How green is my investment?

Posted by Robbie Epsom on 19 September 2016

Is green or sustainable investment finally becoming main stream and how do investors know the difference between an actual green investment and greenwash? With a surge in green bonds, sustainability funds and BlackRock’s recent call on investors to ‘assess climate change impact’ – the question of 'how green is my investment?' is rising up the agenda.

There is a sense of impetus in the world of sustainability at the moment as countries begin to take big steps forward in their environmental commitments. For example, on 4 September 2016, both the United States and China (two of the world’s largest emitters of greenhouse gas emissions) agreed to ratify the Paris climate change agreement. Further to this, with the recent launch of the UN Sustainable Development Goals (SDGs) and the expected introduction of a new UK regulation implementing the EU Non-Financial Reporting Directive requirements (estimated to be 6 December 2016), there continue to be advances in the move to encourage companies to measure and report their non-financial data.

With a surge in green bonds, sustainability funds and BlackRock’s recent call on investors to ‘assess climate change impact’ – the question of 'how green is my investment?' is rising up the agenda

This momentum is leading to significant improvements in the measurement and reporting of non-financial data and is in turn catalysing the green investment market. In particular, it encourages ESG (environmental, social and governance) considerations to be incorporated into investment decisions.

With greatly improved methodologies for assessing ESG factors and increasing evidence of a positive link between ESG and financial performance it seems that the big investment players are starting to take notice and decisions are being made according to ESG data.

In a recent Reuters article, BlackRock Inc. (the world's largest asset manager) said ‘all investors should factor climate change into their decision-making and doing so would not mean having to accept lower returns.’ The article went on to make reference to a recent BlackRock report, published following the G20, which suggested that ‘firms that cut their carbon footprint have performed better than their peers who did not make such changes’.

The evidence for a positive link between ESG and financial return continues to grow with two recent studies. The first was an extensive study carried out by Deutsche Asset Management and the University of Hamburg (2015), which investigated whether integrating ESG into the investment process has a positive effect on corporate financial performance (CFP). This study looked at around 2,200 separate studies and the results showed that the business case for ESG investing is empirically well founded - with roughly 90% of studies seeing a non-negative ESG-CFP relationship and the majority reporting a positive finding. The second study was conducted by Oxford University and Arabesque Partners (2015) and also concluded that it is in the best economic interest for corporate managers and investors to incorporate sustainability considerations into their decision making processes.

Further to this there is now some evidence that investors pay a premium for green investments such as green bonds or sustainable funds. This was highlighted in a 2015 publication from Barclay’s which stated ‘Our model finds an approximately 20bp (basis point) difference between the spread of green bonds and comparable issues, which we see as partly attributable to opportunistic pricing based on strong demand from environmentally focused funds.’

However; it is important to emphasise that, whilst there is evidence for the positive impact of ESG and that investors are paying a premium for green assets, there are still conflicting views as to whether green assets outperform typical bonds, funds or other asset classes.

In spite of this uncertainty, the green investment market continues to grow and investors are therefore increasingly asking the question of ‘how green is my investment’ – particularly when a range of options are on the table and the assumptions behind the ‘green forecast’ are unclear.

Based on these findings, many institutional investors, including banks, are looking to improve their ESG data collection and analysis capabilities to help inform future investment decisions.

In my opinion, the green investment market is about to enter its most exciting phase yet with institutional investors ramping up the ante and even individual investors getting more involved through pensions funds and even crowdfunding for green projects.

What does this all mean if I’m an investor?

As the market begins to really take off, a wider and larger range of green assets will be made available to investors. As such, there is a need to make sure that investors understand just how green their investments actually are and, where possible, compare like with like. If you are going to pay a premium for a green asset, it is important to review any green claims to ensure that they can be substantiated.

Progress in this area is being made and many asset managers have developed their own means of measuring and communicating ESG credentials. Further to this, environmental consultancies such as Ricardo Energy & Environment are able to support investors with green technical due diligence and can also help put in place assessment criteria to determine how green an investment is. For example, our work with Spirax Sarco to assess the wider carbon benefits of their products.

What does this mean if my company or project falls within a ‘green portfolio’?

If you have a company or project (e.g. infrastructure or clean energy) that is being challenged by your institutional investors, then it is time for your company to consider upping your non-financial reporting and ensuring that you are able to respond to any requests for ESG data.

Further to this, there are genuine financial benefits which come with understanding your non-financial data and monitoring ESG factors. As highlighted in this blog, there is a clear link between ESG and positive financial returns. On the environmental side, this could be due to your own internal operations, or through your supply chain, and acting on waste minimisation, energy efficiency, mitigated climate change/flood risk or even better resource management leading to reduced operating costs and decreased risk to production. There is also clear evidence that better social and governance actions lead to increased returns through a healthier, equal and happier workforce and through the mitigation of typical governance risks, such as board independence.

Ricardo Energy & Environment has been supporting FTSE listed companies and international equivalents with their sustainability strategy, data and reporting for many years now and are therefore well positioned to help companies measure and communicate their ESG data to investors and stakeholders.

If you are looking to understand how green your investment actually is or you need to communicate your company/project ESG data to an investor, then please feel free to drop me an email at [email protected]