There are a handful of companies and industries responsible for the vast majority of climate emissions, and these companies are most at risk of being left behind as we transition to a sustainable economy. Right now your investments and workplace-sponsored retirement plans are most likely being invested in these companies by your asset manager. Even many funds currently marketed as sustainable include plenty of fossil fuel projects and companies driving deforestation. But you can help change that by demonstrating demand for truly sustainable investment options.
Climate safe investments. These are investment products (e.g., stocks, exchange traded funds (ETFs), 401(k)s, individual retirement accounts (IRAs) that do not include fossil fuels, deforestation, or high emitting industries that aren’t actively decarbonizing, and are offered as the primary or mainstream option for investors, both to protect the climate and for the strongest returns for investors. Asset managers like Vanguard, Fidelity, and BlackRock create new investment products all the time and can offer truly climate safe options – if we demand them.
According to insurance provider Swiss Re, climate change could reduce global GDP by 11% to 14% by 2050 as compared to a world without climate change. That amounts to a $23 trillion loss, causing damage that would far surpass the scale of the 2008 financial crisis.
ESG stands for environmental, social, and governance, but right now there are no standards that define ESG. So ESG labeled funds can mean anything and can cover a range of issues that, while important, do not mean that ESG funds are inherently climate safe. Many ESG funds are indistinguishable from mainstream funds when looking at climate impact and there is no guarantee that an ESG fund will be fossil fuel free (e.g., BlackRock Transition Readiness ETF).
ESG funds were an initial step in the right direction and now the finance industry needs to build on this thinking by prioritizing climate safe products that will protect their clients’ futures.
As the world tries to slow the climate crisis, the necessary and inevitable transition away from fossil fuels to clean energy will mean a significant decrease in the value of fossil fuels, and bankruptcies in the fossil fuel industry could cause major financial losses to anyone who chooses to stay invested in fossil fuel companies.
The market is now carrying a significant amount of “unburnable carbon.” “There is a disconnect between the current value of the listed equity of global fossil fuel producers and their potential commercialization under a strict carbon budget constraint. This disconnect is the “carbon bubble.”
Asset managers need to create climate safe indexes – meaning no fossil fuels, deforestation, or high emitting industries that aren’t actively decarbonizing – and offer them as the primary option for investors, both to protect the climate and for the strongest returns for investors.
For asset managers to invest our money responsibly, we have to demonstrate an upswell of investors who want climate safe funds to secure their futures. The best way to do that is to speak with them directly. You can set up a call with your asset manager by either contacting them directly or going through your financial advisor. Sign up with us to learn more about how you can be involved.
There are a handful of niche investment products that are truly sustainable, but they are few and far between and almost never prioritized by investment firms. So it is very difficult to ensure that your investments are safe and sustainable. But you can demand better for your future. Together we can push financial institutions to create and prioritize the climate safe products we need and want.
While there are some sustainably-friendly investment options right now, they are few and far between. That’s why we’re not focused on moving our money right now – though we encourage you to make the best decisions for your financial future and our climate. If you decide to move your money, you’ll have a much bigger impact if you set up a meeting with your asset manager beforehand to explain why you need a sustainable option for your investments.
There are lots of ways to help no matter the size of your portfolio. You can call for climate safe funds publicly and set up meetings with your portfolio manager to discuss what products they offer. Sign up with us to learn more about how you can be involved.
There’s a place for everyone in this campaign! You can call publicly for the need for more sustainable investment options, and you can encourage your friends and family to fix their funds. Sign up with us to learn more about how you can be involved.
Asset managers are financial institutions that manage investments on behalf of others – both individuals and institutions. Because of their size they end up influencing trillions of dollars. BlackRock, Vanguard, and Fidelity alone manage nearly $20 trillion in investments.
In all likelihood you will get the same or better returns in the long term by investing sustainably.
For example, since its inception in 2012, the S&P 500’s Fossil Fuel Free Total Return Index has consistently outperformed the S&P 500 overall, and according to a 2021 report commissioned by BlackRock, the funds that committed to divesting from fossil fuels within investment portfolios, all “found either a neutral or negligible impact or a slightly positive impact.”
Fossil fuel companies are valued on their reserves and climate science tells us that most of these reserves have to remain in the ground. Unexploitable reserves become worthless, stranded assets. Without the value of these potentially stranded assets fossil fuel companies are looking at a grim financial future, meaning major losses for those invested in them.
Index investing is an investment strategy that minimizes buying and selling in order to create more long term profit. Rather than a fund manager actively buying and trading stocks, index investors put their money in a portfolio of holdings that tracks a certain market index, such as the S&P 500, and hold it over a longer period of time. Index investing tends to outperform actively managed funds.
Most of the world’s governments are now committed to net zero by 2050 and both the International Energy Agency and the Intergovernmental Panel on Climate Change have made clear that in order to reach net zero emissions we need to immediately stop the expansion of fossil fuels and and quickly and significantly reduce the fossil fuels we are using. This necessary and inevitable transition away from fossil fuels to clean energy will mean a significant decrease in the value of fossil fuels, and bankruptcies in the fossil fuel industry could cause major financial losses to anyone who chooses to stay invested in fossil fuel companies.
While we may see temporary spikes in the value of fossil fuel companies during the global energy transition, even BlackRock has admitted that this price volatility is part of the transition and the International Energy Agency has been clear that fossil fuel expansion must stop. So temporary increases in fossil fuel profits should not be seen as an indication of good long term value.
Selection criteria for index funds are created by fund managers, and their methodologies shift regularly. It is now clear that climate risk is financial risk, and climate change will likely be the cause of the next big financial crisis. So we need to tackle climate change in order to avoid the systemic impacts to the financial system and economy overall. Despite the name, index funds are “passive in name only.” It is past time for fund managers to think seriously about how climate change is a crucial criterion for the longevity of our investments.
There are currently 3 defined types of ESG funds:
Exclusionary screens – These exclude bad acting companies from funds based on the screen. These are the most impactful ESG tools because they result in money being taken away from destructive companies, provided the screen criteria is strong enough.
Screens focused on engagement and voting mandates – These can be a good tool, as they dictate how these funds vote their shares in associated companies. Unfortunately, the funds often don’t vote in line with their mandates despite how they’re marketed and they provide an excuse for asset managers like Vanguard and BlackRock to vote the wrong way with the rest of its funds, thereby negating the impact of the funds in the first place.
Impact investing screens – These bring companies that are doing well into funds they might not otherwise be in. While these screens can also be a good tool, they don’t stop the companies that are currently fueling the climate crisis, which is what scientific consensus tells us we need to do.
The ESG market may surpass $50 trillion by 2025, and while it is encouraging to see such growth in ESG products, the truth is that many of these investment products are still fueling the climate crisis. Due to a lack of standardization of ESG and savvy marketing from financial institutions, products marketed as ESG don’t always reflect the values they espouse or can confuse well-intentioned investors. For example, the ESG fund with the largest inflows of capital in 2020 (iShares ESG Aware MSCI USA ETF) contained 26 fossil fuel stocks with $1.46 billion in investments in these companies, as of December 31, 2021.
Resources like fossilfreefunds.org analyze mutual funds and ETFs for their exposure to fossil fuels and deforestation.