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Why Green Investment Is Not A Silver Bullet

New statistics suggest record numbers of investors want to back environmentally-sustainable companies this year, but there may be unintended consequences. 

On World Earth Day 2021 it seems a fitting time to take stock of the current trends in Environmental, Social and Corporate Governance (ESG) investing, and with the Paris Agreement deadlines looming, a record numbers of investors are seeking to back 'green stocks'. But this may not be the answer to solving climate issues.

A record 45 percent of UK investors will back green or sustainable companies in 2021, according to new research conducted by IW Capital, a specialist SME private equity house. This was compared to just 36 percent of investor backing stocks and shares, 34 percent wanting to invest in life sciences, including biotech, medtech and pharma, and 29 percent in online retail businesses and technology, said the survey. 

“What may surprise some analysts is how much more interest there is in sustainable companies than even stocks and shares or property," says Luke Davis, CEO of IW Capital. 

IW Capital recently invested in Transcend Packaging, the first paper straw producer in the UK, which makes the paper straws for McDonald's, allowing them to almost double their workforce. It also funded SaveMoneyCutCarbon, an environmental consultancy based in the UK designed to help companies reduce their energy bills, and Impact Recycling, which developed a breakthrough plastic recycling technology which separates post-consumer mixed rigid plastic waste to recover two consistent streams of post-consumer resin; polyethylene and polypropylene.

Anthesis is an environmental consultancy which just received a significant minority investment from Palatine Private Equity. With the recent investment, the company is able to help clients remove 3 gigatonnes of CO2e by 2030 to meaningfully ‘move the dial’ during this pivotal ten years. That’s the equivalent to half the emissions from the U.S. in one year, or eight years of emissions in the UK, says Anthesis CEO Stuart McLachlan.

"When Anthesis was established in 2013, sustainability was still positioned as a CSR-led topic. Fast-forward to 2017 and with the public interest in Sir David Attenborough’s Blue Planet II series, consumer pressure took control. Brands listened to consumer demands, such as plastic misuse, and the investor market started to take note and focus on businesses who demonstrate they are a force for good," McLachlan adds. "During the last few years sustainability has moved from being seen as cosmetic or inconsequential; it’s now a boardroom discussion with CEO accountability.

UK savers put almost £1bn a month on average into responsible investment funds in 2020, according to Investment Association (IA) data. According to UK fund manager Hargreaves Lansdown, its clients have put record money into Responsible Investment funds – net flows for 2020 were up over 4,000 per cent against 2016.

The inauguration of President Biden and his promise to put the US on track to net-zero emissions by 2050, and the release a US$2 trillion “American Jobs Plan” last month, has provided a boost to the sector, as well as the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow in November this year. 

Wanted: investors 

Promises and pledges are useful as a starting point but the journey to net-zero needs greater commitment. Whilst more investors are pivoting to invest in 'green companies', greater investment is desperately needed to help existing 'brown energy' companies make a transition from fossil fuels to renewables, according to a report titled Zeronomics, published last month by international bank Standard Chartered. 

Nine in ten investors (89 percent) agree that if the investment community does not finance the transition of carbon-intensive industries the world will not reach net-zero by 2050. Yet more than two-thirds of senior executives (69 percent), say investors are reducing their exposure to carbon-intensive assets, making it even harder for companies to pivot to low-carbon business models.

"This could be an unintended consequence of increased ESG investment," said the report. Standard Chartered has said it will stop financing new coal-fired power plants as part of its commitment to the Paris agreement, but says it will support its clients which rely on fossil fuels to "transition" between now and 2050. After 2050 it will stop financing any company that does not use renewables. 

Some 85 per cent of companies require medium or high levels of investment to transition to net zero, rising to 91 per cent of carbon-intensive companies.

On average, companies are investing just over 2 per cent of annual turnover in net-zero transition. However, almost all senior executives (97 per cent) surveyed admit this will need to increase. Globally, senior executives believe that an average of 60 per cent of the finance they need to transition will have to come from internal sources, such as retained earnings and reserves, and 40 per cent from external sources (of this, they expect 55 per cent to be equity financing and 45 per cent to be debt financing).

There's no straightforward answer, but the solution lies probably somewhere in between.

“There are a number of challenges within ESG investing, and for companies that currently fall outside of this distinction, it would be wise to make real positive steps toward sustainability in whatever way you can," says Davis, of IW Capital. "In doing this companies will show investors that you will be able to adapt to what is an ever more important factor in their decision making.”