So, how do we make socially responsible investment decisions? How do we make a positive impact via our investments?
What is impact investing?
Impact investing is defined by the Global Impact Investing Network (GIIN) as ‘investments made with the intention to generate positive and measurable social and environmental impact alongside a financial return’.
Impact investments are made across all asset classes. The term was officially coined in 2007 and, since then, the industry has grown significantly.
There is now greater recognition of the power of impact investing to address social and environmental challenges, hence it is attracting the attention of a greater number of investors. More people are recognising that their money could – and should – do more than just make money.
The rise of impact investing around the world
In its Sizing the Impact Investing Market whitepaper, the GIIN estimated the full impact investing market at USD 502 billion as of the end of 2018. This was the first rigorous analysis and estimate of the size of the global impact investing market, capturing data from many types of investors based in every region of the world.
In summary, the research shows that there is a significant amount of capital invested in addressing the world’s social and environmental challenges and is set to grow, with 56% of respondents to the GIIN’s Annual Impact Investor Survey targeting both social and environmental impact objectives.
The most common sectors for green investments
Common sectors for green investments include:
- power generation (water, wind and solar)
- water utility companies (collection and distribution of clean water)
- pollution control technologies
- green transportation
- waste reduction
- organic farms
- aquaculture
- geothermal energy.
But just how green is a ‘green’ investment?
Investors need to be aware that there are shades of green in the impact, or ethical, investing market. Investment funds or stocks labelled as ‘green’ or ‘ethical’ may not be exactly what they claim.
Take Tesla, for example. Often held up as the paragon of the new, sustainable economy, just how green are Tesla’s credentials? Even if you pay no attention to individual Tesla stocks, no doubt you will have heard media comments about their performance. The company is currently valued at more than USD 150 billion, almost double that of Ford and GM combined. One research firm predicts that Tesla share prices could reach USD 7000 by 2024.
There is a compelling argument in support of Tesla’s prospects: they are selling high-end cars to compete with luxury brands but at a much lower price. Since car manufacturers typically make most of their profit at the upper end of their ranges, Tesla clearly has the potential to act as the disruptor to the traditional car market. As volumes increase, Tesla has the scope to move down the price range and capture market share across the board.
On top of that, Tesla has been a gift to ‘green’ funds and to the concept of electric vehicles. However, while we may reasonably expect that companies like Tesla to become dominant players in the electric vehicle market, and make large amounts of money, it’s not clear whether they represent an unqualified win for the environment.
Batteries powering electric vehicles are forecast to make up 90% of the lithium-ion battery market by 2025. Fortunately, electric car batteries can be recycled although the recovery of key resources to do so does involve an energy-intensive smelting process.
To reduce the weight of electric cars, they are full of aluminium and rare materials such as lithium, which need to come from environmentally destructive mines. Fortunately, electric cars don’t have exhaust pipes, visibly pumping out fumes, but the car still needs to be powered; the electricity to do this may be generated from fossil fuels.
While an electric vehicle has a higher carbon footprint at the beginning of its lifecycle, it is typically cleaner once in use. Once in use, however, an electric vehicle is only as green as the electricity that feeds its battery.
This is just one example of the kind of multi-level analysis necessary to assess just what is, and what is not, beneficial in our fight against climate change, and the difficulties involved in assessing ‘green’ investments’.
How to include more green investments in your portfolio
If you are interested in investing in sustainable or socially responsible companies, there are a number of ways to find a place for them in your investment portfolio.
The best way to start is by researching and defining which causes matter to you. Are you interested in how you can use your investments to lower carbon emissions or are you keen to exclude from your portfolio companies involved in fossil fuel-based activities?
There are many exchange-traded funds (EFTs), mutual funds and private investments that meet Socially Responsible Investing (RSI) criteria.
You could also review the corporate governance and sustainability reports for companies you have invested in and do your own due diligence on whether or not they are the best performers in their respective industries.
Once you’ve got your list, you can either use investment platforms that promote green investments, such as motif or OpenInvest, or speak with your financial planner to select investments that ailing with your personal values.
We will be happy to speak with you about how we can include more green investments in your portfolio.
