Sustainable Investing: Take these 3 steps to climate-proof your stock-market investments
It has been raining in Nashville. I don’t mean a little rain, I mean 13.47 inches of rain through Feb. 23, a mere 3 inches shy of the record monthly rainfall we received in 2010, which unfortunately flooded my home and many others in the area. Needless to say, I’ve been more than a little worried about the weather.
Extreme weather in the U.S. is inarguably on the upswing; 2018 had the fourth-highest number of billion-dollar weather-related disasters (14) and was the fourth-costliest year ($ 91 billion) for those disasters, according to the National Centers for Environmental Information. The top three years for both number of disasters and costs have all occurred within the last 15 years.
Indeed, for individuals who understand the difference between weather and climate, there is a sense of growing urgency around climate change, particularly in the wake of so many headline-grabbing hurricanes, floods, fires and droughts.
Read: ‘Sleepwalking into catastrophe’: Extreme weather is biggest global risk in 2019
Investors, too, are increasingly wondering how they can put their investment dollars to work to help mitigate climate change. There are a number of ways that climate-concerned investors can mitigate their dollars’ carbon footprints, including:
1. Consider a low-carbon mutual fund or exchange-traded fund. Morningstar introduced a “Low Carbon Designation” in 2017, and estimated in November 2018 that there were up to 100 low-carbon funds that could outperform in their style categories in the U.S. and another 64 in Europe.
To see whether your mutual fund or ETF is fossil-fuel free, low-carbon or high on coal, oil and natural gas, turn to this website, which has a free search tool powered by Morningstar data. Investors can search based on fund family or specific holding and will find low-carbon options available across most investment styles and a growing number of investment houses.
A search of Fidelity funds, for example, shows the Fidelity Series International Index Fund FHLFX, +0.31% has earned zero of five “badges” from the site for avoiding fossil-fuel investments, while the Fidelity Select Environment and Alternative Energy Portfolio FSLEX, -0.56% has earned three for avoiding coal, the Carbon Underground 200 (200 largest owners of oil and gas reserves) and the Macroclimate 30 (30 largest coal-fired utilities). In comparison, six of Ariel Investments funds have earned four of five fossil-fuel-free badges, with only the firm’s large cap value offering, Ariel Focus Investor ARFFX, -0.39% holding more than 2% of its assets in fossil-fuel firms.
2. Look at your real-estate investments. When people think of carbon emissions, they naturally look to fossil fuels, transportation and manufacturing as key culprits for greenhouse gas emissions. However, real estate is a huge player too. According to a November 2017 report from the International Energy Agency, “[b]uildings and construction together account for 36% of global final energy use and 39% of energy-related carbon dioxide (CO2) emissions when upstream power generation is included.” Industry watcher Nareit estimates that 72% of REITs own “green” buildings in their portfolios, but only 37% report on carbon emissions, 33% on energy usage, 29% on water use and 25% on waste management.
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Checking to see what kind of information is available from your real-estate fund or REIT can help you determine whether it is contributing to or mitigating climate change. And if you need more guidance, Nareit has partnered with the Global Real Estate Sustainability Benchmark (GRESB) to award annual Leader in the Light Awards for sustainable real estate practices.
In 2018, the winners were:
You can click the tickers for more about each company.
3. Evaluate your direct investments. A growing number of tools can help investors measure the environmental impact of their investments. Ratings providers like Fitch Ratings and S&P Global Ratings announced improvements to fixed-income environmental, social and governance (ESG) data in the wake of the catastrophic California wildfires last year, since disasters like those are increasingly impacting utility firm credit ratings. S&P is likewise incorporating ESG data into corporate ratings reports, beginning with oil and gas utilities.
Beyond oil and gas and utility companies, sites like CSRHub, Bloomberg and this international website for sustainability reporting can provide information on environmental practices, goals and performance metrics.
And of course, if divestment of fossil fuels or low carbon isn’t your cup of tea, remember that corporate engagement is always an option. While not always successful, there are instances where real change occurs. Australia’s largest superannuation (pension) fund succeeding in getting natural resource producer Glencore PLC to cap annual coal production at current levels and prioritize investment in commodities supporting low-emissions technology after an engagement campaign earlier this year.
Read: 3 ways investors can make their views heard on environmental issues
Whatever you choose to do to mitigate climate change in your investment portfolio, it can feel good just taking some action. After the historic flooding of 2010, I invested in additional waterproofing and a supersized sump pump. While some might say preparing for another 1,000-year event is an expensive and foolhardy mission, a repeat doesn’t seem that far-fetched based on recent weather patterns.
In the meantime, I know I’ve taken at least some steps to avert disaster. Climate-proofing your investment portfolio may feel much the same way.
Read: Climate change has cost the government $ 350 billion — here’s what it will cost you
Meredith Jones is an alternative-investment consultant and author of “Women of The Street: Why Female Money Managers Generate Higher Returns (And How You Can Too)”. Follow her on Twitter @MJ_Meredith_J.