Alternative investments are an asset class that offers both diversification from traditional investment routes and benefits, which stretch beyond the bottom line. Alternative investments as a class are focused in growing industries and at a time when so many industries are contracting this makes them ever more attractive to investors. Business in growing industries obviously has a far greater statistical chance of success than in stable or contracting ones.
At a time when most countries are facing economic challenges across the board, the need for fiscal diversification becomes even more pressing. At the same time, governments and corporations alike are becoming increasingly aware of how business-as-usual practices affect the environment, local economies and societies. It is with this impact in mind that alternative investors are becoming key players in a low-carbon, sustainable and responsible global economy.
Alternative investments in environmentally sustainable initiatives are at the root of this new economy, which has as much to do with necessity as ‘going green’, thought there is undeniably increased awareness of ecological sustainability and demand from clients that companies behave responsibly. However, without even mentioning environmental factors, with fossil-fuels increasing hugely in expense as ‘peak’, output has come and gone, the increasing price of fuel is arguably the greatest challenge and most significant factor to the global economy in the coming years. Companies, technology and industries which will be economically viable and profitable in coming years will be those that most successfully adapt to energy efficiency, either in their own production, or as a part of the solution for others.
Alternative investments connected to the energy-efficient or renewable economy are a subcategory of the socially responsible investment (SRI) class. SRIs are typically medium to long-term investments and hold a significant and growing share of the global investment capital market. In Europe, for example, Eurosif estimates that the SRI investment assets under management (AuM) at the end of 2009 were € 5 trillion – a “spectacular growth” of about 87 per cent over a two-year period. The infograph below is an overview of how these alternative investments have developed globally for the seven-year period from 2002 to 2009.
The Impressive Performance of Alternative Investments
The growing popularity of alternative investments in the green sector can be attributed to a variety of factors – depletion of finite energy sources and high costs of fossil fuel energy in the future, a trend which has already begun; and catastrophic consequences due to environmental pollution, among others.
In addition, green alternative investments have been viewed as attractive revenue streams. A 2010 survey by the EDHEC-Risk Institute found that some of the benefits that drive investors to choose alternative investments are the often lower risk to high returns and low correlation with existing investments. In fact, Eurosif statistics show that alternative investments generated momentum even amid the financial crisis peak of 2008. For the two-year period between 2007 and 2009, for example, mainstream investments have had little to negative growth. Over the same period, SRI monetary assets have grown by an astonishing 114 per cent.
Alternative Investments Show No Signs of Slowing Down
What makes alternative investments an attractive business option is not only their impressive, albeit short, historic performance, but also their future outlook. In 2006, the UN launched the Principles of Responsible Investment (PRI) initiative – a joint venture between the international body and global investors. The initiative has the goal of directing investor attention towards environmental, social and corporate governance (ESG) issues.
For the past five years, over 900 signatories (pension funds, insurance companies, sovereign and development funds, investment managers and service providers) from 49 countries have turned the PRI initiative into an internationally recognised network for responsible investment practices. It’s a collaborative commitment to reduce investment risks and maximise returns through addressing ESG issues when making investment decisions. Failure to incorporate ESG issues could have a negative impact on the value of the investment and undermine it in the long run. To illustrate the significance that environmental issues have on global investments, the UN gives as an example the BP oil spill in the Gulf of Mexico. The incident “wiped billions of dollars” from the value of pension funds and other investments. And while PRI looks at preventing environmental damage rather than creating environmental value, they indicate an important emerging shift in the traditional investment world. The importance of doing business right while behaving sustainably is becoming ever more pressing and urgent.
In the words of PRI Executive Directors Achim Steiner and Georg Kell, “In just five years around 20 per cent of the world’s capital – over $30 trillion of assets – has been signed up to the Principles and this rapid growth shows no signs of abating as responsible investment continues to increase in importance in mainstream and emerging markets.”
In addition to these eco-protective initiatives, the UN recognises the importance of low-carbon green investments. According to a recent report by the United Nations Environmental Programme (UNEP), “60 per cent of the world’s major ecosystem goods and services that underpin livelihoods have been degraded or used unsustainably.” This is a direct result of global economic growth accomplished by drawing down natural resources, without allowing regeneration, and through causing widespread ecosystem degradation and loss. Ecological scarcities, claims the UN, are seriously affecting all economic sectors directly linked to human survival, such as agriculture, forestry, freshwater and energy.
UNEP calls for immediate action on behalf of investors to take part in a green economy – “one that results in improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities. In its simplest expression, a green economy can be thought of as one which is low carbon, resource efficient and socially inclusive. In a green economy, growth in income and employment should be driven by public and private investment that reduces carbon emissions and pollution, enhance energy and resource efficiency, and prevent the loss of biodiversity and ecosystem services.” The international body estimates that, when capital channeled to the sector reaches 2 per cent of global GDP, or $1.3 trillion, a green economic transformation will take place.
What Are the Alternative Green Opportunities?
We will take a look at the four main green investment sectors that offer opportunities for businesses and individuals to engage their funds: timber, renewable energy, carbon markets and agriculture. We will give an overview of the performance of each one of them in the context of the current global economic environment, as well as give an outlook on what the future holds. We will also identify investments strategies on how to enter these markets, and tips on how to maximise your monetary and non-monetary benefits.
The timber and forestry sector includes alternative investments in timberland, timber products, afforestation, reforestation, forestry offset projects and even eco-tourism. The use for sustainable timber ranges from the construction sector, to the biomass sector, to the paper industry. It’s an investment favoured for its historic low-risk, high returns and hedging properties.
Of all green initiatives, alternative energy is a hot topic, especially in the context of the newly released 2011 World Energy Outlook report by the International Energy Agency (IEA). The report claims that global energy-related greenhouse gas emissions have increased by 5.3 per cent in 2010 to a record 30.4 gigatonnes (Gt), and investments in the alternative energy sector are vital to avert irreversible climate changes and “viciously more expensive” power in the future.
Much like alternative energy investments, investing in carbon as a commodity also deals with reducing greenhouse gas emissions. The carbon investment approach includes the development of offset projects and trade with carbon units. And although the carbon trade markets have reached a critical moment in their development, we will see what keeps investors hopeful that the slow-down doesn’t mean a shut-down any time soon.
Investments in agriculture include purchasing of agricultural land as well as growing agricultural commodities. Agriculture continues to be at the core of community sustainability in many developing countries, and with the global population rapidly expanding, it is being recognised as a powerful economic vehicle in some developed countries as well.