Visualized: The Top Five Questions on Sustainable Investing

Today, the surge in green investing has been compared to the dot-com boom of the 2000s.

Back then, the internet was anticipated to radically reshape economies. Many companies fell to the wayside, and now 20 years later, tech stocks currently make up roughly 40% of the S&P 500 by market capitalization. Like the dot-com era, green firms are projected to structurally change the way businesses function.

Given the rising interest in green assets, this infographic from MSCI answers the most important questions advisers need answered on sustainable investing.

1. Which type of sustainable investing is right for my client?

First, let’s start with the basics—understanding the terms used to describe sustainable investing:

• Sustainable investing: An umbrella term that typically refers to all types of sustainable, impact, and environmental, social, and governance (ESG) integration approaches
• Impact investing: A type of investing approach that generates measurable social or environmental benefits
• Socially responsible investing (SRI): An investing approach that aligns with an investor’s ethical, religious, or personal values, while actively reducing negative environmental or social consequences
• ESG integration: Considers material environmental, social, and governance factors to enhance long-term risk adjusted returns through its investment approach
• Climate investing: Looks to reduce exposure to climate risk, identify low-carbon investment opportunities, or align portfolios with “net-zero” climate targets

Knowing the key terms of the sustainable landscape allows advisers to more accurately address client objectives, goals, and beliefs.

2. How can I start a conversation with clients about ESG?

Begin by asking what motivates clients. Typically, motivations fall into one of three core objectives:

• Can ESG factors improve my risk-adjusted returns?
• Can I have a positive impact on society through my investments?
• Are my investments consistent with my ethical, political, or religious beliefs?

Client priorities could include financial returns, impact, values, or a combination. Once these have been established, investors can choose from a universe of funds and investment vehicles that more strongly align with their goals.

3. What is ESG data and why is it important?

At the heart of ESG-focused strategies is data. In some cases, ESG analysis of companies is based on over 2,000 data points from a wide cross-section of sources. For MSCI ESG Research, they fall within these three categories:

• Mandatory company disclosures: 20%
• Voluntary company ESG disclosure: 35%
• Alternative data: 45%

Alternative data commonly makes up 45% of the total ESG dataset—constituting far beyond what a company publicly discloses. Still, ESG data can seem vague or elusive. But this doesn’t have to be the case. Rather, ESG data can be broken down and obtained from the following five sources:

• Company filings: Shareholder results, voluntary ESG disclosures
• Non-governmental organizations (NGOs): Global Reporting Initiative (GRI), Task Force on Climate-related Financial Disclosures (TCFD), UN Sustainable Development Goals
• Government: U.S. Environmental Protection Agency (EPA), European Central Bank (ECB)
• Media sources: Major headlines
• Alternative data: Geo mapping, water scarcity data, flood risk analysis

Importantly, after ESG analysts identify the risks and opportunities most relevant to a company, multiple data points coalesce to inform a company’s ESG profile.

4. Why are environmental risks becoming more important?

Rising global temperatures and ecological disruptions pose imminent risks to humanity.

Along with this, other future risks could include: eroding shareholder value, blocked project proposals, regulation compliance costs, and higher borrowing costs. In response, national, corporate, and investor commitments to achieving net-zero emissions in alignment with the Paris Agreement have proliferated.

How does this affect the risk-return profile of investments?

According to research, climate change could erase $7.75 million in value over five years from a hypothetical $100 million portfolio that shared similar returns and volatility over a five-year period to the median global developed market fund as of December, 2019.

5. Will the consideration of ESG in a portfolio lead to underperformance?

Let’s turn our attention to performance, one of the most pressing questions surrounding ESG.

Companies with strong ESG profiles have an MSCI ESG rating of AAA or AA, meaning they lead their industry in managing the most significant ESG risks and opportunities. Studies show that companies with better ESG ratings have illustrated stronger performance, higher dividend payouts, and stronger earnings stability historically, on average.

They have also illustrated the following attributes:

• Lower cost of capital
• Less exposure to systemic risk
• Lower volatility
• Higher profitability

In addition, companies with strong MSCI ESG ratings may possess greater resilience. Stocks with high MSCI ESG ratings have had lower financial drawdowns during crises compared to their market-capitalization-weighted parent index.

Sustainable Investing: Shaping the Dialogue

Companies with higher environmental risks—including heavy carbon polluters, waste emitters, and poor water management—are facing greater scrutiny. At the same time, client demand is shifting to ESG, and the conversation is changing.

These questions can serve as a launching point for advisers to help clients seize new opportunities and mitigate investment risks.

Corn Beyond the Cob

Corn or maize is the second most-produced crop in the world, and it’s more than just a staple in our diets.

From the sweetener in our coffees to the ethanol that powers our vehicles, corn has hundreds of uses. Consequently, high corn prices have a domino effect that can affect many supply chains and possibly even increase the cost of our weekly groceries, especially if they include tortilla chips.

This infographic uses data from the National Corn Growers Association to break down U.S. corn use by segment in 2020, and the products that a bushel of corn can produce.

The Uses of Corn in the U.S.

While corn on the cob is quite popular, not all corn is sweet. There are five major types of corn grown around the world, and each one differs in taste and uses. Of these, yellow dent corn or field corn accounts for the majority of commercial U.S. production.

Here’s a breakdown of U.S. corn usage in 2020:

Corn accounts for more than 96% of U.S. feed grain use and production. As a result, animal feed makes up nearly 40% of the country’s corn usage. This is because corn is a rich source of carbohydrates, and in combination with protein from soybeans, it can make for an effective diet for livestock.

In the United States, federal mandates require vehicles to use a blend of gasoline and biofuels like ethanol—94% of which is produced from the starch in corn grain. Therefore, a large portion of U.S. corn goes into ethanol production.

Interestingly, the ethanol distillation process produces a co-product known as dried distillers grain, which serves as low-cost, protein-rich animal feed for livestock. On average, the U.S. ethanol industry produces around 90,000 tons of distillers grains each week.

Animal feed and ethanol production collectively make up around 73% of U.S. corn usage. Other uses of corn include the production of sweeteners, starch, cereal, and alcoholic beverages like whiskey.

Breaking Down U.S. Corn Exports

The U.S. is the world’s largest producer and exporter of corn and accounted for roughly 36% of exports in 2020.

Up until 2019, the majority of U.S. corn exports went to Mexico, Japan, and Colombia. China wasn’t among the top 10 destinations, but this changed in 2020.

Between January 2020 and 2021, U.S. corn exports to China increased exponentially, reaching an all-time high in December. China’s massive import appetite is because of a shortage of domestic supplies amid rising demand for feed from its recovering hog-herd, which was hit by the African swine fever in 2018.

Consequently, China became the third-largest importer of U.S. corn in 2020 after Mexico and Brazil. What’s more, the U.S. Department of Agriculture projects that China’s corn imports in 2021 will be much higher than 2020 levels, and the majority of those will be sourced from the United States.

The Corn Price Boom

In addition to a drought-induced yield cut in Brazil, rising demand from China has driven corn prices to their highest level in the last eight years.

Since the beginning of 2020, corn prices have increased 68% and stand at around $6.50 per bushel as of May 19th.

The rise in corn prices is likely to affect several industries and could translate into higher prices for our groceries, including cereals, taco shells, and corn syrups. Additionally, it could also push up the price of gas due to its key role in ethanol production.

Corn, in a Bushel

In a world where commodities like corn are often taken for granted, it’s important to think about how valuable it can be.

A single bushel of corn can provide 33 lbs of sweetener, 31.5 lbs of starch, or 22.4 lbs of polymers. It’s also enough to produce around 3 gallons of ethanol fuel and 16 lbs of distillers dried grains for animal feed.

The uses of corn go far beyond the cob, and just like other raw materials, it supports many industries that make modern life possible.