Investment managers analyse green investments against a range of benchmarks, but it boils down to three things, says Regnan’s Maxime Le Floch.
For professional investors ESG benchmarks are now integrated into regular decision making. For individual investors, that’s not yet the case.
A recent Gallup study showed smaller US investors don’t spend time focusing on environmental, social and governance factors when making investment decisions – and the majority don’t know much about it.
But that’s changing. The survey showing an uptick in smaller investors’ interest in responsible investing. And recent political outcomes, including the success of the Greens and independents in the Australian federal election, will force greater focus on ESG at a policy level.
So, how should a small investor approach ESG?
“Start by make sure what you’re considering is actually green”, says Maxime Le Floch, an analyst with Regnan’s Global Equity Impact Solutions team. “Second, focus on solutions with a strong relative advantage over competitors. And finally, focus on longterm opportunities.”
1. Make sure it’s green
Investors need to define what green is to them, Le Floch says. “There’s a spectrum of how green investments are and debates around that within scientific communities and within industries.”
“These are very complex multi-dimensional issues and it’s not just about climate change. It’s also about ocean health, foods, wastewater and many other issues,” he says.
Investors need a framework to benchmark green investments, and the United Nations Social Development Goals (SDGs) are a good place to start.
“That’s the roadmap. From there you need to do some work in terms of translating the goals into actionable investment ideas and that takes research. It might be around offshore wind, new types of plastic, recycling technologies or water treatment.”
As part of their impact assessment of companies, Le Floch and the Regnan team employ various tools such as life-cycle analysis.
This considers the full life-cycle of a product – from raw materials to production to use to disposal or recycling – and consider all environmental impacts in each stage.
2. Relative advantage of a solution
There is seldom just one ESG solution to a challenge and investors need to consider which is the best outcome for a problem.
“It’s important to not just look at the environmental benefits of a technology but also how it performs relative to other technologies,” Le Floch says.
The simplest example is the automobile sector. Internal combustion engine cars have become less pollutant and with the introduction of hybrid vehicles, the improvement has accelerated.
“But they can only go so far. Electric vehicles provide much greater environmental benefits and have a cost profile that’s getting more attractive. When you include how much you pay for petrol, maintenance and the depreciation of the vehicle, cost parity is coming much faster than was expected,” Le Floch says. “An investor wants to be exposed to a green asset where the relative advantage has reached a point whereby there is accelerating growth coming to those solutions.”
3. Invest for the long-term
Investing for the long term is more important today with rising inflation, Le Floch says.
“It’s really important to stay focused on the long-term opportunities – the total addressable market, structural opportunities, the need to decarbonise that is recognised by governments, companies and investors.
There is a big increase in the number of companies aiming for net zero carbon emissions. That will create demand for offshore wind power, for example. There are these types of structural drivers from companies making net-zero decisions.
Investors should focus on areas where there are structural growth opportunities – offshore wind, wood-based fibres, water treatment solutions,” he says.
“Green assets are attractive because their environmental benefits are going to be increasingly recognised and rewarded”, Le Floch says. “There will be higher demand for these technologies if they can prove they are benefiting the economy and that’s what investors should look for.”
