So, the 20th century was all about oil. It was the black gold that fueled economies and built empires. But it also left us with a legacy of carbon emissions that we’re now grappling with in an attempt to change the temperature of the earth.
Some view green investment as a no brainer, yet others are a bit cynical – either way, it appears we’re on the cusp of another gold rush. But this time, it’s not about drilling into the Earth; it’s about harnessing the power of wind, sun, and innovation. Whether you’re in the climate change is real camp or not, the financial opportunity here is undeniable. We’re talking about a sector that could see up to $12 trillion per year by 2030, according to McKinsey.
It’s worth more than the top 5 companies in the S&P 500 per year; it’s a tidal wave of capital that’s going to reshape industries and redefine wealth.
Now, let’s get into the nitty-gritty of moral complexities. ESG (Environmental, Social and Governance) investing is like a Russian nesting doll of ethical dilemmas. There’s layers of complexity, incongruencies, and contradictions. One of the most intriguing is this: if you’re putting your money into green assets, are you secretly rooting for the climate to get worse? It sounds counterintuitive, but hear me out. If the climate deteriorates faster than expected, it means the market undervalued the climate risk when you bought in (which is what Rohan McMahon suggests in this podcast).
So, your green investments, designed to hedge against climate risk, suddenly become way more valuable.
It’s a twisted irony, but that’s the game. And the best part? You don’t have to buy into the whole climate change narrative to see the financial upside. The green sector is set to attract trillions in investment, and there’s a seat at the table for everyone, skeptics included.
But what about the risks?
Investing is never a sure bet, and the green sector has its own set of challenges.
First, there’s the physical risk. We’re talking about more extreme weather events, rising sea levels, and the impact on infrastructure and property values. But let’s be clear: these risks aren’t confined to green investments. They’re systemic issues that could shake up the entire market.
Then there’s the transitional risk. As consumers become more eco-conscious and governments tighten regulations, industries will have to adapt. This transitional phase is fraught with uncertainty but also ripe with opportunity for those who can navigate it effectively.
Lastly, there’s the risk of market mispricing. The green sector is still relatively new, and there’s a chance that assets could be overvalued or undervalued. But isn’t that the essence of investing? Spotting mispriced assets is how fortunes are made.
Here’s a personal anecdote to drive home the point. A while back, I took the plunge and bought an electric vehicle while also installing solar panels on my roof. Financially, it felt a lot like buying bonds. There was an initial outlay of cash, sure, but then came the steady returns in the form of energy savings. I went from spending $10,000 a year on fuel and car repairs to just $1,000 on electricity. The kicker? I now spend $9,000 on high-performance tires. So, while the savings shifted towards buying tyres instead of petrol (doh!), the underlying principle remained the same: a stable, predictable return on investment, much like a bond. Moving up the risk spectrum investing in managed funds or index funds that own companies which subscribe to an ESG framework, will [hopefully] translate into owning all the right companies poised to benefit in this battle against an existential climate crisis. Another place everyday investors could [eventually] take part in, is the early stage investment into start-ups that are innovating in this area (this could happen through local KiwiSaver providers perhaps here in NZ, or for wholesale investors able to access some of the funds that invest in more than one start up at a time).
So how do you safeguard your investments in a world that’s anything but stable? This is where my green-brown portfolio allocation theory comes into play. The idea is to diversify your assets so that they’re not all moving in the same direction. When one asset class takes a hit, another one gains, balancing out your portfolio. In times of extreme volatility, it pays to think outside the box. Traditional asset classes like equities and bonds are fine to get the job of diversification done well, but what about including a ’tilt’ into the green space too?
In wrapping this up, the strategy of diversifying your portfolio with both green and brown assets isn’t just a savvy move; it’s an essential strategy for anyone serious about long-term financial stability. It’s about finding that sweet spot between risk and reward, between ethical investment and financial pragmatism. Who knew a little green-brown would come back into fashion?!