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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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Energy

Visualizing China’s Energy Transition in 5 Charts

This infographic takes a look at what China’s energy transition plans are to make its energy mix carbon neutral by 2060.

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China Energy Mix

Visualizing China’s Energy Transition in 5 Charts

In September 2020, China’s President Xi Jinping announced the steps his nation would take to reach carbon neutrality by 2060 via videolink before the United Nations Assembly in New York.

This infographic takes a look at what this ambitious plan for China’s energy would look like and what efforts are underway towards this goal.

China’s Ambitious Plan

A carbon-neutral China requires changing the entire economy over the next 40 years, a change the IEA compares to the ambition of the reforms that industrialized the country’s economy in the first place.

China is the world’s largest consumer of electricity, well ahead of the second place consumer, the United States. Currently, 80% of China’s energy comes from fossil fuels, but this plan envisions only 14% coming from coal, oil, and natural gas in 2060.

Energy Source20252060% Change
Coal52%3%-94%
Oil18%8%-56%
Natural Gas10%3%-70%
Wind4%24%+500%
Nuclear3%19%+533%
Biomass2%5%+150%
Solar3%23%+667%
Hydro8%15%+88%

Source: Tsinghua University Institute of Energy, Environment and Economy; U.S. EIA

According to the Carbon Brief, China’s 14th five-year plan appears to enshrine Xi’s goal. This plan outlines a general and non specific list of projects for a new energy system. It includes the construction of eight large-scale clean energy centers, coastal nuclear power, electricity transmission routes, power system flexibility, oil-and-gas transportation, and storage capacity.

Progress Towards Renewables?

While the goal seems far off in the future, China is on a trajectory towards reducing the carbon emissions of its electricity grid with declining coal usage, increased nuclear, and increased solar power capacity.

According to ChinaPower, coal fueled the rise of China with the country using 144 million tonnes of oil equivalent “Mtoe” in 1965, peaking at 1,969 Mtoe in 2013. However, its share as part of the country’s total energy mix has been declining since the 1990s from ~77% to just under ~60%.

Another trend in China’s energy transition will be the greater consumption of energy as electricity. As China urbanized, its cities expanded creating greater demand for electricity in homes, businesses, and everyday life. This trend is set to continue and approach 40% of total energy consumed by 2030 up from ~5% in 1990.

Under the new plan, by 2060, China is set to have 42% of its energy coming from solar and nuclear while in 2025 it is only expected to be 6%. China has been adding nuclear and solar capacity and expects to add the equivalent of 20 new reactors by 2025 and enough solar power for 33 million homes (110GW).

Changing the energy mix away from fossil fuels, while ushering in a new economic model is no small task.

Up to the Task?

China is the world’s factory and has relatively young industrial infrastructure with fleets of coal plants, steel mills, and cement factories with plenty of life left.

However, China also is the biggest investor in low-carbon energy sources, has access to massive technological talent, and holds a strong central government to guide the transition.

The direction China takes will have the greatest impact on the health of the planet and provide guidance for other countries looking to change their energy mixes, for better or for worse.

The world is watching…even if it’s by videolink.

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Energy

Visualizing 50+ Years of the G20’s Energy Mix

Watch how the energy mix of G20 countries has evolved over the last 50+ years.

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G20 Energy Mix share

Visualizing 50+ Years of the G20’s Energy Mix (1965–2019)

Over the last 50 years, the energy mix of G20 countries has changed drastically in some ways.

With many countries and regions pledging to move away from fossil fuels and towards cleaner sources of energy, the overall energy mix is becoming more diversified. But shutting down plants and replacing them with new sources takes time, and most countries are still incredibly reliant on fossil fuels.

This video from James Eagle uses data from BP’s Statistical Review of World Energy to examine how the energy mix of G20 members has changed from 1965 to 2019.

G20’s Energy History: Fossil Fuel Dependence (1965–1999)

At first, there was oil and coal.

From the 1960s to the 1980s, energy consumption in the G20 countries relied almost entirely on these two fossil fuels. They were the cheapest and most efficient sources of energy for most, though some countries also used a lot of natural gas, like the United States, Mexico, and Russia.

Country (Energy Mix - 1965)OilCoalOther
🇦🇷 Argentina83%3%14%
🇦🇺 Australia45%50%5%
🇧🇷 Brazil66%8%26%
🇨🇦 Canada47%13%40%
🇨🇳 China8%87%5%
🇪🇺 EU47%45%8%
🇫🇷 France49%37%14%
🇩🇪 Germany34%63%3%
🇮🇳 India24%67%9%
🇮🇩 Indonesia86%2%12%
🇮🇹 Italy66%11%23%
🇯🇵 Japan56%31%13%
🇲🇽 Mexico61%3%36%
🇷🇺 Russia29%50%21%
🇸🇦 Saudi Arabia98%0%2%
🇿🇦 South Africa19%81%0%
🇰🇷 South Korea20%77%3%
🇹🇷 Turkey46%47%7%
🇬🇧 UK38%59%3%
🇺🇸 U.S.45%22%33%

But the use of oil for energy started to decrease, beginning most notably in the 1980s. Rocketing oil prices forced many utilities to turn to coal and natural gas (which were becoming cheaper), while others in countries like France, Japan, and the U.S. embraced the rise of nuclear power.

This is most notable in countries with high historic oil consumption, like Argentina and Indonesia. In 1965, these three countries relied on oil for more than 83% of energy, but by 1999, oil made up just 55% of Indonesia’s energy mix and 36% of Argentina’s.

Even Saudi Arabia, the world’s largest oil exporter, began to utilize oil less. By 1999, oil was used for 65% of energy in the country, down from a 1965 high of 97%.

G20’s Energy Mix: Gas and Renewables Climb (2000–2019)

The conversation around energy changed in the 21st century. Before, countries were focused primarily on efficiency and cost, but very quickly, they had to start contending with emissions.

Climate change was already on everyone’s radar. The UN Framework Convention on Climate Change was signed in 1992, and the resulting Kyoto Protocol aimed at reducing greenhouse gas emissions was signed in 1997.

But when the Kyoto Protocol went into effect in 2005, countries had very different options available to them. Some started to lean more heavily on hydroelectricity, though countries that already utilized them like Canada and Brazil had to look elsewhere. Others turned to nuclear power, but the 2011 Fukushima nuclear disaster in Japan turned many away.

This is the period of time that renewables started to pick up steam, primarily in the form of wind power at first. By 2019, the G20 members that relied on renewables the most were Brazil (16%), Germany (16%), and the UK (14%).

Country (Energy Mix - 2019)Natural GasNuclearHydroelectricRenewablesOther
🇦🇷 Argentina49%2%10%4%35%
🇦🇺 Australia30%0%2%7%61%
🇧🇷 Brazil10%1%29%16%44%
🇨🇦 Canada31%6%24%4%35%
🇨🇳 China8%2%8%5%77%
🇪🇺 EU22%11%4%10%53%
🇫🇷 France16%37%5%6%36%
🇩🇪 Germany24%5%1%16%54%
🇮🇳 India6%1%4%4%85%
🇮🇩 Indonesia18%0%2%4%76%
🇮🇹 Italy40%0%6%10%44%
🇯🇵 Japan21%3%4%6%66%
🇲🇽 Mexico42%1%3%5%49%
🇷🇺 Russia54%6%6%0%34%
🇸🇦 Saudi Arabia37%0%0%0%63%
🇿🇦 South Africa3%2%0%2%93%
🇰🇷 South Korea16%11%0%2%71%
🇹🇷 Turkey24%0%12%6%58%
🇬🇧 UK36%6%1%14%43%
🇺🇸 U.S.32%8%3%6%51%

However, the need to reduce emissions quickly made many countries make a simpler switch: cut back on oil and coal and utilize more natural gas. Bituminous coal, one of the most commonly used in steam-electric power stations, emits 76% more CO₂ than natural gas. Diesel fuel and heating oil used in oil power plants emit 38% more CO₂ than natural gas.

As countries begin to push more strongly towards a carbon-neutral future, the energy mix of the 2020s and onward will continue to change.

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