Sustainable investments enjoying positive yields

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A new report from Credit Suisse and McKinsey & Co. has revealed a growing interest in financial products that have positive benefits for the environment.

The report, entitled ‘From Niche to Mainstream: The Building of an Institutional Asset Class,’ showed the rise in the number of institutional investors looking for financial products that drive the production of sustainable commodities, protect ecosystems and lower carbon emissions.

The report predicts that, over the coming five years, the private investment opportunity for conservation finance products will be between $200 billion to $400 billion. These figures represent a major uptick from the current annual private investment of around $10 billion. However, the higher figures that are predicted still fall well short of the amount of private investment needed each year in order to protect global ecosystems and clean air and water. This amount is estimated to sit somewhere around the $300 billion mark.

Positive yields are driving this interest even more so than the green benefits and the ‘feel-good’ factor of these type of investments. The report said that investors are also drawn by the fact that the yields from these natural resources – such as forestry – are uncorrelated with overall shifts in the broader marketplace, ensuring reliability in the investment. This is because such resources are, on the whole, independent from overall macroeconomic factors and therefore offer a solid way in which to diversify from other investments in asset classes such as stocks or bonds.

Credit Suisse’s CEO, Tidjane Thiam, wrote in the report: “For institutional investors, the risk-return profile of a product outweighs any other characteristics. Low correlation with other asset classes helps ensure a diversification effect. The conservation impact of a product is generally of little importance.

“In the current environment, investors are looking for an edge to drive excess returns – and many investors are increasingly seeing conservation impact investing as a way to achieve substantial environmental and social impact alongside market-rate financial returns.”

The report – which is a follow-up to Credit Suisse’s 2014 report, ‘Moving Beyond Donor Funding Toward an Investor-Driven Approach‘ – suggests that conservation financing is now ready to move into the mainstream. It suggests that there is a “growing pipeline of in-the-money projects that are ready for scaling.” Indeed, the market for FSC-certified forest products is tipped to skyrocket over the coming five years, quadrupling in value to more than $200 billion.

Sustainable agriculture and ecotourism are also seeing huge growth, the report found. As sustainable products achieve such premium prices, these asset classes “are just smart, economically attractive business opportunities waiting for mindful capital infusions and project developers,” the report said.

Over time, conservation investments look set to become a major segment of the investment marketplace, with institutional, high-net-worth and potentially even major retail investors keen to buy into large-scale ecosystem conservation.

As the report added: “Sustainable farmland, healthy forests, clean water and abundant habitat stand to become more valuable as the global population climbs to 9 billion by 2050. Already, pioneering investors have put together financial solutions that combine real assets, like tropical forests, with cash flows from operations in fields such as sustainable timber, agriculture and ecotourism. Conservation finance, as this field is called, represents an undeveloped, but emerging private sector investment opportunity of major proportion.”

GWD Forestry spokesman James Barrett commented: “Conservation investment not only offers investors that feel-good factor, it brings positive benefits for the environment as a whole. However, what is really drawing in the investors is the reliable, strong yields that can come from such investments.

“An asset class that is not rocked by fluctuations in the broader investment marketplace is always going to be popular, and many investors are beginning to see this and entering into the sphere now.”

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