Climate change and sustainability are some of the most pressing topics discussed across Corporate board rooms, Parliaments and Universities. The increase in awareness of such issues has created a high demand for sustainable alternatives, which has in turn resulted in an influx of new and exciting ‘Green Startups’.
It’s only logical that we start with the following question - What is a ‘Green Business’? The Cambridge dictionary defines it as:
“a way of doing business that protects the natural environment”
A Green Startup is a just a newly formed Green Business and is sometimes also referred to as an ESG (Environmental, Social and Governance) startup.
There is definitely more to unpack from this definition, but I’ll leave that for another blog!
Why Invest in Green Startups?
To reduce personal environmental impact
This is arguably the most obvious reason, but I think that it’s important to actually understand the positive impact you can have through investments. It’s all too easy to get caught up in the details of an investment or purchase, however when investing in ESG the returns have as an investor are not purely financial.
You are making a realised positive difference on your own carbon footprint, as well as protecting the future state of our planet.
Green Investing is very unique in the sense that returns are generally economically, socially and environmentally positive, when compared to other investment opportunities.
Risk Management
With any startup there are risks, and the case is the same for Green startups. However environmentally focused companies have a few underlying benefits during their inception.
Governmental grants and backing are common place in this sector, which can provide more security over the long run.
Changes in regulations also aid emerging startups as by nature they are more flexible, resulting in the ability to respond to market movement and protects investors.
Future Proofing
Green startups are also well positioned to protect future wealth, since their relevance increases in the long run as we become a more sustainable society.
We could also expect these investments to benefit from any ‘change of rules’ in the underlying financial markets, as the risk of climate change may indeed become a foundation of an updated economic system. (I will explore this idea further in a later blog!)
Government Backing - Lime
Founded in 2017, Lime contributes to sustainability by providing a convenient and eco-friendly alternative for short-distance urban transportation.
Lime's electric scooters run on rechargeable batteries, promoting cleaner mobility and reducing the reliance on traditional gas-powered vehicles for short trips. Many cities have welcomed and supported the introduction of electric scooter-sharing programs as part of their efforts to reduce traffic congestion and lower carbon emissions.
Government policies that promote sustainable urban transportation, such as providing dedicated lanes for electric scooters or offering incentives for companies like Lime, have played a role in the success and growth of such ventures. Subsequent to an initial trial in 2020 by the TfL (Transport for London), Lime was awarded a 2 year contract worth £2.25 million in September 2023. This coupled with further trials and testing due to end in may of 2024 could lead to further investment by TfL.
Lime's example illustrates how government support for eco-friendly transportation alternatives can foster the development of green startups in the mobility sector.
The Numbers of ESG Investing
Lets look at the S&P 500 ESG index, which is defined as;
“a broad-based, market-cap-weighted index that is designed to measure the performance of securities meeting sustainability criteria, while maintaining similar overall industry group weights as the S&P 500.”
Below is a table comparing the annualised returns of the traditional S&P 500 Index and the S&P 500 ESG Index
Time Frame | S&P 500 annualised return | S&P 500 ESG annualised return | Difference |
10 Year | 9.81% | 10.34% | 0.53% |
5 Year | 8.03% | 9.57% | 1.54% |
3 Year | 8.44% | 9.85% | 1.41% |
1 Year | 19.59% | 17.80%. | -1.79% |
We can see that the S&P 500 ESG index outperforms the S&P 500 by roughly 0.5% year on year, which resulted in an extra 5% in value over 10 years.
I’d like to highlight the level of consistency of the annualised returns, especially over the last 3 years in light of the COVID fallout. This demonstrates the strong underlying investor confidence in ESG stocks and highlights sustainable investment opportunities as a “safe” investment when there is an increase in market uncertainty.
You can also argue that ESG performance over the last year at 17% is the market realising its true value, which may have been stunted by the pandemic in comparison to the 3 year annualised return.
The 1 Year returns may also suggest that ESG investments are less reactionary to market movements and corrections when compared to traditional equities - whilst consistently outperforming such stock in the long run.
Closing Thoughts
The rise of 'Green Startups' presents a compelling investment opportunity, offering not only financial gains but significant socio-environmental benefits.
Fuelled by governmental support and adaptability, these startups are positioned for integral future relevance amid a shift towards sustainability.
We can also note that the consistent outperformance of the S&P 500 ESG index underscores investor confidence, making investments in ESG companies not just financially sound but integral to fostering a climate resilient global economy.