Sustainable Investing- The New Buzzword in World Markets
Posted in Finance Articles, Total Reads: 1020
, Published on 05 February 2016
Wouldn’t you invest in attractively priced companies with promising returns? What if, they also let you do your share for saving the world? Now, that’s an offer you just cannot resist. 2015 saw several mainstream investment firms putting their money on “sustainable investing,” also known as SRI (socially responsible investing) and ESG (environment, social, and corporate governance).
Wall street is joining the bandwagon, with BlackRock Inc. and Goldman Sachs Group Inc. launching sustainable bond exchange-traded funds. BlackRock currently manages more than $200bn of assets across ESG screened nd impact funds, globally. The BlackRock Impact U.S. Equity Fund (BIRAX) fund has attracted $20 million in assets. Goldman Sachs has brought Imprint Capital Advisors, an asset-management firm creating portfolios for clients aligning their interests on environmental, social and governance isses with the bonds issued.
Why does it matter now?
The importance of sustainability is increasing globally. Beijing issued its first ever red-alert from pollution in 2015. Back home, Delhi had to implement the odd even plan to tackle its pollution issue. With emerging economies suffering from poor emissions standards, climate issues and clean water scarcity, the stage was set in 2015, to have sustainable investing come to the limelight. The corporates are listening. The way institutions approach environmental and social issues are changing for good.
Investing for a cause does not mean a compromise on returns. In 2015, A study by Morgan Stanley on sustainable investment performance showed that sustainability shows more or less the same perfomance results as traditional investments. Ofentimes, the returns has exceeded that of comaparble traditional investments. For th study, around 10,228 open ended mutual funds and aroud 2000 SMA’s (Separately Managed Accounts) were reviewed.
Deutsche Bank (DB) in it’s 2013 paper observed that firms with higher ratings for ESG exibit financial outperformance consistently.
With an increased demand from client side to invest in sustainable bonds, firms are inventing new financial products and services. Several “Sustainable” and ESG rating agencies have come up with ratings for investors to fully access the level to which sustainable fixed income bonds offered fullfills it’s promises. Rating agencies like Vigeo, EIRIS, MSCI, Sustainalytics, Oekum have emerged offering company ratings based on ESG ratings irrespective of the company structure. Sustainable Accounting Standards Board (SASB) provides a viable mean for verification of information provided in accounts and audits. All this has ensured transparency and credibility to sustainable investing schemes.
Aligning the demand for sustainable investments with the investor’s appetite for fixed income securities, Green bonds have emerged as a viable form of socially responsible investing.
Green bonds were first introduced during 2007-08. The proceeds were exclusively used to fund climate and otherwise environmentally friendly projects. It has now evolved from a niche market segment to a mainstream product segment. Investments have gone up till $1billion.
Source: Climate Bonds Initiative (2016)
More recently, India has entered the market with Yes Bank and Exim Bank issuing green bonds. Yes Bank raised ₹1000 crore from insurance companies, pension funds, mutual fund houses and foreign portfolio investors by issuing green bonds. The fund will be used for solar, wind and biomass projects. EXIM Bank raised about $500 million from international investors. CLP India- a power company raised about ₹600 crore for its wind business.
Who invests in Green bonds?
• Asset managers
• Pension funds
• Insurance companies
• Bank.Corporate Treasuries
• HNI’s (High net worth Individuals)
India and other emerging market economies are a perfet marketplace for greenbonds. An estimated $200 billion needs to be raised to build up India’s renewable energy capacity. It is true for most of emerging markets.
On its green bond Yes Bank offered sub-9 per cent rates, while CLP offered 9.15 per cent. This is lower than usual project lending rates of 12-14 per cent. This would also mean the yield is a little less in terms of green bonds. On its green bond Yes Bank offered sub-9 per cent rates, while CLP offered 9.15 per cent. This is lower than usual project lending rates of 12-14 per cent. However, with the 41.8 billion grrenbond industry is expected to grow further in 2016. 7 new countries, viz, Brazil, Denmark, India, Estonia, hing kong, Latvia and Mexico joined the green bond market in 2015. With increased demand, the green bonds market is set to give favourable terms and better price for the issuer, as compared to a regular bond from the same issuer.
Emerging Trends in Energy Sector
With the investments rising, the energy sector worldwide witnessed several reforms in 2015. The growing popularity of green bonds are just indicators of this change. 121 gigawatts capacity was added in 2015 in terms of renewables, with an estimated investment of 329 billion globally (source: Bloomberg new energy finance). China emerged as the champion of renewables, bypassing Europe. Emerging markets outspent the rich countries for the first time in annual investment in clean energy. More than half of the total investments were estimated to come from emerging markets alone.
The rise of clean energy investments:
Source: Bloomberg labs
China dominated in investments with a whopping 17% increase in clean energy investments. Mexico, Chile, Morocco and South Africa closely followed.
Majority of the investments go to solar and wind projects.
What makes 2015 special is the rise in clean energy investments despite the oil prices trending in phenomenal low prices (oil prices plunged 67% in the last 18 months). Traditional energy sources like coal, oil and natural gas prices declined significantly in 2015, owing to global slowdown in world economies. However, this was no deterrent to rising clean energy investments, highlighting the improving cost effectiveness in clean energy projects. This means more megawatts for the same price. The two fields remain unaffected majorly because, oil and other traditional sources are mainly used in auto and aviation sectors as fuel, while renewable energy methods, notably solar and wind are used in electricity generation. It is easy to envisage a world where all these energy sources co-exist with oil becoming scarce and renewables becoming profitable with advanced technology.
Further good news comes in from US lawmakers, who are planning to extend the tax credits for solar and wind for another 5 years. This move will potentially add 20 gigawatts of solar power to US economy alone. Wind power is estimated to contribute 19 gigawatts over the same period. The combined extension has the potential to spur more than $73 billion in investments.
Basic research and development of clean energy technology also witnessed significant growth, with patents soaring to an all time high. 20 countries, which constituted 80% of R&D in clean energy agreed to double their annual spending on these projects. The shift in cleaner energy is underway, bolstered by investments from various firms and governments.
Looking at the market trends in energy sectors, it can be safely inferred that the year ahead will see many more players entering the sustainable investments arena.
Risks and Mitigants
The researches conducted by Morgan Stanley Institute of sustainable Investment have helped dispel several myths regarding ESG’s. Most importantly, they concluded that the investing in sustainability has often met, and exceeded the performance of comparable traditional investments. They also found a positive relationship between corporate investment in sustainability, stock price and performance of a firm.
However, several challenges remain. For one, it is not clear what makes an investment “sustainable”. For one, as of now, companies aren’t required to disclose the associated risk with ESG’s. An audit system needs to be in place, which can assess what companies are reporting as “sustainable”.
Secondly, The flotation and ongoing costs associated with a green bond could be much higher than that of a regular bond. The bonds are mostly long term fixed income securities, implying less liquidity in the market.
Finally, Lack of a standard definition also means there can be disputes as to which bonds are green and which are not. This provides an ongoing reputational risk, just as issuing a green bond might greatly increase the reputation of the firm. Keeping this in mind, In India, SEBI has proposed to call for additional disclosures in green bonds detailing where the funds are being deployed. This is a welcome move.
Though plunging oil prices could be a potential risk, as detailed in this article, green bonds continued to flourish despite new lows in oil prices.
The rising trend in sustainable investments and green bonds are here to stay. As the market grows, more investment products are likely to surface, providing more liquidity to this sector. The markets today are giving more importance to green bonds reporting, to increase the amount of data available for the investor. This will bring in transparency to the market and rope in more firms in the future. Sustainable investing is the sector to look out for in 2016.
This article has been authored by Sharika Nambiar from SIBM Pune