Ethos ESG issue brief: Climate Action

Brief background on the issue:

It is widely accepted that anthropogenic (man-made) climate change began in the 19th century with the Industrial Revolution. At the time, labor shifted from human-based to machine-based, and with it, the era of burning fossil fuels began. The burning of these fuels releases various pollutants, including greenhouse gasses. Over the past century, as our population has exploded, we have released increasingly large amounts of heat-retaining greenhouse gasses, and as a result, Earth's temperature has risen.

Ethos ESG provides a comprehensive framework for understanding how companies and funds impact the broad cause of Climate Action, which includes the sub-causes of Disaster Readiness and Effective Aid, Reduced Greenhouse Gas Emissions, and Renewable Energy Growth. This issue aligns with the United Nations Sustainable Development Goals 7, 11, and 13.

Discussing climate action:

There are both financial and emotional considerations related to Climate Action. We see it as important to address both aspects when talking with an investor, for very few decisions are purely one or the other.

Emotional case:

A recent analysis of over 1000 Impact Assessments administered by Ethos ESG showed that Climate Action was the top cause of concern for respondents. Likewise, a recent survey conducted by Nuveen reveals that 66% of investors are more interested in sustainable investing due to recent climate disasters. These findings are unsurprising considering that natural disasters, exacerbated by climate change, affected1 in 10 American homes in 2021.

Climate Change is an increasingly emotionally charged issue, especially among younger individuals concerned about a permanently diminished quality of life. A United Nations 2021 study shows that urgent climate action has broad support throughout the world, across nationalities, gender, and age. Furthermore, it is a particularly important issue for the under-18 demographic who increasingly voice their concerns to their parents and grandparents. This offers financial advisors the opportunity to deepen relationships by inquiring and listening to client concerns.

Financial case:

The New York Times estimates that the effect of climate change will shave between 11 and 14 percent off of global economic output by 2050, which amounts to approximately $23 trillion. Rising temperatures will cause crops to fail, diseases to spread, and ocean levels to rise. This last is particularly dire as approximately 40% of the worlds population currently lives within 100km of the coast.

As result it is critical for those rendering financial advice to be familiar with both physical and transition risk associated with climate change. Rising seas and extreme weather present physical risk to assets and infrastructure associated with corporations and debt issuers. Those entities whose business models will be disrupted by the inevitable switch to a carbon-free economy are exposed to transition risk.

It is also important to consider varying investor preferences for involvement as opposed to divestment. Many investors want to avoid fossil fuels in their portfolio altogether (reducing the amount of capital available for fossil fuel companies), while others aim to become shareholders of the worst polluters to effect change from the inside. Engine No. 1'smove in May 2021 resulted in activist investors being elected to Exxon's board. That an organization with $12.5 million was able to achieve such a feat against a company with a $265 billion market cap is nothing short of impressive.

How Ethos ESG helps:

  • Evaluate investments by their Climate Action score, an aggregation of over 300,000 datapoints related to metrics like carbon intensity and deforestation.
  • Incorporate the Global Warming Potential analysis into client reports. Show investors how the policies and actions of portfolio holdings align with varying degrees of global temperature increase.
  • Find investments poised to benefit from the energy transition by researching the Renewable Energy Growth cause or find those investments most insulated from physical risk by researching Disaster Readiness and Effective Aid.
  • Utilize Impact Stories to show investors how investments in funds or companies make a direct impact on addressing the climate crisis

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