Is green funding a genuine sustainable investment?
Green funds are neither a fad nor a financial product designed to raise awareness. They are not only reserved for ecology enthusiasts or benefactors of humanity. Their growing presence in investors’ portfolios must now be taken seriously. Their main advantage is that they are sustainable, and this is one of the major concerns of millennials. The current pandemic will increase global ecological awareness. This does not mean that one must invest in green funds at all costs. Performance must be on the cards, and, like any financial product, they must be considered rationally.
Investing is primarily about capital gains
Green investment does not only have advantages. It is far from proven that the returns it provides are commensurate. Investors must keep in mind that the main motivation remains the return on his investments. It is not a crime to sell an ethical investment that does not add value. By focusing only on eco-responsible investment, the risk of missing out on great opportunities is high.
Before any investment, as usual, one must find out more. One must not lose sight of the fact that the very definition of social and ecological responsibility is intrinsically subjective. It is not universal. What applies in Belgium or Luxembourg does not necessarily apply in other countries, even within the European Union.
Green finance is blooming
As Bloomberg points out, with an estimated market of $31 trillion. Sustainable assets account for more than 48% of the European market ($14 trillion). Of the $92 trillion in assets managed annually, more than 30% comes from green finance. Green bonds have grown from less than $5 billion in 2012 to $180 billion in 2018.
A whole new banking ecosystem is developing. It consists of green bonds, sustainability bonds, social bonds, sustainable development loans, and green loans. It can be expected that this will quickly give rise to new products and new financial tools. It is not out of the question that measurement tools are also evolving. Traditionally, they only consider the profitability or impact on the growth of valued companies.
Creating a virtuous cycle based on strong diversification
Green investments are based on values intimately linked to ecology, but not only. Rather, it is a whole virtuous cycle that is to maintain itself, in the image of the environment, to promote a thoughtful growth of profits and resources. It starts by financing the capital of companies, as you do traditionally. By emulation and porosity between the private and public sectors, green public policies are then financed. Finally, the creation and then the strengthening of a financial ecosystem based on green investment becomes the fertile foundation for the cycle’s renewal.
At the origin of this cyclical description, Dr. Nannette Lindenberg of the Deutsches Institute für Entwicklüngspolitik (German Institute for Development Policy), describes the resulting financial products. Investments that have a direct ecological impact include, for example, the treatment and recycling of wastewater, the control of industrial pollution or the protection of biodiversity. Investments may concern activities that have a positive environmental impact even if, as in the case of the purchase of carbon credits, they are indirect. This is particularly the case for energy efficiency, adaptation to climate change, or the development of renewable energies.
A cooperation of public/private investment
The first green bonds were issued in 2007. Until 2012-13 the craze for green finance has not been there. One can blame industrial lobbies strongly opposed to the recognition of global warming. It may also be the fault of the lack of information for financial professionals. One can add that several critical financial adventures, using ecology as a showcase, have tainted and hindered the rise of green finance. That is no longer the case. At the foot of the climate wall, sovereign states are now policing themselves up for becoming eco-respectful investment promoters.
Many countries have a fully integrated environmental dimension in finance and financial decision-making. They issue green bonds worth billions of euros. Both Belgium and Luxembourg have green financing platforms. The Grand Duchy has deployed investment vehicles which proven efficiency generates 39% of the market shares of responsible investment funds in Europe. Mixed financing of both public and private investors accounts for 45% of assets under management in European environmental strategy funds. Since 2018 Belgium has been issuing green linear (OLO) bonds. The green investment machine is launched, it remains for the financial professionals to drive it masterfully.
Green finance is limited by the growth it generates
However, green finance has its limits. It is the blind faith in the ecological benefits of modern technologies that are to be feared. As George Monbiot points out in The Guardian: “In an attempt to avoid climate collapse, what counts is not what we do, but what we stop doing. It doesn’t matter how many solar panels we build if we don’t turn off coal and gas burners at the same time,”. Eco-responsibility is intimately linked to the decrease and reduction of the consumption of natural resources. Instead, green finance tends to increase the value of portfolios. These two objectives may become incompatible.