Hello, and welcome back to Green Investing 101.
I’m Jeff Jones, The Globe’s sustainable finance and ESG reporter. I track where the gusher of money aimed at green investments is coming from, what it’s being spent on and how effective it is in meeting environmental and economic goals. That’s where the action is, and today, we’ll talk about it all. Let’s get started.
ALLY JAYE REEVES
Getting started guide
In this issue, we’ll cover:
- Can I save the world through green investing?
- How green are my green funds, really?
- Sifting through the ESG hype: Who decides what’s green?
This week we’ll discuss the momentum behind the green investing boom – and answer the question: Can green investing live up to the hype? We’ll also look at what tools are out there to help figure out whether companies are as righteous as they claim to be.
Can I save the world through green investing?
The backstory: Demand for investments that offer prospects of financial gains and environmental improvement is surging, and coming from a variety of sources – massive state-controlled sovereign wealth funds, pension plans, university endowments, asset managers in charge of mutual funds and everyday investors like you and me.
- We’re talking serious money. Sustainable assets – stocks, bonds and other holdings – managed by pros in the world’s five largest markets rang in at US$35.3-trillion in 2020. That accounted for more than a third of all assets under management.
Pressure to act: The big, or institutional, investors are responding to demand from folks who entrust them with their money to earn returns while also making a difference on climate or social issues. They are also being nudged by governments and regulators to put climate front and centre in their investment decisions.
- Mark Carney, the former governor of the Bank of Canada and Bank of England and now UN special envoy on climate and finance, is leading a push to bring institutional investors managing tens of trillions of dollars in assets to revamp their portfolios with climate solutions in mind.
But can your dollar invested in an ESG fund help save the planet? Can this shift in investing make an impact as warnings from scientists about climate change get more dire?
The answer is yes, but we have to be patient. There are a lot of old, dirty systems we still use for energy, transport and construction – and a lot of hard decisions around the world about what to replace them with and in what time frame.
Another big question plagues even the experts – how can we make sure that corporate claims of responsible operations aren’t just greenwashing?
The bottom line: Environmental and societal improvements can be made as investors direct their money to businesses that are serious about solving problems, but it will require time, patience and critical thought.
How green are my funds?
How did we get here? What we now call ESG (environmental, social, governance) investing is not new, but it has evolved. Back in the 1990s, when it was called ethical investing, fund managers sought out companies that stayed out of activities such as polluting water, and operating in countries with poor human rights records. As the risks of climate change became better understood and social pressures intensified to foster better gender and racial equity among employees and managers, investments that emphasized solutions to those problems proliferated.
So everyone’s green now? Today, demand has never been higher for green stocks and funds that offer returns from wind and solar power generators, electric car companies and a huge range of other technological solutions aimed at accelerating the energy transition.
The ESG trend has reached into companies in every sector of the economy. Professional and retail investors want to know how railways, banks, mobile phone providers, forestry companies and oil producers are performing in a wide range of criteria. That includes everything from CO2 emissions and the number of women on their boards of directors to waste reduction. On climate change, companies are being grilled on how they expect to thrive over the long term as rules and regulations get tougher.
To help investors study performance in these areas, more and more companies in all industries produce sustainability or ESG reports that provide details of their performance in a range of areas and plans for improvement. The reports tend to be published each year, alongside annual reports of corporate financial results.
Zoom out: Companies in every sector of the economy are now being judged on their ESG performance along with their financial prospects.
Is ESG worth the hype?
Separating the wheat from the chaff: With all this coin in search of green investments, no company or fund manager wants to be left out of opportunities when it comes to sustainability today. That’s good and bad.
- On the positive side, it means that many companies are taking ESG considerations to heart when they are operating their businesses and making plans for the future. For example, some transport companies are buying electric vehicles. Steelmakers are adopting new technology to move away from coal-fired blast furnaces. Electric utilities are investing in renewable power.
- But there’s also the risk that some corporations see sustainability as primarily a public-relations problem. Rather than make real changes to their businesses, they may play up minor environmental gains, such as adopting recycling efforts in their manufacturing plants, while making little effort to reduce CO2 emissions.
Comparing green apples to green apples: This is why international environmental finance organizations have created reporting tools that companies use to provide details of their ESG efforts and areas that require improvement. There are many, but two used frequently are the ones developed by the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD).
These are programs aimed at standardizing the measurement and reporting of all the areas of ESG and climate that we’ve been talking about. They allow companies to report things such as carbon emissions from various sources in their operations.
- It’s kind of like the established accounting rules used for financial results, only for ESG, and many companies post their reports on their websites, typically as part of their sustainability reports. As it stands, the larger companies tend to have the most detailed reports, because the practice is complex, time-consuming and can be expensive.
As more companies adopt this reporting, investors will find it easier to make comparisons within industries to judge how sustainable businesses are and what plans are in place to stay ahead of regulations and changes to their industries. In fact, Canadian securities commissions have started a process to make climate-related reporting using the TCFD system mandatory among companies listed on stock exchanges.
Professional fund managers with experience in ESG investing are now well-schooled at using these tools to help determine whether stocks make the grade for their funds. This provides their investors comfort that the necessary criteria are being evaluated in exchange for their management fees.
There are also third-party firms that provide sustainability ratings and audits. Companies such as Refinitiv, Sustainalytics and MSCI slice and dice companies’ ESG reporting and make assessments that determine whether they can be added to an ESG stock index that forms the basis for an ETF.
The bottom line: Many companies want to be seen as green today and many are making big strides to improve their performance. There are tools available to help gauge whether companies are living up to their claims, and pros who can take the guesswork out of it.
Key takeaways
Sustainable investing is rapidly expanding, becoming a consideration for nearly all investments for all money managers, including those for pension plans and mutual funds. As the climate crisis worsens, managers are responding to growing demand for money to do good.
But it’s not only a world for the largest financial players. Individuals can pick stocks, ETFs and funds that meet their own ESG criteria while (hopefully) generating returns. The trick is understanding which companies are serious about their claims. Use available tools to help make the call, or work with industry pros who are doing in-depth assessments and analysis.
Here are three key points to remember:
- Companies are facing pressure to be sustainable players, but it can be tricky to accomplish that.
- There are programs aimed at standardizing ESG principles, to help regulate the practice.
- Use available tools to distinguish companies that are serious about their climate claims from those that are greenwashing.
These questions are good to keep in mind when deciding where to place your investments: Have you done your research? Can you check out companies’ reports? In the next (and last) newsletter, we will dive into expert advice to help guide your journey.
Pop quiz
Mark Carney joined Brookfield Asset Management to head up its expansion into ESG investing. What is the total value of assets held by Brookfield?
- US$100-billion
- US$150-billion
- US$250-billion
- US$550-billion
Keep going!
So we’ve had our reality check, now it’s a good time for you to check on your own reality.
- We know that disclosures are tricky, but important. This week, try to find a company you like, or a company you would consider investing in, then go online and find their disclosures and environmental practices. Do they align with your values? Are they not as good as promised? Is it greenwashing? For example, here’s Exxon Mobil’s disclosure.
- Does the company you have in mind not even have disclosures? Don’t let that drive you away – shoot them an e-mail yourself and ask about this.
Thanks for reading. If you took action using tips from this newsletter, let us know using #GlobeGreenInvesting on social media or e-mail us with the subject line Green Investing 101. We would love to hear from you.
What do the experts have to say? That’s up for discussion next week.
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Evergreen investing reading
- Canada’s securities regulators eye mandating climate disclosures
- What is in your ESG fund? In Canada, there are no clear definitions for sustainable investments
Pop quiz answer: The global investment firm has about US$550-billion in assets under management.