Visualized: The Top Five Questions on Sustainable Investing
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Visualized: The Top 5 Questions on Sustainable Investing for Advisers

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Sustainable Investing

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.

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Environment

Animation: Visualizing 140 Years of Global Surface Temperatures

Here’s a look at 140 years of global surface temperatures, highlighting the ten coldest and warmest years since 1880.

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Average surface temperature since 1800

Average surface temperatures since 1800

Animated: 140 Years of Global Surface Temperatures

For hundreds of years, Earth’s average surface temperature has been steadily increasing. And over the last decade, this global heating appears to have intensified.

Since 1880, the global average temperature has risen by an average of 0.08°C (0.14°F) every 10 years, according to the National Oceanic and Atmospheric Administration (NOAA).

But since 1981, warming has been occurring at more than twice that rate, by about 0.18°C (0.32°F) per decade.

This graphic by Pablo Alvarez shows 140 years of global surface temperatures, highlighting the 10 coldest and warmest years from 1880-2021 using data from NOAA.

Global Surface Temperatures Over Time

Over the last century and a half, there have been fluctuations in global surface temperatures, with some of the coolest years on record occurring in the late 19th century and early 20th century.

Average surface temperature since 1800

However, the last two decades have seen unprecedented warming, with the 10 warmest years on record all occurring within the last 20 years. Here’s a look at the 10 hottest years since 1800, and how they compared to the 20th century average:

The 10 Warmest Years

RankYearDeviation from 20th Century Avg. (°C)
#12016+0.99
#22020+0.97
#32019+0.94
#42015+0.93
#52017+0.9
#62018+0.82
#72014+0.74
#82010+0.72
#92013+0.67
#102005+0.66

As of this article’s publication, the warmest year on record was 2016, when temperatures were +0.99°C (1.78°F) above the 20th century average. After 2016, the second warmest year was 2020, when surface temperatures reached +0.97°C (1.75°F) higher than the previous century’s average.

What Factors Impact Earth’s Climate?

There are a number of natural factors that influence global surface temperatures, including phenomena such as:

  • Volcanic activity
  • Changes in the Earth’s orbit
  • Shifts in ocean currents

However, scientists believe that our current rate of warming has been undoubtedly caused by human influence, especially because of our carbon and other greenhouse gas (GHG) emissions.

According to the most recent report by the Intergovernmental Panel on Climate Change (IPCC), “observed increases in well-mixed greenhouse gas (GHG) concentrations since around 1750 are unequivocally caused by human activities.”

In other words, while Earth’s surface temperature naturally fluctuates over the years, our actions have undoubtedly contributed to recent changes in Earth’s climate.

What Are The Consequences?

We’re already seeing the impact of this warming, as the world struggles with extreme climate events like droughts, heatwaves, floods, and an influx of wildfires in places like Europe, the United States, and Australia.

These extreme weather patterns could become the new normal if left unchecked, which is why companies and policymakers around the world are embarking on different solutions—from targeting net zero goals to implementing technological innovations that could reduce emissions.

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Energy

The U.S. Utilities Decarbonization Index

This graphic quantifies and compares the state of decarbonization among the 30 largest investor-owned utilities in the United States.

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decarbonization index
The NPUC Annual Utility Decarbonization Report

Introducing the NPUC Annual Utility Decarbonization Report 2022
Created in partnership by Visual Capitalist and Motive Power.

Download the Free Report
decarbonization index

The U.S. Utilities Decarbonization Index

With the Biden administration targeting a zero-emissions power sector for the U.S. by 2035, how are the nation’s largest electric power providers faring in terms of decarbonization? 

Together, Visual Capitalist and our sponsor National Public Utilities Council have developed the Annual Utility Decarbonization Index. The index quantifies and compares the status of decarbonization among the 30 largest investor-owned utilities in the United States.

Decarbonization is quantified by scoring companies on six emissions-related metrics based on publicly available data from 2020 (the latest available).

Why the 30 Largest IOUs?

Why does the Decarbonization Index specifically look at the 30 largest IOUs by electricity generation? 

Well, these 30 utilities collectively generated around 2.3 billion megawatt hours (MWh) of electricity (including purchased power), making up over half of U.S. net electricity generation in 2020. Moreover, they also served over 90 million customers, accounting for roughly 56% of all electric customers in the country.

30 largest utilities in the U.S.

Therefore, it’s safe to say that the 30 largest IOUs have an important role in decarbonizing both the power sector and the U.S. economy. Since the residential, commercial, industrial, and agricultural sectors all use electricity, the decarbonization of utilities—the providers of electric power—can enable emissions reduction throughout the economy.

Decarbonization Index Methodology

For each of the six metrics used in the Decarbonization Index, utilities are scored on a scale of 1 (lowest) to 5 (highest), indicating whether they are trailing or leading, respectively. Scores for each metric are based on the range of figures for each metric divided into five equal buckets that the utilities fall into. 

For simplicity, let’s suppose that the lowest reported total emissions figure is zero metric tons of carbon dioxide (CO2) and the highest is 100 metric tons. In that case, companies that emit fewer than 20 metric tons of CO2 will receive the highest score of 5. Those that emit between 20 and 40 metric tons of CO2 will receive a 4, and so on.

A utility’s overall decarbonization score is an average of their scores across the six metrics, summarized below:

  1. Fuel Mix:
    The share of low-carbon sources (renewables, nuclear, and fuel cells) in the utility’s owned net electricity generation. We’ve assumed that the share of low-carbon sources can range from 0% to 100%, and scores are assigned based on that range.
  2. CO2 Emissions Intensity:
    The amount of CO2 emitted per megawatt-hour of owned and purchased electricity generation.
  3. Total CO2 Emissions:
    The sum of absolute CO2 emissions from owned and purchased electricity generation. While this overlooks the differing sizes of utilities, the rationale is that smaller unconsolidated utilities may find it easier to decarbonize than larger peers.
  4. CO2 Emissions per Capita:
    The amount of CO2 emitted from owned and purchased electricity generation per retail customer served in 2020.
  5. Decarbonization Goals:
    An evaluation of the utility’s interim greenhouse gas (GHG) emissions reduction goals and net-zero targets. The baseline for this is 50% GHG emissions reduction by 2030 and net-zero emissions by 2050 (utilities with baseline targets get a score of 2.5/5).
  6. Low-Carbon Investment:
    The share of planned capital expenditure (CAPEX) for electricity generation that is allocated to low-carbon sources. We’ve assumed that the share of CAPEX for low-carbon sources can range from 0% to 100%, and scores are assigned based on that range.

The data for these metrics comes from various sources including company sustainability reports, quantitative reporting templates from the Edison Electric Institute, and the Climate Disclosure Project’s Climate Change Questionnaire filings.

Explore all six metrics of the U.S. Utility Decarbonization Index

NPUC Annual Utility Decarbonization Report

Download The NPUC Annual Utility Decarbonization Report for free.

The Annual Utility Decarbonization Index 2022

Before looking at numbers, it’s important to note that the Decarbonization Index is relative and compares the 30 largest IOUs to each other. Therefore, a score of 5 does not indicate full decarbonization or net-zero emissions. Instead, it suggests that the utility is doing particularly well relative to its peers. 

With that in mind, here’s a look at the Annual Utility Decarbonization Index 2022: 

Rank
CompanyDecarbonization Score
#1Public Service Enterprise Group4.7
#2NextEra Energy Resources4.7
#3Pacific Gas and Electric4.5
#4Avangrid4.2
#5Exelon4.1
#6Portland General Electric3.7
#7Dominion Energy3.6
#8Florida Power and Light3.6
#9PNM Resources3.5
#10Alliant Energy3.4
#11Consolidated Edison3.4
#12Fortis Inc.3.4
#13American Electric Power3.3
#14Consumers Energy3.3
#15Evergy3.0
#16NRG Energy3.0
#17AES Corporation2.9
#18Xcel Energy2.9
#19WEC Energy2.9
#20DTE Energy2.8
#21Duke Energy2.8
#22Entergy2.8
#23TransAlta2.8
#24Emera2.7
#25Ameren2.6
#26Berkshire Hathaway Energy2.5
#27Oklahoma Gas & Electric Company2.4
#28Southern Company2.3
#29PPL Corporation2.2
#30Vistra Corp.2.0

A small number of companies did not report data on certain metrics and have been excluded from scoring for those metrics (denoted as N/A). In such cases, the decarbonization score is an average of five metrics instead of six.

Public Service Enterprise Group (PSEG), headquartered in New Jersey, tops this year’s rankings thanks to its low-emissions profile and ambitious climate goals. The company is aiming to achieve net-zero emissions from operations by 2030—five years ahead of the Biden Administration’s target and faster than any other utility on the list.

Tied with PSEG is NextEra Energy Resources, the clean energy-focused subsidiary of NextEra Energy. The company is the world’s largest producer of solar and wind power and generated 97% of its net electricity from low-carbon sources in 2020.

In third place is California’s largest utility, the Pacific Gas and Electric Company (PG&E). PG&E had the lowest emissions per capita of the 30 largest IOUs at 0.5 metric tons of CO2 per retail customer in 2020. That figure is significantly lower than the average of 11.5 metric tons across the 30 IOUs. 

Rounding out the top five are Avangrid, a renewables-focused U.S. subsidiary of the Spanish Iberdrola Group, and Exelon, the nation’s largest utility by number of retail customers. Avangrid had one of the cleanest fuel mixes with 87% of its owned net electricity coming from low-carbon sources. Exelon is the nation’s largest provider of emissions-free electricity, generating around 157 million MWh or 86% of its owned net electricity from nuclear power.

Download the Full Utility Decarbonization Report

While the Decarbonization Index provides a look at the current status of utility decarbonization, there’s much more to uncover in the full report, including:

  • The obstacles that utilities face on the path to decarbonization
  • The detailed data behind the six individual metrics
  • The U.S. utilities ESG report card
  • The solutions and strategies that can help accelerate decarbonization

>> Click here to download the full report and find out everything you need to know about utility decarbonization.

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