Sustainable Investing: The Rise of Green Alternative Asset Classes

Sustainable Investing: The Rise of Green Alternative Asset Classes

Sustainable Investing: The Rise of Green Alternative Asset Classes

Sustainable investing provides resources to companies that work to prevent climate change and environmental harm while encouraging corporate responsibility. We will discuss the rise of green alternative asset classes in this article.

 

According to a new report from Morgan Stanley’s Institute for Sustainable Investing and Investment Management, investing in companies or funds that aim to achieve market-rate financial returns while considering positive social or environmental impact is becoming more popular among institutional investors.

 

80% of asset owners indicated they actively incorporated sustainable investment in 2019, a 10% increase over Morgan Stanley’s previous biennial survey in 2017. 

 

According to the report, constituent demand, perceived potential for attractive financial performance, and emerging legislation requiring greater transparency on environmental, social, and governance (ESG) factors are driving this trend.

 

“These results provide additional proof that sustainable investing has become table stakes,” says Audrey Choi, Chief Sustainability Officer and CEO of Morgan Stanley’s Institute for Sustainable Investing. 

 

“According to this year’s survey, more asset owners identified return potential as a key driver for sustainability integration, and as a result, many anticipate limiting their allocations to managers with formalized sustainability approaches in the future.”

 

Between October and December 2019, 110 asset owners in North America, Europe, and Asia Pacific were polled, including financial institutions, insurers, and pension funds. 

 

According to eight out of ten respondents, organizations with good ESG standards may make superior long-term investments. 

 

The majority (57%) envision a time when they will only allocate to investment managers with a formal ESG approach; however, many mention challenges to large-scale sustainable investing, such as access to suitable tools for measuring sustainability goals and quality data.

 

“The majority of investors surveyed believe that companies with ESG-aligned practices can be better long-term investments, but we continue to need better reporting and data to evaluate holdings on those criteria,” says Ted Eliopoulos, Vice Chairman of Morgan Stanley Investment Management. 

 

“Investment managers can play a critical role supporting clients as they implement tools to assess how investments align with their sustainability goals.”

 

To ensure we are on the same page, what really is sustainable investing?

 

What is Sustainable Investing? 

Sustainable investing encompasses a variety of techniques in which investors seek financial rewards while increasing long-term environmental or social benefits. 

 

Combining traditional investment methodologies with environmental, social, and corporate governance (ESG) insights has resulted in more complete evaluations and better investment decisions for investors.

 

Sustainable investing guarantees that enterprises are judged on more than just short-term financial benefits but also on what and how they contribute to society. 

 

Investors must consider the potential implications of their investments on the environmental, political, and sociological environments.

 

Why Sustainable Investment is Important

Demand from millennials and impact investors concerned with ethical investing or backing companies with fundamental values that create a positive impact and promote change has increased the popularity of sustainable investing.

 

Sustainable investing promotes businesses to adopt sustainable practices, which can result in long-term social and financial benefits. 

 

This concept is expressed in the triple bottom line, or the idea that firms should measure their social and environmental consequences and focus on financial performance and profit.

 

Encouraging businesses to adopt sustainability fosters the emergence of purpose-driven businesses with social and environmental benefits extending beyond selling goods or services. 

 

Furthermore, large-scale global challenges like climate change are frequently addressed through sustainable corporate practices.

 

Learning about sustainable investment methods is critical so you can decide where and when to invest based on your values and investing trends. 

 

For example, when corporations are encouraged to be more sustainable, certain investors are under increased pressure from asset owners to focus more on sustainability.

 

Investing sustainably does not imply foregoing financial returns. While returns cannot be guaranteed, ESG funds and investments can perform as well as, if not better, non-ESG funds. 

 

From January to May 2020, 14 of 17 ESG-focused ETFs outperformed the S& P 500. 

 

Meanwhile, according to Morningstar, 23 new ESG funds will be created in 2020, giving investors more sustainable options and indirectly motivating companies to reassess their ESG rankings to be included.

 

What are Green Alternative Asset Classes?

Green alternative assets try to encourage business activities that benefit the natural environment. 

 

Green alternative assets, frequently associated with socially responsible investing (SRI) or environmental, social, and governance (ESG) criteria, focus on companies or initiatives committed to natural resource conservation, pollution reduction, or other environmentally conscious corporate practices. 

 

Green alternative assets, while falling under the SRI umbrella, are more particular.

 

Some investors purchase green bonds, exchange-traded funds (ETFs), green index funds, green mutual funds, or stocks in ecologically friendly companies to support green projects. 

 

While profit is not the main motivator for these investors, there is some evidence that green investment can match or outperform more traditional assets in terms of returns.

 

Understanding Green Alternative Asset Classes

Green alternative assets that are pure plays generate all or most of their income and profits from green business operations. 

 

Green alternative assets can also refer to businesses with other business lines but focus on green projects or product lines.

 

There are numerous opportunities for firms seeking to better the environment. 

 

Some green businesses are researching renewable energy or producing environmentally acceptable alternatives to plastics and other materials. 

 

Others may aim to reduce pollution or other environmental problems from their manufacturing processes.

 

Because there is no definitive definition of “green,” what constitutes a green alternative asset is open to opinion. Some investors are only interested in pure-play choices such as renewable fuels and energy-saving technology. 

 

Other investors put money behind companies that use natural resources wisely, control waste, and generate cash from different sources.

 

Types of Green Alternative Asset Classes

There are several ways to invest in green technology initiatives. While long thought to be dangerous, certain green technologies have proven profitable for their investors.

 

  1. Green Equity
  2. Green Funds 
  3. Green Bonds 

 

Green Equity

Buying stock in companies with solid environmental goals is perhaps the most basic type of green alternative asset class. 

 

Many new firms are attempting to develop alternative fuels and materials, and even established players are betting big on a low-carbon future. 

 

Some companies, such as Tesla (TSLA), have achieved multibillion-dollar valuations by focusing on environmentally-minded customers.

 

Green Funds 

Another option is to buy shares in a mutual fund, ETF, or index fund with broader exposure to green companies. 

 

Instead of a single stock or bond, these green funds invest in a basket of prospective assets, allowing investors to spread their money over various environmental projects.

 

Green Bonds

These fixed-income instruments, also known as climate bonds, are loans that help banks, enterprises, and government organizations finance projects that favorably impact the environment. 

 

The Climate Bonds Initiative estimated that around $1.1 trillion in new green bonds were issued in 2021. These bonds may also provide tax breaks, making them a more appealing investment than ordinary bonds.

 

Proof of Green Alternative Asset Class

Once considered a niche sector, green investing has grown in popularity due to various natural disasters that have drawn attention to the impending climate issue. 

 

The new money in ESG funds reached over $70 billion in 2021, nearly a third more than the previous year.

 

Although profit is not the main goal of green investing, there is evidence that environmentally friendly investments can match or outperform more traditional assets in profitability. 

 

Morningstar Inc. forecasted “another year of broken records” between environmentally sustainable funds and the overall market in 2022. 

 

The study also discovered that sustainable large-blend funds in the United States “outperformed their traditional peers in 2021 as well as the previous three and five-year periods.”

 

The Rise of Green Alternative Asset Class

Investing in green companies can be riskier than other equity strategies because many are in the development stage, with low revenues and high earnings valuations. 

 

On the other hand, green alternative assets can be an appealing option for investors to put their money to work if boosting eco-friendly firms is essential to them.

 

The term “green” can mean different things to different investors. Some so-called green funds invest in companies that produce natural gas or oil. 

 

Although these corporations may be exploring renewable energy technology, some investors may hesitate to invest in a fund affiliated with fossil fuel companies. 

 

Prospective investors should research their investments (such as reviewing a fund’s prospectus or a stock’s annual filings) to determine whether the company meets their definition of green.

 

Conclusion

Green alternative assets help to ensure long-term viability by providing financial resources to environmentally friendly projects and businesses.

 

These investments assist in reducing greenhouse gas emissions, promote resource conservation, and stimulate the creation of a more sustainable and resilient economy by allocating capital to renewable energy, energy efficiency, waste management, and other sustainable activities.

 

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