Elon Musk is a colorful figure in company circles. After all, the entrepreneur who tends to favor smart casual created the electric car marque Tesla seemingly out of thin air, and with his SolarCity is investing billions in renewable energy. And he makes no secret of it. Not only does he provide headlines for the press, but also gets investors thinking. Because Musk shows that business and ecology can blossom in a symbiotic relationship, that you can make money with “sustainability.” As a result, the topic is increasingly taking the public limelight. Even if things sounded very different at the beginning.
From cloudy to crucial
“Sustainability” was long considered a cloudy topic, hard to grasp and not really lucrative. Since then, things have been defined more closely. ESG stands for the three crucial aspects of it, namely “environment,” “social” and “governance” (ESG). And there are primarily two reasons why it has stepped out of its niche and into the mainstream. First, because politics has placed it on the global agenda. For example with the resolution at the Paris Climate Summit in 2015, intended to brake global warming. Second, because business has embraced the issue. It is no longer only niche corporations that prioritize sustainability, as they have been joined by the global players, too. Coca-Cola, for example, or Apple – a study by Morningstar suggests that they, too, intend to incorporate such considerations into their strategy.
It is a major topic, then, one shaping the face of an entire era. And it takes the shape, for instance, of insulation regulations for housing construction in Germany or Oslo’s intention to ban diesel automobiles from the city. Or of major investors, such as the Norwegian sovereign fund, which repeatedly and emphatically insists on its investments complying with ESG goals – something that echoes strongly in the media. Or of course the treaty signed off in Paris.
This also means that ever more money is flowing into the sector. That on its own would not constitute a zeitgeist investment. That would require another component – namely the knowledge that factoring in ESG criteria does not impair the value appreciation of an investment compared to plain vanilla commitments.
Long-term development, long-term power
Choosing in favor of ESG does not squeeze value appreciation, as, among other things, a study published in 2015 by Gunnar Friede, Timo Busch and Alexander Bassen shows. The scholars examined over 2,200 analyses conducted to date. And came to the conclusion that in 90 percent of the studies there was no negative correlation between investment performance and reliance on the ESG criteria.
A meta-study conducted in 2013 by Steinbeis Research Center for Financial Services reaches the same conclusion. Sustainable investments, the study says, do not offer a worse risk/return profile than do classic investments. In the case of equities, for example, the investigation analyzed 55 studies. Only one of them recorded a negative impact on the RoI from focusing on sustainability criteria. The CFA Institute, for one, declares that sustainability is the key to a “robust analysis.”
These insights are increasingly gaining sway in the investment world. First, for the abovementioned political reasons. And second because pressure on investors is rising to achieve good results. And few can afford to simply ignore an entire sector.
The process is already moving forward: While in 2010 sustainable investment funds in Germany, Austria and Switzerland already brought together EUR 26.3 billion in assets, the figure had leaped to EUR 63.7 billion by 2015, according to the Forum Nachhaltige Geldanlagen (FNG). And as distinct from investment vehicles, in 2015 EUR 326.3 billion was committed to sustainability investments in the three countries, a figure up 65 percent on the year.
This inflow of capital is likely to persist. Thanks to politics and thanks to investors like Musk, who have shown the way forward. Driven by the Zeitgeist, as it were.
Technology has improved and efficiency in producing and distributing green energy is growing
New mobility and the tougher regulatory environment toward fossil energy will continue to push investment toward clean energy. Furthermore the potential rise in the price of oil will support the shift toward clean energy.
I like the new energy zeitgeist not only because it is good for he environment, but also because it rides a global trend. The cost of solar electricity, for example, is falling below the cost from older, dirtier sources. And big cities are starting to insist on clean fuels, too.
Index performance since inception:
Disclaimer: Historical returns are no guarantee for future performance. A negative development of the instruments contained in the index can lead to a negative development of the overall index. The performance shown here is indexed to a starting value of 100 and corresponds to the gross value development of the Zeitgeist, which will be reduced by the asset management fee of up to 0.85% p.a.