In today’s Exponential Investor:
- What is sustainable investing
- Why sustainable investing is important
- Why you should invest in sustainability
Would you buy a company if you knew it could never be profitable in the low carbon economy we are heading for?
Should investors consider the relevance and competitiveness of a company they invest in over the next ten, or even twenty years?
It certainly seems self-evident that if you are thinking of buying shares in a company, it matters whether the business model will still be viable in the future, and whether customers will want to pay for its products or services.
This, in essence, is sustainable investing. Will the company stand the test of time?
The reason sustainability is so synonymous with environmentally friendly practices is that the key challenge facing humanity is climate change.
The next two decades are expected to see an unprecedented shift – in terms of generation and usage of energy – from fossil fuels to renewables.
As more and more people buy electric vehicles (EVs) and need chargers, as more and more of our power comes from solar and wind, and as companies in every sector of the global economy – from food to mining – are put under pressure to reduce their emissions….
Investors need to understand how humanity’s fight against climate change will affect the future profitability of the companies that they are investing in.
What is sustainable investing?
Sustainable investing can mean many things. Sadly, this has opened it up to wide interpretation from marketing departments, leading to a wide array of things being called “sustainable”.
One key definition of sustainable investing means investing in companies which are driving or benefitting from the fight against climate change.
In the most basic terms, a company which extracts and sells oil may not be sustainable if we are successful in moving away from fossil fuels. That is a business model which is not going to see three decades of rising demand.
A company which can turn unrecyclable plastic into electricity though could be considered sustainable, as it turns a waste product which is clogging up our planet and its oceans and turns it into useful power.
Sustainable investors seek to invest in companies which are the most likely to help us get to net zero carbon dioxide (CO2) emissions.
What are examples of sustainable investments?
There are many kinds of companies which could be considered sustainable.
For example, a utility providing electricity to homes and businesses with power generated mainly or entirely by renewable sources – like wind, solar, nuclear or hydro.
Generating power using wind turbines, whose blades are pushed to rotate by the wind, which then turns a turbine, generating electricity, with zero carbon emissions.
Generating power using solar panels, which capture sunlight with photovoltaic cells and convert its solar energy into electricity, with zero carbon emissions.
Huge plants which use uranium as a fuel and a process called nuclear fission to split atoms creating huge amounts of energy, with zero carbon emissions.
Dams across rivers allow water through, which passes over the blades of a turbine, turning it and generating zero carbon electricity as a result.
Or, maybe, you have a huge utility with millions of customers that is trying to wind down its gas- and coal-fueled plants to replace them with zero carbon sources like those above. This process may take time, but is going to result in huge emissions reductions for the planet.
Emissions can be displaced (by a new, zero carbon, competitive product/service), or they can be reduced by those who are already emitting.
So, some companies are sustainable if they offer a zero-carbon solution to growing food, extracting copper from the earth, transporting goods across our cities or generating electricity.
But they can also be older companies, which are still doing things the old way, but are trying to change. For example, the Australian iron ore miner Fortescue, which emits two million tonnes of carbon every year, but is moving quickly towards renewable power and green hydrogen – in order to decarbonise its operations.
Three reasons why sustainable investing is so important
1. It’s popular.
That means more money is likely to flow into sustainable funds or companies, driving improved share price performance. So, it’s worth being a part of.
2. It feels good.
Many people find it more fulfilling and rewarding knowing that you’re sharing in the profits generated by fighting climate change, than profiting from businesses that are causing the droughts, fires and floods which are destroying people’s lives across the world.
3. It is likely to generate better returns.
Analysing whether a company will be relevant and profitable in the future as mankind decarbonises and fights climate change is an important task for investors. If you invest in companies that turn out to have business models not compatible with a low carbon economy, you will likely find yourself sitting on losses.
Why should you invest in sustainability?
The global economy is having to reduce its emissions to avoid the worst effects of climate change. This change is happening very quickly.
You should look to invest in sustainable companies that are helping to provide the necessary solutions and will see rising sales, or in companies that can survive and thrive as we move to a low carbon economy.
As famed investor Jeremy Grantham noted, stocks that can do this are going to see growth which dwarfs that of the rest of the market: this is because the surge in demand for sustainable solutions and low carbon products is going to be absolutely gigantic.
Many people invest sustainably because they want to, because it aligns with their beliefs.
That is admirable, but the best thing is that investors who can latch on to these sustainable superstar companies can expect to generate superb returns over the long term. That is why you should invest sustainably.
How to invest sustainably
If you’re want to invest sustainably in the future, whether it’s in the next few months or the years to come, the most important thing is to keep up to date with the latest projects and understand who’s in that space.
That’s why we advise you to subscribe to our Exponential investor newsletter for free to learn more about it.
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