Sustainable Investing in 2020

May 19, 2020

What Is Sustainability?

Sustainability is the practice of focusing on existing in the modern world and meeting the current generation’s needs, without depleting natural resources or compromising the life of the future of human civilization. Sustainability is based on three main concepts, also known as the ESG metrics:

  • Environmental – which refers to caring for the environment
  • Social – how well the businesses treat their clients, employees, associates
  • Corporate Governance – how well an organization is run

What does this have anything to do with investors? Sustainable investing is a modern notion that refers to investors being wary of corporations they invest in based on their ethics and commitment towards sustainability. And while large organizations often make strong pledges to sustainability, it often takes a lot of time and money to achieve these goals.

How Does Sustainable Investing Work?

Sustainability inspires modern corporations to consider the environmental, economic, and social impact that their business decisions will have on future generations and the planet. Sustainability also encourages paying attention to these factors without considering the short-term effects on earnings, therefore paying attention to more factors than just profit and loss.

More and more businesses are implementing sustainability goals such as lowering their energy use, reducing overall emissions, or committing to less or even zero-waste, for example. In the last decade, wealth management companies have noticed a significant growth of investors who are interested in sustainable investments.

“Sustainability is not just about adopting the latest energy-efficient technologies or turning to renewable sources of power. Sustainability is the responsibility of every individual every day. It is about changing our behavior and mindset to reduce power and water consumption, thereby helping to control emissions and pollution levels.” – Joe Kaeser

Ernst & Young has reported that “sustainable investing has experienced a compound annual growth rate of 107.4%.” There are a number of reasons why investors are turning to sustainable investment opportunities:

  • Demand – As the millennial generation slowly steps into the shoes of financial decision-makers, demand for sustainable investment solutions grew immensely.
  • Pressure – Regulators and governments are putting pressure on corporations to conduct business more responsibly and incorporate sustainability into their corporate strategy.
  • Marketing – investing in matters like modernization in energy-saving and generation, sanitation, clean water, accessible health care, improving city infrastructure, etc. can highly improve a corporation’s brand image.

However, one of the main reasons is the macro-economic demand for natural resources which are rapidly diminishing as the global population grows.

The Green Generation

Sustainable investing has continually displayed strong performance on global financial markets. There is increased demand from investors across the world, who are more interested in affiliating their investments with their values versus committing to traditional investing. It’s important to note, that millennials are responsible for a sizeable chunk of the current investor population; Millenials are often considered to be the green generation of modern times.

“The industry is moving from a passive investor population, which is dependent on the income from defined benefit and pension plans, to a population that is self-funding via their defined contribution plans. These millennials will demand more active involvement in their own investments as they wish to be more actively involved in controlling their own destiny. Along with this more active approach will come more activist tendencies.” – Greg Cobb

Millennials are the generation that grew up together with the Information Age; as a generation, they are highly accustomed to using the internet, and in that way staying updated on global news with the help of digital devices.

Value-based investing has become a priority for modern young investors. They seek out corporations who follow ESG practices and are much more likely to exist an investment position if they notice the organization is involved in questionable activities. Global consciousness has impacted not only how millennials invest, but also how the build business models and create their own companies.

What Are Some Top Green Industries to Invest In?

As the topic of climate change grew from a “conspiracy theory” to a major global problem. Renewable energy refers to the energy that is collected from renewable natural resources, such as:

  • Sunlight
  • Wind
  • Rain
  • Tides
  • Waves
  • Geothermal heat

Renewable energy will provide energy for important areas like electricity generation, heating and cooling of water and air, transportation, etc.

Water Stocks

Water is perhaps the most vital natural resource that the human civilization has to its disposal. Running out of freshwater due to climate change is a major global fear.  In Europe, over twenty countries require more water than their local rivers can provide, which means they are obligated to import water from abroad.

This is why water investments have become increasingly popular. Companies that collect, purify, and distribute water are a popular addition to an investing portfolio. Investors can invest in water-based mutual funds, not just individual securities, such as Invesco S&P Global Water Index, or Invesco Water Resources Portfolio which are both ETFs. Investors can also invest in hydropower corporations which are companies that focus on yielding energy with the help of water.

Waste Management and Reduction

“Recycling, packaging, businesses are changing all of those things because that’s what consumers want.” – Jerry Greenfield, Co-founder of Ben & Jerry’s Ice Cream

In many households, recycling has become a common practice. People are aware that paper, metal, PMD and glass can be recycled and eventually reused. Businesses are paying more attention to packaging, where they source their produce and how they run their companies, but they are also incorporating this in their marketing mix.

Waste is amongst the biggest worries of environmentalists; we have all seen those horrendous, shocking images of garbage ridden seas and beaches. This why companies who approach waste management differently, such as burning it to generate power, have become largely popular. The same applies to private recycling facilities that deal with common recycling like glass, plastic and paper but also with the batteries, mobile phones, car parts and white goods.

Solar Energy, Wind Power, and Geothermal Energy

Supplying buildings with electricity and heat is vital. Solar panels not only provide homeowners with cheaper electricity, but they are also incredibly profitable. Investors are turning towards shares of companies like Sunpower and First Solar who work with developing and installing solar panels.

Wind power is another popular and fast-growing source of renewable energy that has expanded heavily over the last decade. Investors are looking at businesses that own wind farms, wind turbines, and sell wind-energy.

Aside from solar and wind power, energy can be derived directly from the earth, which is amongst the cleanest ways to produce energy. Organizations own, develop and operate geothermal plants to help produce such energy.

Organic Farming and Sustainable Fishing

Nutrition is an important topic in the modern world, more people than ever are paying attention to their eating habits but most importantly where their food is coming from. Organic farming involves not using pesticides, engaging in humane animal farming practices, and avoiding using hormones and antibiotics. Procedures as such can be costly for businesses due to reduced shelf-life of products.

Another food-related investment is sustainable fishing, which is growing immensely in popularity amongst the global overfished oceans. While this is still a very new business, fishing is an important topic in the modern world. Sustainable fisheries are looking to reduce the environmental impact of fishing by ensuring enough fish are left in the ocean but at the same time, fishermen who depend on this business can maintain their livelihoods.

Green Transportation

Transportation is an aspect that’s impossible to live without in the modern world. Modern companies like Tesla are creating exciting and attention-grabbing innovations as they develop the technology in their automobiles.

Electrical cars are a unique innovation that helps save on fuel and provide an alternative, safer method of powering automobiles. Consumers are saving a vast amount of funds on this innovative

How Can Investors Think Sustainably?

Access to sustainable investing has become easier to access in 2020. Investors have access to exchange-traded funds (EFTs), as well as index funds which offer the kind of transparency that allows investors to make their investments based on their values.

Sustainable investing is powerful; it allows investors to screen out controversial businesses and influence important issues like climate change. And as ESG investing becomes more mainstream and even outperforms traditional investing, it seems like a natural addition to any investor’s portfolio.