Green investments worldwide now total $3.3 trillion.
So finds the Green Transition Scoreboard (GTS), which has been tracking private investments in green markets since 2007. The March 2012 update has found Asia, Europe and Latin America catching up with the U.S.
The GTS excludes several subsectors such as nuclear, biofuels (except algae), and carbon capture & sequestration, either because of controversy or a lack of consensus that they will make a long-term contribution to sustainability.
While the S&P 500 rose by a paltry 2.11% in 2011 (and the S&P/TSX 60 fell by 9.08%), these green sectors achieved double digit growth: smart grids (23%); renewable energy (21.8%); energy efficiency (13.9%); and green construction (10.1%).
Such demand is a result of government action to reduce pollution and promote health, which in turn spurs private innovation. (GTS researchers removed government spending from investments whenever possible.) Also, consumer demand for efficient green products is rising along with the price of energy.
Major projects like the Keystone XL and Enbridge’s Northern Gateway pipelines are raising concerns among legislators, Aboriginal groups, and environmental interests, so investors are increasingly worried about financial and reputation risks. In fact, some investors now view fossil-fuel reserves as potential liabilities in a carbon constrained world.
An open letter from more than 20 investors, experts, NGOs, and universities (including the London School of Economics) recently warned the Bank of England and the European Central Bank that these are now sub-prime assets, posing a systemic risk to pension funds and economic stability.
Therefore, analysts and managers should update their strategic asset allocation models to highlight green markets. A recent Mercer report titled “Climate Change Scenarios: Implications for Strategic Asset Allocation,” suggests up to 40% of portfolios should be invested in green sectors—half to hedge against climate risk and half to capitalize on these opportunities.
Investors can use environmental, social and governance data (commonly known as ESG) provided by Bloomberg, Thomson Reuters, and Sustainalytics to identify companies like IBM that invest heavily in green R&D and have lower carbon intensity ratios. ETFs like the PowerShares Cleantech Portfolio (PZD) include companies operating within green sectors.
The green transition is transforming sectors one-by-one. The automobile sector is investing (and advertising) heavily in the green space with new cars like the fully electric Audi E-tron coming to market, while consumer goods producers like Hitachi, Philips, and Sharp are also investing billions in green R&D to develop new energy-efficient products.
As this transition matures, companies who invested earliest and heaviest will be providing the most innovative products in the leanest, most cost-efficient manner. Additionally, several large Canadian pension funds, including CPPIB, OTPP, and Caisse de dépôt et placement du Québec are shifting their investments in accordance with the UN Principles of Responsible Investing. This, too, will increase demand for green leaders.
The green transition is quickly becoming reality; MIT scientist Peter Senge refers to it as the necessary revolution, and economist Jeremy Rifkin calls it the fifth industrial revolution.
Smart investors can see these changes occurring, and are repositioning assets to reduce risk exposure and profit from the opportunity it presents.
Timothy Nash is president of Strategic Sustainable Investments, a Toronto-based consulting firm that specializes in ESG manager searches and green impact investments.