Climate change may still be a topic of debate for some politicians, but investors are becoming more determined. Money is flowing into any type of asset class labeled green or sustainable. The frenzy now has both investors and companies grappling with what is considered “green finance,” and with funds that are no longer considered green enough.
Renewable energy developers have turned to pension funds to back new projects, offering securities with steady returns backed by contracts to sell electricity. That helped create a market for green bonds and loans that barely existed a few years ago. And now it is so big that it has reached Central America from the hand of the Bosch Gutierrez family.
Some investments are likely to be “greener” than others. There is no agreed definition of what is considered green or sustainable finance. Some asset managers want to back only pollution-free energy. Others count efficiency or even a strict set of policies on social issues.
There is concern that broad definitions of sustainability are not meaningful, allowing some funds to sell themselves as green or ethical even though they are not good for the environment.
There is concern that broad definitions of sustainability are not meaningful, allowing some funds to sell themselves as green or ethical even though they are not good for the environment.
The GSIA has the broadest definition, counting any type of fund that uses a strategy associated with sustainability. The largest and oldest strategy is negative or exclusionary screening, which filters out support for undesirables from oil to guns, tobacco and alcohol. It accounted for $19.8 trillion of sustainable assets under management last year, up 31% from 2016. The GSIA also counts those that buy “best-in-class” assets on certain measures or that follow environmental, social and governance, or ESG, rules. . Funds that engage corporate boards or encourage shareholder action also make the cut.
In addition to broader strategies for green investment, more funds are being divested from fossil fuels, according to a study by 350.org, a campaign group that wants to limit funding for oil and coal companies.
Funding is being divested from fossil fuels, according to a study by 350.org, a campaign group that wants to limit funding for oil and coal companies.
As of mid-May, 1,048 institutions managing $8.73 trillion were counted as having some kind of strategy restricting fossil fuel funding. And both figures have more than doubled in the past four years.
The group acknowledges that its campaign has outpaced all previous divestment moves, including those targeting tobacco and South Africa during the apartheid era.
Changes are also taking place in the equity markets. The value of green or ESG funds traded on stock exchanges reached a record $41.6 billion last year.
It seems certain that the growth of green finance will continue as most governments around the world focus on how to reduce pollution and greenhouse gases and more regulators require companies to disclose climate-related risks, generating more data showing which companies are most exposed and a better understanding of how to make money while saving the planet.
