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| Jérémie Fischer |
You’ve
saved your money and amassed a surplus. You’ve read a few books on
investing and gleaned the basics — the importance of diversification, of
investing for the long term, and of buying and holding rather than
trying to beat the market. But you also know that human-caused climate
change will (if it hasn’t already) start eroding economic output.
Extreme weather, droughts and crop failures could mean mass migration
and political instability. As Henry Paulson, the former Treasury
secretary, recently put it, the “greenhouse-gas crisis” won’t burst like
the housing bubble of 2008 because “climate change is more subtle and
cruel.”
What’s a climate-aware investor to do?
Individuals
aren’t the only ones contemplating this question. Sixty-nine percent of
Fortune 500 companies reported more demand for “low carbon” products
this year, according to the nonprofit Carbon Disclosure Project. And
some of the country’s largest pension funds, including the California
State Teachers’ Retirement System and New York State’s retirement fund,
have begun tilting away from fossil fuels.
This
approach has been called “socially responsible investing.” But these
days, money managers aren’t doing it only because they think it’s
morally correct; they also worry that, over the long term, fossil fuels
are a losing bet.
Some
experts told me that the historic accord on limiting greenhouse-gas
emissions reached in Paris last year was a turning point in how
investors think about climate change. The United States and China, the
world’s two largest emitters, ratified it in September. It’s now unclear
what will happen to the agreement; President-elect Donald J. Trump has
said he wants to pull the United States out of it.
But
it’s worth noting that business interests — and Mr. Trump sells himself
as a consummate businessman — were integral to making the Paris deal
happen in the first place. They realize that “environmental stability is
absolutely at the base of financial stability,” Christiana Figueres,
the diplomat who organized the conference, told me. Extreme weather,
like the 2011 monsoon floods that ravaged parts of South Asia where
electronic components that go into hard disks and cars are built, have
driven that lesson home.
Something
more hopeful is happening as well. Renewable energy prices have
dropped, and are nearly competitive with fossil fuels. China aims to
build enough charging stations to power five million electric cars by
2020. What will happen, Ms. Figueres asked, if China phases out the
combustion engine altogether? “You can begin to see the signals,” she
said. “The tide is beginning to change.”
Advances
in battery technology are part of this change. The wind doesn’t blow
all the time, nor does the sun shine all day. Energy produced
intermittently needs to be stored. A lack of easy storage options has
been an obstacle to renewables. But battery costs have declined by more
than 70 percent since 2008. Mark Fulton, a founding partner of Energy
Transition Advisors, says that what’s about to happen with the battery
and renewables is an old-fashioned technological disruption story, akin
to the advent of the internet. From an investor’s standpoint, this kind
of disruption could mean losing your shirt or, if you plan properly,
handsome returns.
One
of the myths around socially responsible investing is that aligning
investments with ethics means lower returns. But that’s not the case.
George Serafeim, an associate professor at Harvard Business School, and
his colleagues analyzed data going back over 20 years. Companies that
were committed to sustainability outperformed companies that weren’t,
they found. A dollar invested in sustainability-minded companies in 1993
would have grown to $22.58 by 2014, but just $15.35 if invested in
companies with no such commitments. Why might this emphasis increase
profits? These firms may also be more likely to invest in human capital
and be better run overall.
So
what can an individual investor do? You might follow the Rockefeller
Family Fund and divest from the fossil fuel companies entirely. The
research firm MSCI offers fossil-free stock indexes — like the S.&P. 500 but without fossil fuel companies — as does a newer organization called Fossil Free Indexes. Various climate-aware mutual funds exist.
But
even if you divest, says Jean Rogers, chief executive of the nonprofit
Sustainability Accounting Standards Board, there’s no escaping the
ripple effects of climate change. “Because it’s so ubiquitous, it’s very
hard to diversify away from climate risk,” she told me.
Another
approach is a kind of divestment lite. Asha Mehta, director of
responsible investing at Acadian Asset Management, told me that her
clients increasingly request a “decarbonization” of their portfolios.
Worried that complete divestment might hobble a portfolio’s performance,
however, Ms. Mehta might reduce a portfolio’s carbon footprint to, say,
80 percent of a benchmark like the S.&P. 500 by removing the
biggest emitters.
A
firm called Osmosis Investment Management takes a different tack. It
researches the overall efficiency of companies — how many resources a
firm uses to create how much product. And instead of excluding certain
industries entirely, Osmosis chooses only the most efficient within a
given sector. It caters to institutional investors, but plans to release
a fund for individuals soon.
You
can, of course, try to do what Osmosis does on your own; the Carbon
Disclosure Project has a trove of information on how companies fare on
the sustainability front. But here’s the problem. More than 5,600
corporations disclose sustainability information, but no standards
govern these disclosures. The Sustainability Accounting Standards Board
and others are working to devise such standards. Pressure is also
mounting on the Securities and Exchange Commission to enforce the
disclosure of sustainability information. The commission recently asked
for feedback on reforming the disclosure process, and a good chunk of
letters mentioned sustainability and climate change.
Under
a Trump administration, it seems less likely that the S.E.C. will
respond to these concerns. But that may have a paradoxical effect: If
investors can’t count on regulators to enforce transparency on
sustainability, says Sonia Kowal, the president of Zevin Asset
Management, they may take matters into their own hands.
So
if you’re concerned about how climate issues might damage your nest
egg, you might begin by raising your voice. Ask your fund managers about
their plans. And look at how the funds you own vote on
sustainability-related issues, such as whether to calculate and disclose
a company’s greenhouse gas emissions, or whether to develop a
risk-assessment plan for climate change.
Some
of the largest asset managers consistently vote against such
resolutions. In so doing, critics argue that they work against their
customers’ interests. An organization called Fund Votes tracks how mutual funds vote, and the nonprofit Ceres
keeps a list of what happens with climate-related resolutions. The
broader point is that climate-proofing your portfolio may require
homework and some rabble-rousing.
Does
that make you an activist? “The word I prefer is ‘investor advocate,’ ”
Jackie Cook, who operates Fund Votes, told me. “You’re advocating for
your own investments.”
For
many, the perceived gap between socially responsible investing and good
business has narrowed almost to the point of convergence. And maybe
that shouldn’t be a surprise. A Citi report from last year put the costs
of climate change, without mitigation, at $44 trillion by 2060. Many
analysts have pointed out that a yearslong drought preceded the conflict
in Syria — an example of how shifting climate can encourage political
instability that ripples around the world. And this year, a report from
the World Economic Forum said that the No. 1 global risk in the next 10
years was water crises. Nos. 2 and 3 were climate adaptation failure and
extreme weather.
The
economy can be only as healthy as the planet that houses it. Pushing
for transparency on sustainability issues, and asking money managers to
consider climate change, is really the purest form of self-interest.
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