Monday 19 February 2018

Green funds offer opportunities in transition to low-carbon economy


Andrew Mason is investment director at Aberdeen Standard Investments (stock image)
Andrew Mason is investment director at Aberdeen Standard Investments (stock image)

Andrew Mason

Green investment continues to be a hot area as investor demand for it continues to grow. Large pension funds seek greater exposure to stocks that can positively transition to a low-carbon economy - while avoiding stocks with 'climate risks' attached. Investors are increasingly considering environmental issues when making investment decisions.

Two of the most popular green investment areas are solar and wind (within the utility sector). A recent Morgan Stanley renewable energy report found the majority of new power capacity in 2016 came from wind and solar. It predicted renewable energy would be the cheapest option in most of the world by 2020. Technological innovation, reductions in production costs, consumer demand and stimulus from governments have supported this transition.

We are positive on the growth potential for electric vehicles, especially in China, and we believe the market is underestimating growth levels. There has been a growth in funds favouring stocks believed to be best-placed to manage the transition to a low-carbon economy. At the same time, there has been a divestment from sectors such as oil and gas. The green bond market, where companies seek to allocate capital to projects with environmental benefits, has experienced significant growth. The global green bond market has grown eightfold from below $10bn in 2012 to over $80bn in 2016. Furthermore, that market is predicted to hit close to the $150bn mark by the end of 2017.

Ireland has been relatively late to the party, with renewable energy company Gaelectric becoming the first Irish company to issue a green bond, via a €10m instrument in 2016. Ireland's push to become a green investment hub has seen the growth of green and climate-aligned bonds, which are now close to the €14bn mark. This push has also seen the recent flotation of Greencoat Renewables, the first renewable energy infrastructure company to list on the Irish Stock Exchange.

This is all positive. However, investors should be aware that upon further examination, certain companies seeking to benefit from the 'green wave' may not be as positive in the long run. Green investing does not necessarily mean sacrificing returns in favour of more environmentally-friendly stocks -importantly, it does not guarantee greater returns either.

The physical impacts of climate change can be on a time horizon which is too far in the future for most investment strategies. However, regulatory change, disruptive innovation and consumer demand exist on time horizons that can be more easily factored into company valuations. Investment strategies that seek stocks which are well-positioned to lessen environmental risks and enjoy the opportunities of the carbon transition serve as a catalyst to promote similar behaviours within sectors and among individual stocks. The growth of green bonds illustrates how companies have realised their 'green' credentials can make them more attractive to the market.

The most advanced companies and investors consider environmental issues as part of company strategy and investment philosophies, including company valuations. Quite simply it's not 'green' investment - it's investment in the companies that will avail of the transition to a low-carbon economy, and in avoiding the risks presented by those which do not.

Andrew Mason is investment director at Aberdeen Standard Investments.

Any investment commentary in this column is from the author directly and should not be seen as a recommendation from The Sunday Independent

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