“In A new survey of 439 institutional investors, ‘50% say climate risks are already a factor in their investment decisions.’”
While Coronavirus has captured headlines for the past year, climate change is still a serious topic discussed and debated over Zoom chats, in boardrooms, and by news programs all over the world. Climate change can be a divisive topic, one with political overtones; but regardless of what one believes, there is no denying it is front and center in the minds of millions of people and some of Wall Street’s most prominent investors.
Larry Fink, the CEO of Blackrock (the world’s largest asset manager with more than $7 trillion in assets under management), wrote in his 2019 annual letter that because of rising investor concern, “Climate change has become a defining factor in companies’ long-term prospects.”1 Meanwhile, a new survey of institutional investors conducted by the University of Texas, Austin found that of 439 respondents, “50% say climate risks are already a factor in their investment decisions.”2
Manchester Capital Management has increasingly been asked to help clients implement sustainable investment strategies within their portfolios. More specifically, a growing number of clients are requesting that funds be directed to investment solutions that lead to a lower carbon path for the planet.
Three primary ways to invest for sustainability are:
- Via negative screens (avoiding certain companies)
- Via positive screens (investing in companies providing solution opportunities), and
- Via tilts (tilting towards companies with higher sustainability scores) within public equity funds.
An example of a negative screen is the decision to divest from climate-harming companies like top corporate greenhouse gas emitters. The negative screen strategy has been around for decades3 and has historically been used to avoid companies that produce items such as tobacco, liquor, weapons, etc. These strategies are not mutually exclusive. Many investors will choose to complement negative screens with positive screens or tilts in order to invest in sectors and companies that are focusing on solutions to resource challenges, climate change issues, or companies that have a lower carbon footprint. This positive strategy is a newer approach that money managers are using as new data provides insight into how companies are addressing climate change risks within their business models. This analysis depends on quality data, which varies greatly from company to company. Fortunately, the Sustainable Accounting Standards Board and the Securities and Exchange Commission are beginning to work on regulation and data standardization.4
Looking specifically at fixed-income (i.e. bond) markets, investors can target bonds used to fund projects that have positive environmental effects such as waste management, green building construction, and regenerative water and land use. This approach seeks opportunities for positive change. We have begun seeing many successful bond managers focus on environmental, social, and governance factors within their funds. As part of their assessment, they consider long-term measures of a company’s overall risk exposure to climate change faced by its operations, activities, products, and services.
Private equity and debt markets offer opportunities for diversification within an investor’s portfolio as well. By accessing private markets, investors can invest in solutions and innovation across a company’s life cycle—from initial seed funding to growth stage and beyond—as well as in specific geographic regions. While private investments carry additional risks, there can be additional return opportunities. From a positive screening perspective, private markets often allow investors who have a sustainability mandate to focus on specific sectors such as renewable energy, sustainable timber and land management, organic food companies, environmental technology, regenerative and organic agriculture, and waste management.
Sustainable investing and climate-change-solution investing are highly investor specific. For some investors, excluding particular companies from a portfolio is sufficient. For other investors, including companies focused on solutions across asset classes and sectors meets their objectives. Often, it is a mixture of both strategies. As disclosures and data standardization improve, researchers and wealth managers will have more tools to understand what best supports their client’s financial and sustainability goals.
At Manchester Capital Management, our process for investing in this area always begins with understanding clients’ objectives and explaining the risks and opportunities. From there, we can incorporate investments that meet both their financial and sustainability objectives.
2 https://academic.oup.com/rfs/article- abstract/33/3/1067/5735302
3 https://www.thebalance.com/a-short-history-of- socially-responsible-investing-3025578
This material is solely for informational purposes and shall not constitute a recommendation or offer to sell or a solicitation to buy securities. The opinions expressed herein represent the current, good faith views of the author at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented herein has been developed internally and/or obtained from sources believed to be reliable; however, neither the author nor Manchester Capital Management guarantee the accuracy, adequacy or completeness of such information.
Predictions, opinions, and other information contained in this article are subject to change continually and without notice of any kind and may no longer be true after any date indicated. Any forward-looking predictions or statements speak only as of the date they are made, and the author and Manchester Capital assume no duty to and do not undertake to update forward-looking predictions or statements. Forward-looking predictions or statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward- looking predictions or statements. As with any investment, there is the risk of loss.