Why Green Investing?
Why prioritize investing in stocks operating in climate-related industries?
The prominence of green investing arose with the popularity of ESG investing, peaking at the end of the previous stock market bubble in 2021. Environmental, social, and governance (ESG) factors are combined, arbitrary metrics for tracking how sustainable a corporation's operations are.
ESG Was Destined for Failure
To illustrate just how broken this system is— companies like Phillip Morris, Shell, and Exxon have higher ESG scores than Tesla. ESG, as a guiding principle, was destined for failure.
In theory, merging the three ESG factors made sense, as it estimated how strongly a company accounts for all potential stakeholders affected by how said company is operating… not just its shareholders.
With vague guidelines, politicization, and outsized exposure to challenging industries like electric vehicles or hydrogen production… it’s no wonder that capital flows into sustainability funds have been declining.
The problem here is that ESG has become increasingly unpopular, and environmental industries have been caught up in the optics crossfire. At the same time, they’re the only sectors you can genuinely target in an investing strategy…
How do you invest in “social benefits” or “proper governance?”
Both of these factors just correlate to how a company is run, but neither of them are actual business models you can buy individually.
If I want to gain exposure to climate-friendly companies, I can look at renewable energy producers, hydrogen infrastructure businesses, nuclear energy technologies, carbon capture operations, and so on…
They benefit the environment directly with their business models.
Growth Rates
The best part? The growth rate projections for many of these industries are immense:
The UNFCCC’s Climate Champions and Vivid Economics published research stating that to reach net zero, the world will need to invest $125T into climate-related investments by 2050.
Global intergovernmental body, the International Renewable Energy Agency (IRENA), approximates the world will need to invest $35T by 2030 for the energy transition to succeed.
BlackRock estimates that the world’s energy transition will require $4T of investment yearly by the mid-2030s.
In addition, while ESG investing has been in decline, institutional investors largely continue to signal their desire to invest in new climate solutions.
Robeco’s Global Climate Investing Survey in May 2024 of 300 global institutional and wholesale investors representing a collective $29T in AUM found that:
62% of investors reported that climate change is a central or significant part of their investment policies; this figure declined from 71% last year. This downturn was primarily accounting for North American investors.
48% of respondents reported that they are currently allocating to funds that invest in climate solutions, with another 25% planning to do so over the next two years.
Taking these investment projections and the opinions of investment managers into account… I believe that green investing will emerge as a prevalent, standalone area for investment focus. This is the trend I’m looking to take advantage of.
Public Opinion
If you’ve been on X (Twitter) recently, you could be led to believe that the world no longer thinks climate change is a concern, and that the whole premise is a hoax.
Climate-skeptical accounts tend to trend on the platform.
Just to be clear, I’m not here to discuss politics or express an opinion on whether this is right or wrong; I’m just stating the facts.
With that said, climate change skepticism is actually decisively unpopular across the globe.
According to a survey of 139,136 Facebook users in 107 different countries by the Yale Program on Climate Change Communication… the majority of users in nearly every country believed that climate change was at least partially caused by human activities.
Only 16 countries said that climate change was mostly caused by humans, but you get my point: The majority of the world believes that we’re contributing to this problem.
As you can see, public opinion will continue to be a source of pressure on governments and corporations to take action regarding their carbon emissions or other environmental effects.
This narrative has only grown in strength since its introduction into the mainstream in the 1970s and 1980s. We’re 50+ years past its true emergence, and we’re still talking about it… so I’m not concerned about shifting political winds ruining any investment.
Financial Incentives
Not only will public opinion influence where capital ultimately flows, but financial incentives are being introduced to further juice environmental sectors.
In a previous post in March 2023, I outlined the various financial incentives driving investment in these spaces now.
Emissions trading systems, carbon taxes, carbon tariffs, green bonds, subsidies, and more are all making it increasingly expensive to not hedge against the emission of carbon dioxide and other greenhouse gases.
Climate-friendly governments are playing a large role in providing these incentives, but as I mentioned earlier, this narrative will persist regardless of who enters any particular political office.
Institutional investors realize this, and it makes sense why they want to position accordingly. I want to invest in the companies that they’ll be interested in.
So, the majority of global population believes in climate change, and both governments and businesses are incentivized to engage in these sectors…
Reality
Even if you’re climate-skeptical yourself… in my opinion, it’s important to avoid allowing politics or personal beliefs to influence your financial decisions.
Ideally, we can both follow and anticipate where capital is going to flow while positioning to take advantage of it, regardless of how we feel about that reality.
I think all signs are pointing toward continued, significant growth for sectors and companies that benefit the environment. My newsletter service is dedicated to tracking and identifying new investment opportunities in these areas.