more far-reaching consequences in the coming years. That becomes more obvious in light of the growing class of wealthy millennials, which cares far more about sustainability than prior generations. They might well be willing to sacrifice some level of investment return in order to make a more significant impact. If so, that could accelerate changes in investing behavior across a variety of markets.
Verdict
This has been far from an exhaustive discussion of the effects climate change has wrought - and will wreak - on the investing world. A myriad of asset classes will be affected by climate shifts, and a host of new asset classes and opportunities will no doubt emerge in the future.
Ultimately, climate change will create both risks and opportunities in the years ahead, whether market participants want it to or not. Shrewd investors would be wise to learn carefully in order to avoid the former and to seize the latter.
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