Green Alternative Investment and Alpha Returns

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BlackRock’s CEO Larry Fink, in a letter to fellow CEOs, made a special note of the growing importance of sustainability, not simply as a nod to changing public attitudes, but also for the ability of “sustainability- and climate-integrated portfolios [to] provide better risk-adjusted returns to investors.” BlackRock’s findings reflect a growing sense in some corners of the alternative investments industry that green investing may not only be the shrewd thing for a company to do in the face of changing shareholder attitudes, but that it is also the best path toward achieving long-term, profitable, risk-adjusted returns. While data is still scarce, and green alternative investments have only just begun to slip into the mainstream, some research is beginning to suggest that ESG investments may be outperforming their non-green counterparts. While the still limited body of data, along with a taxonomy for ESG investments that has yet to be entirely standardized (although the EU Taxonomy marks a strong step in that direction) make predicting the future of green alternatives difficult, below are some notes on this growing body of data that suggests that green alternatives may be gearing up for a decade of growing returns and profitability:

• Eurekahedge, one of the world’s largest hedge fund databases, created an index of 63 hedge funds that incorporate ESG criteria in their investment decisions. In 2017 alone, the ESG fund index grew 12.6% by year-end, while the industry average reported growth of 8.5%. In fact, since 2008, Eurekahedge’s ESG Fund Index has outperformed a similar fund index composed exclusively of non-ESG funds by 80 basis points, posting annualised returns of 7.91%.
• In private equity, managers are also warming to the idea that ESG investments may not only satisfy environmentally and socially conscious shareholders, but also generate alpha returns. A survey of 542 PE investors by RBC Management found that, in 2018, 90% of investors viewed ESG portfolio performance as similar to or better than non-ESG portfolios; 53% viewed ESG as a risk-mitigating factor, up from 16% the year before, and 18% viewed ESG portfolios as alpha generators (40 points up from the year before, where investors saw ESG as counterproductive to generating alpha returns).
• While alternative ESG investments are an increasingly enticing proposition due to their potential for alpha returns, a growing body of research suggests that ESG investments are also better hedges against risk. A study conducted by Linklater, a consultancy, indicates that 97% of infrastructure companies are exposed to ESG-related risks. For example, plans for a third runway at London Heathrow Airport were recently scuttled by the English Supreme Court, which ruled that the project undermined English environmental obligations outlined in the Paris Agreement.
• A recent study of the European renewables sector conducted by researchers at the Fondazione Eni Enrico Mattei found that, by 2025, onshore wind and Solar PV will be profitable investments across Europe (if they are not profitable already — which in some countries, like Spain, they are).
• One driving force behind the potential growing profitability of renewable energy, especially Solar PV, is the rapidly decreasing cost of production. For example, between 2010 and 2019, the cost of solar power production dropped by 82%.
• While innovation and new technologies mean the green alternatives industry is still evolving rapidly, the early signs are that green alternatives are set to provide investors with both socially responsible and profitable investments in the coming years.
• To learn more about green alternative investments, contact us at [email protected]r-5.com