Why green investing is the new growth
* Are these constructs of value or growth really beneficial and why can't you have both? How do you define them?
* Are all stocks really only one or the other?
Defining these stocks can be difficult, as even major indices have a different methodology for categorising them. Some good value stocks have growth characteristics as well. There is also the opinion that the long-standing dispute between growth and value equity investors is obsolete due to both concepts becoming ineffectual as a result of the shift from active investment into passive investments.
Historically, “big oil” and the tobacco majors have been viewed as both growth stocks and value stocks at different points in time. But when environmental, social and governance (ESG) research began with the simple premise that companies with weak ESG practices run higher risks of future scandals and thus have a higher tail risk, there were plenty of examples within these types of companies to support this notion.
A major example of this being the Master Settlement Agreement (MSA) reached in November 1998 between the attorneys-general of 46 states, five US territories, the District of Columbia and the five largest cigarette manufacturers in the US regarding the marketing and promotion of cigarettes. As well as requiring the tobacco industry to pay the settling states billions of dollars yearly forever, the MSA also imposed restrictions on the sale and marketing of cigarettes.
Then there is the BP Deepwater Horizon oil spill, regarded as one of the largest environmental disasters in US history, and as of 2018 clean-up costs, charges and penalties had cost the company over $65 billion (R976bn).
With the increasing awareness of ESG matters and of the many crises presently facing the world (for example urbanisation, resource scarcity and climate change) opportunities for “new growth” arose.
The renewable electricity market has witnessed exceptional growth in recent years, facilitated by falling costs, innovation and global policy support. Renewables represented almost two thirds of the net new electricity capacity built in 2016, driven mostly by solar power and Chinese investment.
“New growth” provides protection from the crises hanging over us and the challenges caused by changing demographics such as urbanisation. Half of the global population already live in cities, and by 2050 two-thirds of the world's people are expected to live in urban areas. But in cities two of the most unrelenting problems facing the world today converge, poverty and environmental degradation.
In our socially responsible investing models we recognise the worth of “new growth” as both a solid performing investment strategy and a way to do some much needed good. New growth is already demonstrating its ability to provide superior returns.
Sarah Warner is an analyst at MitonOptimal.