With the release of the latest Intergovernmental Panel on Climate Change (IPCC) Report this week, many are looking for practical steps to reduce global warming. Where you invest your money is a simple, powerful way to have an impact.
Where we are today: "code red for humanity"
The IPCC report paints a grim picture of global warming and the difficult road ahead to mitigate the worst effects of climate change. UN Secretary General António Guterres called the crisis "code red for humanity."
Key points from the report include:
- Global temperatures were 1.09°C higher over the last decade compared to 1850-1900, and the last five years were the hottest on record.
- The recent rate of sea level rise has tripled relative to 1901-1971, highlighting the risk of global warming for the 40% of the world's population that lives within ~60 miles of a coast.
- The retreat of glaciers since the 1990s and decrease in Arctic sea-ice have "very likely" been driven by human activity.
The report makes clear that we need rapid, much more significant action to address climate change if we want to avoid its worst effects.
What investors can do: vote with your money
When you invest in a company or a fund (such as a mutual fund, ETF, or your pension plan), your money has an impact on climate change, whether you intend it to or not.
Your investment provides capital for your invested company’s business model, such as extracting fossil fuels (on the negative impact side) or building clean energy infrastructure (on the positive impact side). You are essentially “voting” for the climate future you want to see.
For most investors, it may not seem like your single investment can make much of a difference on a company’s balance sheet and decision-making. But in some ways it’s like voting and all votes count. When you invest in a company producing sustainable products, for example, you send a signal to larger institutions such as mutual funds and pension plans about what investors like you care about.
Rapid growth in the number of sustainable-focused ETFs and mutual funds over the last several years (for example, a 30% increase in the US from 2019 to 2020) is an example of investment managers responding to changing market demand. As these funds grow, it becomes easier for companies with strong sustainability credentials to access capital and more difficult for companies seen as non-sustainable.
Of course the analysis of which funds and companies should have strong sustainability credentials is important. This is where reliable, transparent data can help. Ethos aggregates climate data (and other impact-related data) on ~13,000 companies and funds across sectors and asset classes, making it easy for investors to find diversified investments that can help mitigate climate change.
While there are many sources of climate-related data available to investors, Ethos provides transparent access to carbon and other climate-related data at the company, fund and portfolio level. For example, Ethos automatically shows how a portfolio compares to benchmarks on carbon metrics:
What investors can do: influence company decisions as a shareholder
When you purchase shares of a company, you become a shareholder with associated shareholder rights, including voting on resolutions that can help shape the company’s future direction.
While most investors own a very small number of shares, small shareholders are increasingly exercising outsized power when it comes to climate-related shareholder action. For example, the small investment fund Engine No. 1 recently led a charge at Exxon to vote three activist investors onto the board, with the goal of pushing Exxon to reduce its carbon footprint.
If you invest in mutual funds or ETFs, you join your voice with the managers of the fund. As large shareholders, funds often have influence on decisions brought before a company’s board of directors, such as how the company addresses climate-related risk.
Funds have widely divergent practices on how they support climate-related action at a company. As evidenced by this 2020 Morningstar report, some fund managers (e.g., Voya) voted against ESG (Environmental, Social and Governance) resolutions at investee companies more than 95% of the time, while other fund managers (e.g., Allianz) voted for ESG resolutions more than 75% of the time.
Along with carbon and climate-related data, Ethos makes shareholder advocacy data available to investors, so you can see how your portfolio is effecting change (or not) through the funds you invest in.
How to get started investing to address climate change
No matter what kind of investor you are – do-it-yourself, financial advisor, or institutional – you can use reliable, transparent data on Ethos to make investment decisions that address climate change. Ethos is free to research company and fund ratings; search for an investment at ethosESG.com.
Authors: Luke Wilcox is the Founder and CEO of Ethos. Eduardo Deschapelles is an Adjunct Professor at Georgetown University, where he teaches a sustainable finance course, and serves on the Ethos Advisory Board.