“Man, it’s hot!”: Zeroing in on Climate Investments
Dr. Bob Explains Series on Financial Topics
THE GROWTH OF SUSTAINABLE AND RESPONSIBLE INVESTING HAS MADE IT EASIER TO ZERO IN ON CLIMATE STRATEGIES. On a recent Sunday morning I set out on my jog humbly, which is to say, sloooowly and for only four miles. At 7 am, the “feel-like” temperature was 89°! Yes it was a heat wave.
I later learned that last month was the hottest June for the world on record, that nine of the 10 hottest June’s have occurred since 2010, and that the first six months of 2019 were the 2nd hottest on record.
Coincidentally, a 50-year-old organization of scientists identified “killer heat” as one of the most consequential effects of climate change in the coming period. There is no way to attribute one specific heat wave in one specific region to climate change. Still, what if you:
- Believe that we will have to move towards a low-carbon economy to stem global warming?
- Believe that some businesses are better positioned for that future?
- Want to invest consistently with that belief, even if in part?
ESG (environmental, social, and governance) funds experienced record investment inflows in the 1st half of 2019. This contrasts with outflows from stock funds overall (and net inflows to bond funds overall).
But ESG includes everything from Environmental concerns such as water, pollution, and climate change; Social issues such as prison or child labor, and employee health and safety; and Governance matters such as executive compensation and board diversity.
Can we get straight to the “C” in “ESG”? And are there ways to zero in on climate-friendly strategies? Yes! There are fossil-fuel-free, low-carbon, and climate change mutual funds and exchange-traded funds. Let’s consider them based on how they could “behave.” At risk of oversimplifying, they can:
1. Behave like the broad stock market
2. Behave similar to the broad stock market and underscore the climate theme more
3. Depart from the broad stock market and be emphatic about a low-carbon future
In the first case, the strategy is likely to include the same names as a broad index. The difference would lie in over-weighting those businesses expected to thrive in a low-carbon world, and under-weighting those not. While the weightings would differ, the holdings should be identical with a related index. Such investments can serve as a core holding and can be easily compared to a standard index.
The 2nd strategy adds to the 1st by excluding some names altogether. Such an investment could serve as a core holding or paired with one.
The 3rd strategy seeks to be emphatic about businesses expected to do well in a low-carbon future. It can be a “best of the best” approach and thus constructed with little reference to a broad index. The behavior of such investments can be expected to march to the beat of a different drum. with implications for risk and return. Depending on your risk capacity and risk preferences, such an investment may serve better as a “satellite” to a core holding.
Obviously these are not hard and fast categories, merely different points on a spectrum. Additionally, all rules of thumb for smart and prudent investing still apply.
Climate change may rank as one of the most important and pressing global issues facing us. You and I can sweat through today’s triple-digit temperatures. But we may be leaving behind a world where extreme weather is normal, health risks are higher, food supply chains disrupted, coastal regions overwhelmed by higher sea levels, and ecosystems dismantled. This isn’t a prediction. After all, we determine what kind of world to leave behind.
iDisclosure: This commentary is furnished for the use of Glen Eagle Advisors and its clients. It does not constitute the provision of investment advice to any person. It is not prepared with respect to the specific objectives, financial situation or particular needs of any specific person. Investors reading this commentary should consult with their Glen Eagle Advisors representative regarding the appropriateness of investing in any securities or adapting any investment strategies discussed or recommended in this commentary. The Chartered Financial Analyst (CFA) designation is conferred by the CFA Institute.