Written by: Ameya Keertikar
The world is standing at the crossroads. While as many people care to see practical issues like poverty, terrorism, and human rights concerns, one overarching issue overshadows them all-the health of the dear Earth. With every passing year the cruel and ruthless exposure to growing pollution, carbon emission, food wastage, and many other abuses are under increased exposure. This should serve as a pointer for immediate, requisite action before dire, incomprehensible consequences manifest themselves.
Fortunately for us, a clutch of new environmentally conscious builders has developed new ethical business models, taking a stand not only for our planet’s health but also making a profit in the process. As the globe begins to confront these challenges, a new era of sustainable business has evolved.
Corporations are no longer profit-oriented entities only; they are global stewards who accept responsibility for the environmental and social effects of their operations. Investors, too, grow increasingly sensitive to the advantages derived from investing in sustainability. Here, investors could connect financial goals with environmental and social goals-including sustainable food production, carbon-capturing concrete, and eco-friendly manufacturing-and create positive impact alongside long-term returns.
The rise of ESG investment has altered the financial landscape, creating new opportunities for individuals and businesses to build long-term wealth and contribute to a more sustainable future. As investors grow more aware of global environmental challenges, they understand the importance of ESG factors on financial success. According to Morgan Stanley analysis, sustainable funds returned a median of 12.6% in 2023, above standard funds’ normal return of 8.6% (Morgan Stanley 2023). This outperformance suggests that ESG investment can produce competitive returns while also addressing important social and environmental issues.
ESG, or Environmental, Social, and Governance, refers to how a company’s performance is assessed in terms of these three categories. For environmental factors, this would involve a company’s impact on climate change, resource consumption, and pollution. The most important social factors include work practices, human rights, and community relationships. Governance factors include a company’s leadership, CEO compensation, and shareholder rights.
The green investment landscape is fast changing, thanks to technological developments, shifting consumer tastes, and more regulatory pressure. Renewable energy, sustainable agriculture, and clean technology are among the key industries driving growth.
Solar, wind, and hydropower are becoming increasingly cost-competitive in the renewable energy market as technology progresses and government regulations encourage their use. The International Renewable Energy Agency (IRENA) underlines the vast potential for growth in these businesses.
Sustainable agricultural approaches, such as organic farming and precision agriculture, strive to reduce environmental effects while ensuring food security. By minimizing dependency on chemical fertilizers and pesticides, these approaches can improve soil health, preserve water, and lower greenhouse gas emissions.
Clean technology refers to a wide range of advances, including carbon capture, utilization, and storage (CCUS), electric vehicles, and energy-efficient devices. These technologies have the potential to significantly reduce greenhouse gas emissions and alleviate the effects of climate change.
Green investments are not only environmentally and socially responsible but, above all, they are also profitable. Indeed, research has documented that companies with good ESG behavior tend to perform better economically. For example, one report by Morgan Stanley published in 2023 said sustainable equity funds outperform their conventional counterparts, with an annual median return of 16.7 percent against 14.4 percent for the latter. This improved outcome indeed suggests that ESG investing is capable of addressing pressing social and environmental issues while competing on returns.
Besides, the green economy is expected to enjoy robust growth in the long term. The transition to the low-carbon economy will create new technologies, new industries and new jobs. Such unexplored developmental zones can be accessed through investments in green farming, energy saving, and renewable sources of energy.
Companies with strong ESG scores outperformed their rivals in terms of return on equity and stock price appreciation during a five-year period, according to a University of Oxford study. Companies with high ESG scores had an average yearly return on equity that was 4.8% greater than that of their low ESG counterparts, according to Harris and Serafeim (2013).
But it’s important to recognize that green investments could come with special hazards. These can include market volatility linked to new technologies and industries, regulatory uncertainty, and technological hazards. A green investing portfolio’s diversification can help reduce these risks.
Investing in green technology has its praises, but some issues need addressing. Some countries may alter their stance concerning the Environmental Domain by altering rules, policies, and incentives which may create uncertainty in the market. For example, modifications to carbon pricing regulations may greatly impact the competitiveness of renewable energy sources. As per the International Energy Agency report, investments in Renewable Technologies set a record of $1.3 trillion in the year 2022. But these figures have to grow even faster by an average of $2 trillion each year if the global goal of reaching net zero emissions by 2050 is to be achieved (IEA, 2023).
Aside from that, technological limitations, particularly in carbon capture and energy storage, require additional research and development to improve efficacy and cost.
This does not mean, however, that there are no investment opportunities in the interior; sectors likely to be prospected for investment will increase with time. The cost of wind power, solar, and other renewable energies is likely to decrease over time by huge margins, thereby opening up new industries that have huge potential. New segments are also emerging in the vehicle market, including those dealing in electric energy and energy storage systems. The global electric vehicle market is likely to develop at an impressive CAGR of 18.5% from 2023 to 2030, reaching approximately USD 1518.8 billion.
We’ve reached a point in history where sustainable investments are now widespread. ESG investments are no longer a niche investment activity, rather their use is rapidly growing and is changing the investment landscape. Nevertheless, a new age of investing has evolved – that of ESG awareness where investors appreciate the relationship between social, environmental, and governance factors and profitability. According to studies, high-language companies with positive ESG profiles perform better than their peers when measuring profitability and risk-return metrics. In addition, advances in clean technologies, sustainable farming, and renewable energy will contribute to the rapid growth of the green economy. Incorporating ESG into or even alongside strategies would not only generate good returns but also contribute to a more equitable world and a healthier planet. It also relates to the idea of fostering a healthy economy for the prosperity of future generations, not only for the sake of profits.
References
EY. (n.d.). Why ESG performance is growing in importance for investors. Retrieved from https://www.ey.com/en_us/insights/assurance/why-esg-performance-is-growing-in-importance-for-investors
Freemalaysiatoday. (2022, November 28). ESG compliance by companies all a farce. Freemalaysiatoday.com. Retrieved from https://www.freemalaysiatoday.com/category/opinion/2022/11/28/esg-compliance-by-companies-all-a-farce/
Grand View Research. (2023). Electric Vehicle Market Size, Share & Trends Analysis Report By Vehicle Type (Battery Electric Vehicles, Plug-in Hybrid Electric Vehicles), By Component, By Region, And Segment Forecasts, 2023 – 2030. Retrieved from [invalid URL removed]
Harris, M., & Serafeim, G. (2013). Corporate sustainability: First evidence on materiality. Review of Finance, 17(1), 809-852.
Impact Investing Conferences. (n.d.). Top 10 ESG investing trends in 2024 in UK and Europe. Retrieved from https://impactinvestingconferences.com/top-10-esg-investing-trends-in-2024-in-uk-and-europe/
International Energy Agency. (2023). World Energy Outlook 2023. Retrieved from https://www.iea.org/reports/world-energy-outlook-2023
Morgan Stanley. (2023). Sustainable Funds Outperform: Year-End 2023. Retrieved from https://www.morganstanley.com/ideas/sustainable-funds-performance-2023-full-year