Council Post: Four Real Assets For Impact Investing

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Founder and CEO of FarmTogether

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In 2016, global ESG assets under management totaled $22.8 trillion, Today, that figure stands at $40 trillion (subscription required). The impact investment industry has increased 10x over the past 10 years as a majority of investors now assess exposure to ESG risk when screening potential investments.

As investors continue to explore ways to drive impact with their dollars, real assets have proven to be a strong option for those looking to make a difference.

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Real Estate & Infrastructure

Historically, the real estate industry has played a significant role in climate change. The building and construction industry has been responsible for roughly 39% of all annual global carbon emissionswhile 30 billion tons of concrete—with a massive environmental footprint—are used each year.

However, the industry is changing to meet the growing demand for green assets from office tenants, developers and investors. Eighty-four percent of premium office buildings now boast environmental sustainability certification, while commercial real estate is poised to reap benefits from the electric vehicle charging station race.

Though properties embracing ESG standards have historically incurred higher initial costs, they’ve generated even higher rental income and higher net cash flow in the long term. This cash flow and rental income have also historically provided investors with a hedge against inflation (subscription required).

farmland

Today, there are a growing number of sustainable opportunities within agriculture real estate. To navigate a changing climate while meeting the increasing consumer demand for food, many farms are embracing the transition to sustainable farmland management.

Over the past decade, no-till acres worldwide have increased by an estimated 93%while 81% of farms from a recent survey now incorporate cover crops, which aim to help manage soil erosion, soil quality, water retention and more. Major manufacturers and food retailers have committed to sourcing their products from farms using regenerative agriculture practices, which have the potential to sequester up to 30% of annual greenhouse gasses under ideal conditions. On the market side, organic agriculture has been 22% to 35% more profitable than conventional agriculture, according to one research study.

Historically, sustainable farmland management has paid off for investors. The farmland industry has not experienced an annual loss since the index began 30 years ago. In my own company, I have seen an average annual return of approximately 11%. Sustainable agriculture, in particular, has proven to extend the life of the investment compared to other farming methods. After all, sustainable agriculture promotes efficient operations through natural soil nutrient replenishment, disease prevention, biodiversity growth and water conservation. Further, regenerative farming systems had 78% higher profits than traditional production systems.

Energy

One estimate asserts that 46% of all human-made greenhouse gas emissions since 1750 are the result of coal production and usage. However, modern innovations within the energy industry are presenting investors with innovative, sustainable opportunities.

Worldwide spending to transition to low-carbon or carbon-neutral energy grew 27% from 2020 to 2021 (subscription required). The amount invested in global solar farms is expected to increase roughly 20% each year through 2027, while a record number of wind turbine installations are expected in 2022, These moves can pay off. One estimate of the payback period for onshore and offshore wind turbines asserts payback can happen in six to 17 monthswhile one solar farm company claims an average annual ROI of around 15%. Renewable energy generated 7x higher returns than fossil fuel investments from 2010 to 2020.

There’s also enormous opportunity within the automobile industry. The number of electric vehicles on the road has risen 100x over the past decade, The global electric vehicle market—estimated at $287 billion in 2021—is expected to grow 24.3% every year from 2021 to 2028. This is partially due to future anticipated legislation to incentivize electric vehicle adoption.

Real assets in the energy industry have also historically correlated positively to inflation. Both inflation and the demand for energy typically increase during global economic growth periods as businesses expand and manufacturing attempts to scale. This is currently the case as the economy attempts to recover from the Covid-19 pandemic. Coupled with weaker than expected increases in supplyenergy prices, much like general inflation, have begun to soar.

Timberland

Various wood alternatives are emerging as sustainable substitutes. cross-laminated timber is comparable to concrete or steel; an 80-story mass timber skyscraper (subscription required) in Chicago is currently in development. Wood pellets have been shown to emit 91% less GHG emissions than coal. A high-quality bioplastic derived from wood byproducts has emerged as an alternative to plastic.

As an investment, timberland has historically had almost no correlation to equity markets, The industry’s average return between 1970 and 2020 was 6.7% (if you manage the land yourself), with average returns of 9.17% in 2021, Timberland has previously had a low correlation to the S&P 500 (12% correlation) and a high correlation with inflation (82.3% correlation,

Real Assets, Real Change

Historically, it has been possible to achieve a net-zero carbon portfolio by allocating just 20% of your portfolio holdings to real assets. Even more impressive, this portfolio would have generated higher returns with a lower standard deviation than some traditional portfolios holding just stocks and bonds.

If you’re looking for environmentally-friendly opportunities to invest in without sacrificing financial performance, real assets may be the investment class to help you make an impact.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?


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