The most impactful thing you can do for climate change

Jon Hale, Morningstar's director of ESG research for the Americas, shares a simple and practical truth.
By Morningstar |  16-10-20 | 

As the world struggles with multiple crises--the pandemic, social unrest, geopolitical tensions, justice, inequality, and misinformation--the past couple of weeks serve to remind us of the relentless climate crisis.

Vast expanses of the West Coast in the United States are on fire; smoky haze darkens skies across much of the country. All-time heat records have been recorded. Slow-moving hurricanes are inundating the Gulf Coast. A vast chunk of ice 50 miles long and 12 miles wide has broken off of Greenland. All this in just the first half of September.

India this year has encountered Cyclone Amphan, Cyclone Nisarga, Assam floods, Hyderabad floods, Kerala floods and the Uttarakhand forest fire.

What can you do about it? You can find lots of articles suggesting ways to lower your personal carbon footprint and be a more sustainable consumer. Seldom do these pieces mention investing. But if you are fortunate enough to be an investor, perhaps the most impactful thing you can do right now is to focus your investments around sustainability.

I say "fortunate enough to be an investor" because barely more than half of Americans own stocks. India faces a similar situation. A fairly small portion of its population owns individual stocks or equity mutual funds.

About 350 sustainable funds, including ETFs, are available to U.S. investors, and they are more popular than ever, attracting record amounts of new money from investors last year and during the first half of this year.

When sustainable-fund managers decide on what stocks to include in their portfolios, one of their main considerations is how well the company performs on a range of environmental, social, and corporate governance issues, referred to as ESG issues. Companies that have large carbon footprints and no plan to reduce them, for example, are generally avoided. Those that are environmental leaders in their industries, on the other hand, are favoured. Most sustainable funds have low exposure to fossil-fuel-based energy stocks, and many are completely fossil-fuel-free.

Sustainable funds also prefer companies that treat their own employees well; oversee their supply chains to ensure the safe and fair treatment of workers; respect their customers by producing safe and useful products, protecting their privacy, and avoiding misleading marketing claims; and are good citizens in the communities in which they operate--that's the S in ESG. And they prefer companies that manage themselves in an ethical and transparent manner, respect diversity, and embed sustainability throughout their business--that's the G in ESG.

By becoming a sustainable investor, you are directing your capital toward companies that are better ESG actors and avoiding those that aren't. But no company is perfect. That's why sustainable investors scrutinize corporate policies and behaviours and use their rights as shareholders to engage with companies about these issues. They also can sponsor shareholder resolutions to be voted on at companies' annual general meetings. In fact, ESG resolutions have attracted record levels of shareholder support in recent years.

Shareholder engagement can change company policies and actions. Over the past several years, many companies have agreed to produce reports outlining what they see as the risks they face from global warming and their plans to combat climate change.

As a sustainable investor, you will not be alone. Sustainable investing is a global movement that includes many of the world's largest institutional investors.

And in case you are wondering, sustainable funds can and should be expected to perform as well as conventional funds, which is important for your bottom line.

Going forward, your sustainable fund is an investment in the future being a place where companies treat not only the planet, but also their workers, their customers, and their communities with as much respect as they do their shareholders. In a post-pandemic world, those are the types of companies that are likely to prosper.

Sustainable investing is thus a win-win for you as an investor and as someone who is concerned about the climate crisis. Do it for your children and grandchildren but also for your fellow citizens who don't have the means to invest. You can make the economy work better for them while also doing your part to mitigate the climate crisis.

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