The so-called “green investment” is taking off in the world: investing in stocks and economic sectors related to environmental, climate and social projects. However, the efficiency of such investments remains low. They are taking rather only as image-building ones and nothing more.
Create Your Own Rules in Time
“Green” finance funding is taking off the ground and gaining momentum at the business and regulatory levels, all around the world and in Russia particularly. According to the daily Kommersant, in 2016-2017, a total of 132 countries, which were responsible for 82 percent of all harmful emissions, adopted a number of national initiatives to develop green financing at government level.
Evgeny Walter, the Director General of WALTER Construction, told Wek that green energy and green investments are commonly understood as investments in the securities of companies that produce and install alternative energy facilities, such as wind, tidal and geothermal ones.
According to him, these technologies of energy output, as well as the shares and bonds of companies that produce and install them, become usually of great and immediate interest after major environmental disasters. For example, accidents at hydroelectric power plants resulting in floods or emergency situations at nuclear power plants. The last major event of that kind happened in Japan. A tsunami destroyed the Fukushima Daiichi Nuclear Power Plant and led to environmental pollution. As a result, the shares of nuclear companies fell 20 to 30 percent, and the securities of “green” companies grew by 10-15 percent at the same time.
Russia has also somehow got into the zone of “green influence”. The Central Bank is discussing the development of standards for “green” financial instruments. Moscow Stock Exchange has launched a special section for them, while management companies have started to offer their clients socially responsible investing. Central Bank representatives said in the interview to Kommersant that “countries that do not participate in the development of rules and standards in this still unregulated market will eventually be forced to accept the rules of the game drafted by more active players.”
In this regard national rules and standards for verifying “green” financial instruments might appear in Russia. As part of development of financial market from 2019 through 2021, there is a requirement “to address formation of the national system of financial instruments for sustainable development, and to organize methodological and verification systems for responsible financing instruments.”
Business Is Cynical
Such investments are of no interest to an ordinary investor, as their profitability is usually lower than that of traditional ones. Most often these instruments are conservative and do not bring much money to clients. However, profitability is not the main thing with such investments. In developed countries, being a buyer of “green” stocks and bonds means improving your image as an investor. It is quite fashionable, and you can show off at shareholders' meetings and social events, Walter says.
In developing countries, including Russia, this is unlikely to have an effect on your colleagues. The high profitability and luxury assets that show your success in investing are more relevant here. In this sense, the Russian traditions are closer to the Eastern ones, where success has always been shown with the aid of external attributes.
There is also a rational kernel in this: developed countries with plenty of “green” companies have already built post-informational economies and transferred the rest of polluting industrial production to developing countries, which are focusing not on alternative “green” energy but on industrial growth. “Green” energy is simply unprofitable in developing countries because governments do not subsidize it.
Walter says, however, that the average investor in developing markets is mercantile and looks for high profitability rather than long-term public purposes. He is more likely to invest in oil and gas companies, traditional power producers and distribution companies.
Mark Goikhman, the head of analysts in the Center for Analytics and Financial Technology, agrees with Walter. He identifies that “green” investments are still perceived more as a kind of charity. Why is this happening? The answer is plainly visible, Goikhman said in his interview with Wek. Such companies and campaigns, with rare exceptions, require higher costs of the capital invested during the implementation of projects. Therefore, even if they get positive values on profitability, cost-effectiveness will be low. It is significantly less than the average market yield opportunities even of low-risk investments. For instance, one of the pilot investments in the environmental sphere are the euro-denominated “green” bonds of Russian Railways (RZD) state railway corporation, which assume 1.28 percent per annum at the Moscow Exchange.
Investment business, like any other business, is quite cynical, Goikhman says. Business pays more attention to the return on investment, and profit is more important rather than benefit. This is especially true for Russia, where the social component of business traditionally embraces a very small percentage of investors' motivation. Therefore, the demand for such investments has shifted to the premium-class customers of banks and investment companies.
Why to them exactly? Again, the answer is quite simple: wealthy investors want to show their social responsibility and are willing to get lower returns along with their other investments that compensate for missed profit.
However, trends in the Russian market usually come from the West, Goikhman says. If investments in environmental projects are popular in the West, this “fashion” is likely to emerge in Russia too. Another factor contributing to this is that as interest rates decline worldwide and in Russia particularly, the average profitability of other instruments will fall too. There is also a competitive factor, which is less important in this regard. Thus, if “green” investments become more popular, the increasing demand for them will result in the growth of quotations of the instruments like bonds, stocks, etc. Then their profitability will rise through the increase of prices of relevant securities, not with the aid of warrants or interests on them.