Green investments: Leveraging the opportunities of sustainable investments

Eco-investing. Why sustainable investments are becoming more vital. 

Investors would be well advised to keep a close eye on trends in the area of sustainability. One reason to do so is that changes in the world's climate can create investment risks. What's more, sustainable investments and green investments are continuing to surge, with the potential to generate exciting returns in the future. 

Investment risks are increasing due to climate change

Climate change is causing numerous risks for investors and their portfolios. First, it has a direct impact such as weather-related damage to companies' production facilities. Second, hundreds of countries have taken measures to protect the environment, and they are expected to change the economy, including carbon-pricing regimes and mandates around low-emission industrial processes. Besides these regulatory risks, the transition to a low-emissions future will also cause upheaval in numerous sectors and supply chains, leading to the creation of new technologies. Many companies will need to completely transition their business models, and some will do this better than others.

Investors are focusing more and more on green investments

For many investors, it is therefore time to rethink their investment strategies and realign their investment portfolios with the current environment. There is now a recognition of the importance of ESG risks and opportunities to the future of business and investment. Many investors now see climate change as one of the key material issues to be considered throughout the investment process. Over the past five years, sustainable investments in the broadest sense have more than doubled worldwide to roughly USD 40 trillion. Impact investment – the subset of the sustainable investing spectrum that can demonstrate measurable impact – has grown even faster over a similar period, while traditional investment funds have seen outflows.

Strong growth in sustainable investments

Market for sustainable investments seeing tremendous growth 

Source: 1 Global Sustainable Investment Alliance. Data provided every 2 years
2 Global Impact Investing Network. Data is based on self-reported impact AuM figures from GIIN members

Innovation is expanding in the field of sustainable investments

Within the climate-focused investment sector, green bonds, in particular, are one of the fastest-growing segments. These are fixed income instruments that finance green or climate-related projects, from renewable energy infrastructure to public transportation. More than 100 billion US dollars of sustainable bonds were issued globally in the first half of 2020.

Moreover, investors can invest in new and innovative products from the area of green investing. For example, they can choose from transition bonds, which are used to finance investments that are making a substantial contribution to global emissions but do not have a long-term role to play, or climate-focused hedge funds, which use special equity strategies to benefit from not only the winners of climate change but also from short positions on the losers.

Sustainable investments – enormous potential with green bonds

Green bonds are sustainable investments with plenty of potential 

Source: US Energy Information Administration, Credit Suisse 

Leverage the opportunities of sustainable investments

There are plentiful opportunities arising from the transition to a low-carbon economy. Several key industries will benefit from this period of transformation.

Green energy and related infrastructure

The obvious winner from the low-carbon transition will be companies involved in the production of clean energy and its supply chains. This not only involves solar PV and wind generation, but also the industries and infrastructure to support clean energy, from power transmission and batteries/storage to the mineral supply chains required for the transition. Innovation and economies of scale are rapidly driving down the cost of renewable energy, which creates a huge opportunity for consumers and investors.

Smart cities and the built environment

There will be tremendous opportunities in energy efficiency in areas such as insulation and efficient lighting of buildings, and green renovation and refurbishment. Mobility will also be a key driver of lower emissions, with the growing electric vehicle fleet being charged by a grid supplying increasing amounts of renewable energy, along with major investments in public transportation and rail infrastructure. Aviation, trucking and shipping are challenging sectors that will likely see significant opportunities for investment in solutions, such as green hydrogen.

Food and agriculture

The global food system is responsible for 25–30 percent of global GHG emissions There are likely to be many opportunities in areas such as plant-based and cellular meat, controlled environment agriculture and technologies to dramatically increase the productivity of the world’s least productive farms.

Water and oceans

Water is a key variable in the climate equation, as climate change is likely to have an impact on water scarcity, and also affect oceans in significant ways. There will be many investment opportunities around water treatment, stormwater, irrigation and sanitation infrastructure, and an increased focus on ocean health.

Health and inclusion

Climate policy is unlikely to succeed unless it is inclusive, and there is an explicit effort to address human needs, particularly among the poorest countries and communities in the world. This can be through investments into health, education, access to finance, agricultural productivity and water and other adaptation infrastructure that can help manage the effects of climate change and ensure these communities are more resilient.

Excellent prospects for sustainable investments in a wide range of industries

The future looks bright for sustainable investments in a wide range of industries 

Source: Credit Suisse 

Impact of sustainable investments is multiplied

Much of the focus around climate change has been on companies that manage climate risk well, are aligned with a low-carbon future or provide solutions to mitigate climate change. However, it is also important to invest in adaptation, as the climate is already changing due to past emissions. These investments are most urgent in developing countries, as these populations are most vulnerable to the impacts of a changing climate, and have less capacity to adapt. Examples of areas include healthcare, education, and infrastructure to protect against flooding. Investing in adaptation can also be seen as a hedge against climate change if policy efforts fail and the world does not manage to keep global warming between 1.5 °C and 2 °C.

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