Our planet’s climate is changing. There is no denying this fact, and there is no denying that over one hundred years of fossil fuel use are to blame.
Wall Street, rarely known for its high ethical standards, is finally realizing that the changing climate will negatively impact everyone on earth, and some of the harshest effects will be economic.
For those still skeptical, why else would Larry Fink of Blackrock, the CEO of the largest investment firm in the world, state that “climate change has become a defining factor in companies’ long-term prospects,” and pledge to incorporate climate risk in Blackrock’s investing decisions?
Like just about everything, climate change has morphed into a political left-versus-right wedge issue that divides us along party lines. However, the fact is that climate change will impact every facet of our lives, irrespective of our party affiliations. The shifting climate is likely to have a devastating impact on our economy, and our investment portfolios will not be immune.
If we want to remain a prosperous society, we must deal with the problem now.
And as it turns out, helping mitigate climate change through your investment choices could be very profitable.
In the past, ESG (Environmental, Social, and Governance) investing was framed as a feel-good issue. Like a day trip to a spa, it felt wonderful but was expensive. Responsible investing sometimes required a sacrifice of accepting lower returns in exchange for avoiding the “bad apples.”
That isn’t the case anymore. As the ESG investing industry has grown and evolved, with economies of scale and improved technology, the costs to run ESG funds have fallen. On top of that, the sustainable versions of mainstream investment indices have actually outperformed their conventional counterparts in recent decades.
For example, The MSCI KLD 400 Social Index is a collection of 400 US stocks with outstanding ESG ratings. Over the past ten years, the MSCI KLD 400 Social Index had an annualized return of 16.56 percent versus a 16.04 percent return compared to its benchmark.
If our children’s futures weren’t enough to consider, another reason you should care about sustainable investing is that it can produce competitive returns with less business risk. In 2015, Oxford University conducted a meta-study of over 200 independent investigations into environmentally and socially responsible investing. Researchers found that firms operating with strong socially responsible principles are often better run and make for better investments.
ESG-based firms also tend to have lower market volatility and are less likely to be involved with fraud, corruption, or bribery, making them prudent investments.
It makes sense that ESG funds may outperform their peers in the long run. Why? Because unsustainable companies are . . . unsustainable. They sell products that may kill their customers. Think oil companies and cigarette makers. They operate in ways that jeopardize the lives of the people they claim to serve.
Even when these companies produce short-term profits, that’s a flawed long-term business model. Long-term growth requires long-term thinking. Who does that better than ESG-minded companies?
Simply put: Investing for the future while destroying the future makes no sense.
In an era of the Great Political Divide, let’s try to make environmental considerations a political middle ground upon which we can all meet. It is in our individual and collective best interests to do so.
We all need to save and invest for retirement, and we need to save the planet. We want the highest possible returns on our investments while being good people. Investing responsibly can do it all.
I can’t promise anything about future returns in the stock market, but my money is on ESG investing.