Earth Day
What’s the most impactful thing you can do to combat climate change?
Putting your money into sustainable investments
Today is Earth Day and you may be wondering what you can do to help improve the environment and, especially, fight climate change. There is no shortage of articles offering advice on the subject. I read two of them first thing this morning.
The final section of The New York Times special report on climate change, titled “Is what I do important?”, outlined steps that middle-class Americans can take to lower their carbon footprint.
And Huffpost listed “50 ways to celebrate the 50th Anniversary of Earth Day from Home”, addressing the topic more broadly with suggested actions big and small.
Lots of good ideas, for sure, but one glaring omission from these pieces and others I’ve read on the subject is your investments. Yet, if you are fortunate enough to be an investor, perhaps the most impactful thing you can do right now is to focus your investments around sustainability.
To be sure, not all of you are investors, but more than half of you are. Gallup found 55% of Americans reported they owned stocks as of April 2019. This was based on a question asking respondents about whether they owned individual stocks, as well as stocks included in mutual funds or retirement savings accounts, like a 401(k) or IRA.
Let’s focus on mutual funds, including exchange-traded funds. More than 300 sustainable funds are available to U.S. investors and they are more popular than ever, attracting record amounts of new money from investors last year and during the first quarter of this year.
When sustainable funds decide on what stocks to include in their portfolios, one of their main considerations is how well the company performs on a range of environmental, social, and corporate governance issues, referred to as “ESG” issues. Companies that have large carbon footprints and no plan to reduce them, for example, are generally avoided. Those that are environmental leaders in their industries, on the other hand, are favored. Most sustainable funds have low exposure to fossil-fuel-based energy stocks and some are completely fossil-fuel-free.
Sustainable funds also prefer companies that treat their own employees well, oversee their supply chains to ensure the safe and fair treatment of workers, respect their customers by producing safe and useful products, protecting their privacy, and avoiding misleading marketing claims, and are good citizens in the communities in which they operate — that’s the S in ESG. And they prefer companies that manage themselves in an ethical, transparent manner, respect diversity and embed sustainability throughout the business — that’s the G in ESG.
By becoming a sustainable investor, you are directing your capital towards companies that are better ESG actors and avoiding those that aren’t. But no company is perfect. That’s why sustainable investors scrutinize corporate policies and behaviors and use their rights as shareholders to engage with companies about these issues. They also can sponsor shareholder resolutions to be voted on at the company’s annual general meeting of shareholders. In fact, ESG resolutions have attracted record levels of shareholder support in recent years.
Shareholder engagement can change company policies and actions. Over the past several years, many companies have agreed to produce reports outlining what they see as the risks they face from global warming and their plans to combat climate change.
As a sustainable investor, you will not be alone. Sustainable investing is a big, global movement that includes many of the world’s largest institutional investors.
And in case you are wondering, sustainable funds can and should be expected to perform as well as conventional funds, which is important for your bottom line. In the first quarter market decline, sustainable funds held up better than conventional funds, and they have competitive returns over longer periods.
Going forward, your sustainable fund is an investment in the future being a place where companies treat not only the planet, but also their workers, their customers and their communities with as much respect as they do their shareholders. In a post-COVID19 world, those are the types of companies that are likely to prosper.
Sustainable investing is thus a win-win for you as an investor and as someone who is concerned about the climate crisis. Do it for your children and grandchildren, but also do it for the 45% of your fellow citizens who don’t have the means to invest. You can make the economy work better for them while also doing your part to mitigate the climate crisis.
