Are You Prepared for the Future of Investing?

Corporations and the stock market itself are much like humans: They're living, changing, evolving entities. It's easy to forget the real world we all live in when we're poring through financial statements and trying to make our investments, but every number has to do with the real world, the humans in it, and how people can hurt or help the future.

Long-term buy-and-hold investors seek sustainable, if not growing, returns. Sustainable investing -- investing that takes into account environmental, social, and governance (ESG) factors -- gets a bad rap, but it's actually the way of the future. Falling behind in this regard could wreck portfolios and economies. Getting ahead is one way investors might drum up the returns they dream of.

The $5 trillion question (and answer)
Sustainability advocacy organization Ceres, which brings together investors, corporations, policymakers, and nongovernmental organizations, recently released a forward-looking report: "The 21st Century Investor: Ceres Blueprint for Sustainable Investing."

Investing styles tagged "green," "socially responsible investing," "responsible investing," and so forth tend to get a bad rap. The factors they tackle have been greatly politicized, and unfortunately, many traditional investors are missing the big picture of what the future looks like without action on these fronts. The bad news: It's risky. The good news: There are financial opportunities for corporations and investors.

There are increasing signs that climate-related threats are material financial issues, and could hit companies' top and bottom lines hard. Ceres has often pointed to increasing extreme weather events and their price tags. For example, just last year in the U.S., disasters like Hurricane Sandy and the drought resulted in insured losses of $58 billion. Meanwhile, when it comes to general economic losses, Hurricane Sandy's price tag was actually $70 billion.

The report is full of data on the subject. For example, Mercer Consulting has calculated that the investment opportunities in areas like global clean energy and climate adaptation may reach the $5 trillion mark in the course of the next 15 to 20 years..

Here comes the sun
Many companies are already addressing these issues, and many moves are significant. Their efforts will not only help their businesses over the long term through cost savings, but helping reduce the damage will help protect fragile economic ecosystems. Furthermore, innovating to devise forward-looking options to help successfully navigate a changing world will result in products in demand.

Many of these money-saving, environmentally friendly options use renewable resources instead of scarce ones. Let's consider solar, just for starters.

Apple (NASDAQ: AAPL  ) hasn't always impressed the public with its environmental policies, but it's probably doing better than many think. Although it already boasts the largest solar array in the U.S., it's also making plans to add another solar farm near its Nevada data center. The company is working with SunPower and NV Energy on the venture, and the farm will use new technology to boost the amount of energy it can harvest from the sun. Apple's ultimate goal is to power its data centers with 100% renewable energy.

In addition, if regulators approve the venture, the Ft. Churchill Solar Array will provide 100 high-paying jobs in the area; that may not be a ton of new jobs, but America's still large unemployment numbers tell us we need every new job we can get, and projects like this one add opportunities. In this case, the surrounding area has a staggering 13% unemployment rate.

SolarCity (NASDAQ: SCTY  ) has been one of the most successful IPOs of the year. Maybe it's an overvalued and risky stock -- high-flying IPOs can be recipes for disaster -- but one thing's for sure: There are reasons that investors are excited about its growth potential. Solar installations are its core business, and the signals are bullish. Last year, California alone booked a 26% increase in solar installations. Overall, solar installations in this year's first quarter increased by 33% -- not surprisingly led by California -- with increasing growth attributed to residential and business adoption.

Even more exciting, SolarCity is looking to tackle one of solar energy's biggest obstacles. It has announced plans to develop a product that will store solar power, aimed for 2015. The battery packs in question are actually Tesla Motors' (NASDAQ: TSLA  ) tech; Tesla's another environmentally friendly upstart, and another visionary Elon Musk join venture.

In a great example of the interconnections of companies with the same goals -- to provide environmentally sound alternatives -- the move is also a win for Tesla, since it's been working on such batteries, and the more the batteries saturate the market, the cheaper these solutions will become. That's a long-term win-win for both companies.

Don't let your investments dry up
Climate change and resource scarcity risk and reality will impact all of us, whether we're investors, businesspeople, or consumers. Although storms and floods may not always sink in for many people on a day-to-day basis -- after all, many destructive events are easily dismissed unless they happen in your own backyard -- we have already seen disturbing peeks at ramifications.

Last year's drought resulted in higher food prices, the type of ripple effect that impacts the financial well-being of everyone from restaurant companies and food suppliers to consumers simply shopping at the grocery store. Threats to the water supply in places like the Colorado River Basin could hurt wide swaths of people in huge states like California and Nevada -- not to mention blight some very important American crops.

Still, we investors can prepare, and don't worry: We won't necessarily lose money doing it. In just one example of data refuting conventional wisdom that sustainable investing is financial suicide, Harvard Business School's Professors Robert Eccles and George Serafeim conducted a particularly compelling -- and very long-term -- study of companies over an 18-year period.

The stock returns of 90 companies in the sample that emphasized strong sustainability initiatives in their businesses outperformed 90 companies with low sustainability standards by 4.8%. They also outperformed on metrics like return on equity and return on assets.

Successful investing has everything to do with future growth, and realistically assessing signs of what the future will look like for certain business is part of the long-term investing model. Right off the bat, the Ceres report [download required] gives a great amount of information on the topic and nails an important bottom line: Investors need to truly gear themselves for the 21st-century marketplace. It will be much different from the one we've grown accustomed to, and preparation is essential for investors -- and everyone else.

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Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


Read/Post Comments (6) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 15, 2013, at 11:58 AM, StanO6 wrote:

    You like the “synergy” of TSLA & SCTY?

    Consider this: Elon also runs SpaceX, while privately held, there is nothing stopping him from using the brain trust (YES! They are rocket scientists!) at SpaceX to help move Tesla forward. No other car maker has this connection.

  • Report this Comment On July 15, 2013, at 12:01 PM, TMFLomax wrote:

    Stan06, yes... SpaceX, awesome as well. Can't help but love REAL rocket scientists. :)

    Alyce

  • Report this Comment On July 15, 2013, at 12:03 PM, zjk1018 wrote:

    I love it! This year has really been a testament to the fact that you can invest in a cleaner more efficient future and make a lot of money while doing it. Don't forget GE with its wind turbines, MMM with its hand in mass transit, and WM for it's recycling services.

  • Report this Comment On July 15, 2013, at 12:09 PM, TMFLomax wrote:

    Thanks for adding those zjk1018... Waste Management is one of the stocks in the real-money Prosocial Portfolio I'm managing for Fool.com, and it's in my personal portfolio too. So, indeed. We are seeing the building momentum in this kind of investing!

    Alyce

  • Report this Comment On July 16, 2013, at 11:43 AM, mdk0611 wrote:

    You talk about sustainability in the article, but then only point to solar and Tesla, neither of which are cost effective and both rely on government subsidies. Why? Sustainability can involve efficiency, conservation and profitability. As you point out in the comments section Waste Management turns a profit on recycling. They also have been generating power using methane from their new landfills.

    More interesting to me is the Exxon plant in Baton Rouge that gets a significant amount of it's energy by using methane from a nearby retrofitted land fill. Why is there such a laser like focus on a subsidy dependent technology and a 100k automobile while the considerable (and profitable) possibilities of retrofitting landfills doesn't even rate a footnote?

    Hell, WalMart at this point has saved roughly $200 million and significantly reduced CO2 emissions by simply requiring their trucks to turn off their engines while being loaded at distribution centers for the last 10 years. This stuff works, and it works without subsidies and tax credits.

    I think you need to consider a more expansive definition of sustainability.

  • Report this Comment On July 17, 2013, at 10:09 AM, TMFLomax wrote:

    mdk0611, I was just giving some examples of alternatives becoming more mainstream and gaining traction. Sorry, I didn't mean to imply those were the ONLY sustainable initiatives worth examining, nor was I really thinking about incentives and subsidies in this piece. Those were just some recent events/examples that had hit my radar. Frankly, I'm glad to see Apple doing more in this area, and honestly, increasing solar adoption is a big deal in terms of bringing it mainstream, and it's absolutely happening, even making inroads in residential (which was not part of the equation several years ago due to expense, you know?).

    Both of your examples are great ones too, and yes as you point out possibly even better. (And I'm always a fan of business that does NOT require subsidies and tax credits, don't get me wrong). I've written in the past about the total business sense, cost effectiveness, cost savings of sustainability. Sorry I fell short on those in this article, and thanks for pointing those out as well. I do in fact have a much more expansive view of sustainability, but I also have word count limits for each article. ;)

    Best,

    Alyce

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