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A Carrot and Stick for Investors on Climate Action Thumbnail

A Carrot and Stick for Investors on Climate Action

We don’t hear much good news on climate change these days.

A recent report from one of the world’s largest insurance providers, Swiss Re, estimates the effects of climate change will reduce global economic output 10 percent to 14 percent by 2050 on our current trajectory. That’s around $23 trillion in lost economic output every year.

And that is not the worst-case scenario. If we continue to expand our use of fossil fuels, Swiss Re estimates that developing countries, especially those with extensive coastlines, could see their economic output drop by almost half.

To put this in context: The global economy shrank by an estimated 4.9 percent in 2020 due to the coronavirus pandemic and is expected to rebound by 5.4 percent in 2021, according to the International Monetary Fund. Permanently losing 11 percent to 50 percent of economic output would be an economic catastrophe.

However, one cause for optimism is that Wall Street is beginning to take the threat of environmental devastation seriously. If the world is poorer, then companies stand to make less profit.

Many corporations, especially insurance companies, see the dramatic impact climate change will have on their bottom line. And, ultimately, no industry will be able to avoid the looming economic repercussions of rising sea levels, rampant wildfires or Arctic cold snaps.

Recognizing the imminent danger, some of the world’s most influential companies are adopting a new tone. They are lining up behind the United Nations Sustainable Development Goals, making zero-carbon pledges or joining organizations like the Council for Inclusive Capitalism.

Beyond mere lip service, these meaningful changes in corporate behavior toward a zero-carbon economy are a necessary next step.

Investment managers have also taken heed of climate change. One out of every three dollars under professional management in the U.S. is invested according to sustainable investing strategies, according to the Forum for Sustainable and Responsible Investment.

Moreover, the amount of capital flowing into sustainable investments is increasing each year exponentially.

This trend is driven by growing evidence that sustainable investing can go head to head with conventional investing — offering competitive returns with less volatility risk. More than 2,200 studies of financial markets over the past two decades have shown that environmental, social and corporate governance criteria can be key factors in achieving superior investment results.

For example, a Bank of America/Merrill Lynch study showed that stocks ranked within the top third by ESG scores outperformed stocks in the bottom third by a whopping 18 percentage points from 2005-15. Investors are waking up to the reality that ESG metrics are as crucial to consider as conventional considerations.

The bottom line is that sustainability is good for the bottom line. That’s good news for conscious investors, but it may be even better news for the health of our planet.

Moralizing, sermonizing and even scientific data have thus far failed to sway many Americans about the perils of climate change. However, the stick of economic apocalypse and the carrot of potentially better risk-adjusted returns may accomplish what appeals to conscience and reason have not.

By all means, go out and protest the destruction of the planet. And vote for the Green New Deal at the ballot. But make sure to vote with your dollars as well.

One of the simplest ways you can help tip the balance is by ensuring your portfolio is managed according to socially responsible investment criteria. Please invest sustainably so we can all protect the future we are investing for.


Doug Lynam is a partner at LongView Asset Management in Santa Fe and a former monk. He is the author of From Monk to Money Manager: A Former Monk’s Financial Guide to Becoming A Little Bit Wealthy — And Why That’s Okay. Contact him at douglas@longviewasset.com.

The information contained herein is intended to be used for educational purposes only and is not exhaustive.  Diversification and/or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risk and return.  If applicable, historical discussions and/or opinions are not predictive of future events.  The content is presented in good faith and has been drawn from sources believed to be reliable.  The content is not intended to be legal, tax, or financial advice.  Please consult a legal, tax, or financial professional for information specific to your individual situation.

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