End of Week Notes

Sustainable investing trends for 2018

  1. Climate risk takes center stage

Climate-risk disclosure was one of the big trends in sustainable investing in 2017, but I expect climate risk to be an even bigger deal this year, as more people — not just investors — begin to perceive climate change as an immediate problem and as the field of climate attribution advances — both of which will reinforce the considerable momentum already generated by sustainable investors on getting companies to disclose the risks (and possibly opportunities) they face due to climate change.

A shorter time horizon. The time horizon over which the effects of climate change are perceived to be material has gotten shorter. Last year, we experienced first-hand the effects of extreme weather events, an unfortunate trend that’s continued during the first week of 2018 with its polar vortex and bomb cyclone (whoever heard of that?) in the U.S. while Europe deals with multiple winter storms, bringing high winds, wildfires, and avalanche alerts.

One of the barriers to action on climate change has been the perception that its impact would occur far enough into the future that it wouldn’t affect us in the here and now. According to data released by the Yale Program on Climate Communication in 2016, 69% of Americans surveyed said they thought global warming would harm future generations, but only 38% felt global warming would harm them personally. Fast forward two years and wait for the data, but I expect a much higher percentage would now feel like global warming is harming them personally.

This has implications for investors. While true long-term investors — those with perpetual time horizons — have led the charge on climate risk, shorter-term investors, including those with individual lifetime horizons are likely to become more concerned about mitigating climate risk in their investments.

Scientific consensus and climate attribution. Climate science is reinforcing the idea that the effects of climate change are harmful and immediate. The Climate Science Special Report, released last fall by the congressionally mandated National Climate Assessment, concluded that global warming is real, caused by humans, and its impacts are currently being felt across the United States, from increased heat waves to greater flooding risks along the coasts. No serious person could read this carefully prepared and thoroughly researched document and come away thinking climate risk is immaterial either because it isn’t real or because its impact lies far off in the future. Meanwhile, the science of attributing extreme weather events to climate change has been rapidly advancing, according to a summary of the latest research in Scientific American that was published this week. As the field matures, it will have major implications:

Legal experts suggest that attribution studies could play a major role in lawsuits brought by citizens against companies, industries or even governments. They could help reshape climate adaptation policies throughout a country or even the world. And perhaps more immediately, the young field of research could be capturing the public’s attention in ways that long-term projections for the future cannot.

As Greg Rogers notes,

The attribution of weather-related catastrophes to human carbon emissions will expand the legal and fiduciary duties of those responsible for keeping people and their retirement savings safe.

I think we’ll see greater attention this year to climate risk among large asset owners, advisors, and individual investors. They’ll all support better disclosure on the part of companies, but they’ll also become more interested in structuring low carbon-risk portfolios, and advisors should expect more of their clients to be asking about how to reduce climate-risk in their investments.

2. More Asset Manager Engagement on ESG Issues

As I noted in a recent post, investors were vocal in 2017 in their support of climate proposals and the three biggest asset managers, BlackRock, Vanguard, and State Street, have said they will continue to pressure companies for better climate-risk disclosure. The table below shows how the 10 largest asset managers voted on climate proposals during the 2017 proxy season:

Bloomberg Sustainable Finance, January 3, 2018

With greater investor interest in sustainability issues and with large asset managers getting more involved with engagement around those issues, I think we will see even more asset-manager engagement on ESG issues in 2018. Already this year, Neuberger Berman announced it would focus its engagement efforts on helping companies understand why SASB standards are material and useful and that it would integrate SASB into its Proxy Voting Guidelines. (SASB, which stands for the Sustainable Accounting Standards Board, has identified industry-specific material ESG issues and developed standards for reporting on them.)

3. Larger numbers of advisors will incorporate sustainable investing into their practices

Finally, I think this is the year when significantly more advisors will incorporate sustainable investing into their practices.

First, investor surveys over the past several years have consistently shown that that a lot of investors are interested in this approach to investing. And interest is high not only among millennials and women. I saw at least two surveys this year that showed high levels of interest among boomers. As concerns over the effects of climate change grow, investor interest in sustainability will only grow. And, the #MeToo movement reinforces investor interest in getting companies to put more women on boards and in executive positions and, more generally, how companies treat their employees.

Bloomberg Sustainable Finance, January 3, 2018

Secondly, there are a lot more sustainable investment products available. Just in the last two calendar years, more than 70 new mutual funds and ETFs have been launched that practice sustainable investing in some fashion. Another 23 existing funds have added ESG criteria to their prospectuses during that time. There are now sustainable funds or ETFs in 58 Morningstar Categories. And once again in 2017, the performance of these funds skewed positive relative to their conventional peers.

Source: Morningstar Direct

Beyond that, many conventional asset managers are addressing sustainability in their engagement activities and improving their ESG analytical capabilities.

Finally, advisors have more resources at their disposal. The Morningstar Sustainability Rating assesses funds based on the ESG performance of their underlying holdings. Education opportunities abound, including one between Morningstar and the Money Management Institute that will be offered later this year. And literally every week, useful new information comes out in the form of easily accessible reports and articles. From just this week, check out pieces by Strooga Consulting, Bloomberg, Investment News, and Breckinridge Capital Advisors.

Put that all together — plenty of investor demand, plenty of investment products, and plenty of information — and I think plenty of advisors will get on-board the sustainable investing bandwagon in 2018.