Environmental Economics and Impact Investing
By Ahnika LeRoy, Contributor
While conventional wisdom holds that environmental protection and financial success are at loggerheads, they can coexist and even flourish together. The growth in impact investing, a form of investment designed to generate financial gain and positive social and environmental impact, is a testament to investors’ willingness to take non-financial factors into account in their investment decisions.
In effect, they are taking into account factors (called externalities) that don’t hit a company’s bottom line. Investors are using their investment dollars to help the market determine the full benefit and cost of economic activity, a key focus of environmental economics.
Environmental Economics, a sub-field of economics, focuses on determining the full costs of economic activity to all individuals. This includes impacts on air and water pollution, global warming and general environmental health, which are often unaccounted for in traditional profit and loss accounting.
An example of production caused externalities impacting people is the 2014 10,000-gallon chemical spill into West Virginia’s Elk River. The spill left 300,000 people without potable water. They couldn’t drink it, bathe in it, shower with it, cook or wash the dishes with it. One major chemical found in people’s drinking water was crude 4-methylcyclohexanemethanol (MCHM), a chemical foam used to clean coal and remove impurities that contribute to pollution during combustion. Researchers say they identified crude MCHM in the Ohio River at Louisville, Kentucky, 390 miles downriver from the spill site. The people exposed to MCHM experienced illnesses such as rash, nausea, vomiting, abdominal pain, and diarrhea.
Coal is the dirtiest fossil fuel that contributes to climate change, and even though MCHM is meant to clean impurities, coal continues to contribute a significant portion of greenhouse gasses and other harmful materials. A typical 500-megawatt coal-fired electricity plant in the United States annually contributes 3.7 million tons of carbon dioxide and 10,000 tons of nitrogen and sulfur oxide, the primary cause of smog and acid rain. Another 500 tons of small particles are spewed from a plant this size. These particles are health hazards, causing lung damage, among other problems. The typical coal-fired plant also releases 720 tons of carbon monoxide, 125,000 tons of ash, 225 pounds of arsenic, 114 pounds of lead, and many other toxic heavy metals. In Wisconsin, more than 200 lakes and rivers are contaminated with mercury, making fish toxic in those areas. Divesting from coal would reduce all of these harmful externalities associated with the production of energy from coal.
Luckily, trends in young adults’ values are shifting the market and triggering environmental, political, and financial change. According to a Time Magazine piece, young adults make up a “big portion” of impact investments. Going forward, this is only likely to grow: “As millennials’ earning power grows and they inherit $30 trillion over the next 30 years, investing for positive impact stands to attract trillions more.” The more we see the impacts of externalities caused by poor environmental practices, the more conscious of environmental externalities we become. Environmental Economic values are becoming mainstream for many investors, not just young adults.
It should come as no surprise that more than two-thirds of advisors saw sustainable investments as an opportunity to grow their practice. With increasing attention and concern for social and environmental considerations, we can expect strong future growth in the impact investing space. This will shift corporate focus to include externalities and drive positive social and environmental change.
At First Affirmative, we understand that the ways we save, spend, and invest can dramatically influence both the fabric and consciousness of society. We believe that in addition to the benefits of ownership, investors bear responsibility for the impact our money has in the world. Are you making conscious decisions about the impact of your consumer purchase and investment decisions?
Past performance is not indicative of future results. Mention of specific securities should not be considered a recommendation to buy or sell that security. For information regarding the suitability of any investment please contact your investment advisor.
Posted: May 27, 2015