As the world debates climate change, what is impact investing?

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Highlights

  • Impact investing means considering socio-environmental benefits while parking money in stocks
  • The COP26 meet is discussing ways to limit the impact of climate change
  • Many clean energy stocks have returned well, especially after the outbreak of the pandemic

Impact investing is based on the concept of social responsibility that has the individual and institutional investors at its heart, compared with corporate social responsibility (CSR) that has businesses at its heart. Impact investing is undeniably gaining momentum, especially after the Covid-19 pandemic.

As the world debates climate change, what is impact investing?

The electric car maker Tesla's stock is an example of how investors are flocking to the asset classes that generate socio-environmental benefits. The rise of Tesla’s stock helped Elon Musk become the first-ever person with over US$300 billion net worth.

Are dirty stocks losing sheen?

At least some investors are exiting dirty stocks. Lately, Caisse de dépôt et placement du Québec, Canada's leading pension fund, declared its intention of shedding the fund’s multi-billion-dollar investment in oil stocks by the end of 2022. In January this year, two New York City pension funds announced a similar divestment from the fossil fuel industry.

In the ongoing COP26 meet, world leaders have committed to cutting methane and greenhouse emissions to limit rising temperatures. It is not possible to cut emissions without rethinking investment in the fossil fuel industry. Activists and environmentalists are creating pressure on governments and banks to reduce their exposure to dirty fuels. This is where impact investing and choosing green over dirty makes more sense than ever. 

Also read: Algonquin & 2 other TSX clean energy stocks to buy before November

Retail investors and impact investing

This is a time when retail investors are on the driving seat of the stock market, given the proliferation of online discount brokerages. Many of these investors are looking at greener and socially responsible stocks as a social responsibility and for a likely appreciation of their portfolio. Impact investment is expected to grow further from hereon.

The S&P/TSX Renewable Energy and Clean Technology Index comprises of stocks operating in green and sustainable technologies. The three-year return of the index is over 20 per cent and one-year return is over eight per cent.

 

Also read: 3 Canadian EV stocks that should be on your radar

Bottom line

Impact investing is exercising caution while investing that the money is placed in responsible and positive assets. Choosing electric car or renewable energy stocks over oil stocks is an example of impact investing. It is all about making a positive impact on our surroundings while also doing our bit in cutting negative forces like emissions.



 


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