End of Week Notes
Are you being a climate inactivist in your practice?
If so, you’re sending the wrong message to your clients
It took me until the end of Earth Week, but I just finished reading The New Climate War: The Fight to Take Back Our Planet, by Michael Mann, a professor of atmospheric science at Penn State.
Mann argues that the old climate war — the debate about the science of global warming — has largely been won. Out-and-out denial of climate change has largely faded away, the result of continually accumulating science on both the causes of global warming and its impact, the direct experience of more frequent extreme weather disasters, and growing climate activism. Additionally, Mann notes, “a global pandemic has now taught us key lessons about vulnerability and risk.”
Thus, with growing consensus on the need for action and a new administration in place in the U.S., the prospects for decisive action are brighter than ever. But while the old climate war was over the science of climate change, the “new climate war” is over what to do about it, and pits those who are ready to take on the crisis against the forces of inaction, who downplay the need for decisive action and seek delay in implementing solutions.
So here’s the question I have for financial advisors and wealth managers:
Are you being a climate inactivist in your practice?
A recent Cerulli report suggests that, for many of you, the answer is yes. More than half of U.S. advisors, 53% according to Cerulli, say they do not even bring up ESG investment options unless prompted by their clients.
While there may be a glass-half-full interpretation of that (we’ve come a long way in the past 5 years or so), what it says to me is that, for most of their clients, most advisors are failing to take action to protect them from climate risk or to help them invest in opportunities that may contribute to climate solutions. Advisors who don’t even bring up the subject with clients, through their silence, are promoting climate inaction.
The message being sent, intentionally or not, is that climate change, not to mention other, often interrelated, ESG issues, poses no risk to a client’s financial future. Yet we know that virtually every industry has at least some exposure to transition risks that stem from the shift to a low-carbon economy. Concrete, steel, aviation, automobiles, utilities, and, of course, fossil-fuel companies all have much higher transition risks. And for many companies, global warming poses direct physical risks depending on the locations of their operations, their supply chains, and their customer base, which, in turn, create industry-level risks for insurance, banking, and real estate.
Beyond the message that investors need not be concerned about climate risks, the broader message being sent by advisors who ignore climate change is that there is no connection between investing and taking action on climate.
Not true. Investor action through shareholder engagement is prompting hundreds of public companies to better manage their climate risks and to commit to emissions-reduction targets in line with the Paris Agreement. As more money is invested sustainably, more public companies sense the shift in their shareholder base, one that is aligned with similar shifts in their customer base and among their employees, in favor of climate action.
For investors, in other words, climate-aware investing is not only about individual preferences, it has a collective-action component to it. Similar to casting votes for political candidates or supporting groups promoting climate aciton, investors are casting votes with their dollars when they allocate them to asset managers who will engage with companies on climate issues.
In addition to suggesting that climate risk isn’t relevant to their clients and that there is no connection between investing and climate action, advisors are sending an even broader message to their clients: If climate change isn’t really important to a client’s investments, then perhaps taking broader action on climate change, individually or collectively, is really not that important either.
At least some, perhaps most, climate-inactivist advisors may not intend to be. They are quite willing to discuss the subject if a client brings it up, but, they say, not all that many clients actually bring it up, which justifies their inaction. The problem with putting the onus on clients to bring up the topic is that only the most-concerned and better-informed clients are likely to do that. Yet survey after survey report large majorities who say they are interested in applying their climate and sustainability concerns to their investments. Cerulli reports, for example, that “83% of U.S. retail investor households prefer to invest in companies that are leaders in environmentally responsible practices.”
By not bringing up climate change and related sustainability issues with your clients, you are sending a message that you don’t care about issues that are important to them, along with the messages that climate risk itself isn’t relevant to investing and that investments have no broader impact.
So the bottom-line message today is that if you don’t intend to be a climate-inactivist advisor, you still have an opportunity to turn things around by proactively bringing up the topic with every one of your clients and routinely taking steps to mitigate climate risk in their portfolios.
It’s not hard to build sufficient knowledge on climate and other sustainability issues and on how various asset managers are approaching it in their investments. Nor, these days, is it difficult to find funds or ready-made model portfolios.
And even if you haven’t seen it in your own practice, more and more money is flowing into sustainable funds. They accounted for an astounding 24% of net flows into open-end and exchange-traded equity and fixed-income funds in the U.S. last year. That’s in spite of the fact that so many advisors are promoting climate inaction. (And in spite of the fact that regulators have, in effect, limited the use of ESG funds in 401(k) plans; something that the Biden Administration may change).
As an advisor, you can still be a part of climate action, rather than inaction.
