Twelve years. That’s how long the earth has before temperatures warm to a maximum of 1.5 degrees Celsius (2.7 degrees Fahrenheit) since the Industrial Revolution, sharply increasing the risks of more severe droughts, floods, extreme heat and poverty, according to the latest (October) report by UN Intergovernmental Panel on Climate Change.
“The biggest sustainability challenge the world faces today is global warming,” writes Jon Hale, global head of sustainability research at Morningstar.
Indeed, the Intergovernmental Panel report said a temperature increase of 1.5 degrees Celsius by 2040 could cost the global economy $54 trillion, and a major scientific report recently issued by 13 federal U.S. agencies said climate change could slash U.S. GDP up to one-tenth by 2100, which would be more than double the losses of the Great Recession.
Climate change threatens the sustainability of healthy water supplies, food resources, ecosystems, populations and individual companies.
It tops the list of ESG (environmental, social and governance) issues concerning U.S. asset managers, according to the U.S. SIF (Forum for sustainable and Responsible Investment).
Institutional investors are leading in the fight against climate change, among them the members of the Institutional Investors Group on Climate Change and Jeremy Grantham, co-founder of asset manager GMO and of the Grantham Foundation for the Protection of the Environment. Grantham is not very optimistic about limiting the earth’s warming to 1.5 degrees Celsius.
“We are going to have to fight and scratch and do much better than we are doing today to keep [the increase in the earth's temperature] below 3 degrees [Fahrenheit], and at 3 degrees, all manner of bad things are already happening and some of them may actually get out of control, become self-reinforcing vicious cycles,” Grantham told wealth manager and commentator Barry Ritholtz in a recent podcast.
Individual investors should consider joining the fight against climate change not only to protect the environment but their own assets.
“Investors often neglect to thoroughly understand just how vulnerable a company’s physical assets and infrastructure are to severe disruption and damage as a direct result of drastic weather patterns,” writes Jessica Ground, global head of stewardship at Schroders, in her 2019 sustainability outlook.
“Oil and gas, utilities and basic resources are the sectors most exposed to the physical impact of climate change [and] the potential costs of insurance their physical assets amounts to more than 3% of the asset value,” says Ground.
An increasing number of investors are becoming aware of the benefits of sustainable investing, according to Garvin Jabusch, chief investment officer of Green Alpha Advisors, an asset management firm focused on sustainable investments.
“There is an increasing level of demand from all channels — advisors, individuals, corporations, foundations and endowments.” Even traditional advisors at Morgan Stanley and Wells Fargo who had considered sustainable investors “tree huggers before are starting to come around and ask for products,” says Jabusch.
At the same time, there’s a growing universe of sustainable companies to invest in, including new companies that belong to the “the next economy” and older ones transitioning to sustainable products or services — all “getting paid to solve risks rather than make them,” says Jabusch.
He expects that sustainability investments will be a “powerful driver of returns over the next 5 to 10 years. The business tailwinds will not be there for a company if they aren’t doing something to improve their their risk profile and the economy’s.”
Jeffrey Gitterman, co-founder of Gitterman Wealth Management, also reports growing interest in sustainable investing, which he uses in strategies for his own clients and strategies he’s now providing to other advisors for a fee, including on the Envestnet platform.
One of the biggest drivers for sustainable investing among advisors is the wealth transfer to millennials. “A lot of large companies feel if they don’t have product to attract millennials they will lose them as clients,” says Gitterman.
Morningstar’s Hale notes that the universe of sustainable mutual funds and ETFs continues to grow and by his count totals 341 funds available to U.S. investors that clearly note in their prospectus the use of sustainability or ESG criteria or seek to deliver a “measurable impact along with financial returns,” or both.
Through Dec. 17, 34% of 252 sustainable funds operating since the beginning of the year placed in the top quartile of their Morningstar category; 60% finished in the top half.
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