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.
Mapping the World’s Forests: How Green is Our Globe?
Where are the world’s forests? These high-resolution maps show how the world’s carbon-sequestering forests are spread.
Mapping the World’s Forests: How Green is our Globe?
More than half of this green cover is spread across the boreal forests of Russia and Canada, the Amazon in South America, and China’s coniferous and broad-leaved forests. These carbon-sequestering forests purify the air, filter water, prevent soil erosion, and act as an important buffer against climate change.
|Rank||Country||Forest Cover (in millions of hectares)|
|#4||🇺🇸 United States||310|
|#7||🇨🇩 Democratic Republic of the Congo||126|
This series of maps by Adam Symington uses data sourced from images collected aboard the MODIS sensor on the Terra satellite to reflect the ratio of the world’s surface covered with tree canopy to non-green areas.
To explore the entire high resolution forest map, click the image above. Below we’ll take a closer look at some of the world’s green zones.
Home to the boreal forests of Russia, China’s broad-leaved forests, the mangrove forests of Indonesia, and the green belt along the mighty Himalayas, Asia boasts some of the richest and most biodiverse green canopies of the world.
Russia holds more than one-fifth of the world’s trees across 815 million hectares—larger than the Amazon’s canopy. Like the country’s geography, most of Russia’s forests are situated in Asia, but spread into Europe as well.
To the southeast and with a forest cover of almost 220 million hectares, China is the fifth greenest country in the world. However, this was not always the case.
In 1990, China’s forests stretched across only 157 million hectares, covering 16.7% of its land. By the end of 2020, this forest cover reached 23.4%, thanks to decades of greening efforts.
On the other hand, the continent’s third most biodiverse country—Indonesia—is losing its green canopy. With a 92 million hectare-wide forest canopy, the country is home to between 10 and 15% of the world’s known plants, mammals, and birds. Unfortunately, over the past 50 years, 74 million hectares of the country’s rainforest have been logged, burned, or degraded.
Meanwhile, the 72 million hectares of Indian forest cover can be followed closely with the eye. From the rainforests along the Himalayas in the northeast, to montane rainforests of the South Western Ghats, and finally to the coastal mangrove forests.
The Amazon and Congolian Rainforests
In South America, Brazil has the second-largest green cover in the world.
Most of its 497 million hectare-wide forest cover falls within “the lungs of the planet”—the Amazon rainforest.
One of the most biodiverse places on the planet, the Amazon rainforest is said to house about 10% of the world’s biodiversity, including over three million wildlife species and over 2,500 tree species.
On the other side of the Atlantic, extending along the Congo River basin and its many tributaries, are the Congolian rainforests.
Spread across nine countries in Central Africa, this collection of tropical moist broadleaf forests is one of the remaining regions in the world that absorbs more carbon than it emits.
With 126 million hectares of the world’s green cover, the Democratic Republic of Congo (DRC) contains the largest part of this rainforest, equal to about 60% of Central Africa’s lowland forest cover.
North American Forests
Canada, the United States, and Mexico combine for 723 million hectares of the world’s forests. The vast stretches of pine and fir trees in the Great White North, coupled with the United States’ mixed variety of forests, make the continent one of the largest carbon sinks in the world.
With over 347 million hectares of forests, Canada ranks third in the list of greenest countries. Approximately 40% of its landmass is tree-covered, representing 9% of the global forest cover.
Its boreal forests store twice as much carbon per unit as tropical forests and help regulate the global carbon footprint.
The United States, on the other hand, holds about 8% of the world’s forests. Spread across 310 million hectares of land, these diverse forests range from the boreal forests of Alaska to pine plantations in the South, and the deciduous forests in the Eastern United States to the dry coniferous forests in the West. The country is also home to temperate rainforests along its West Coast and tropical rainforests in Puerto Rico and Hawaii.
The World’s Lost Forests
While China and a few select countries have proven that there is hope for building out the world’s forests, the story is different in other places around the world. This map by Adam Symington uses data from the University of Maryland to track the changes in the world’s forest cover from 2000 to 2021.
Since 2000, the world lost over 104 million hectares of pristine and intact forest landscapes. In 2020 alone, over 10 thousand square kilometers of the Amazon were destroyed for the development of roads.
Deforestation and fragmentation are caused by a range of human development activities. But they are also exacerbated by climate change, with increasing forest fires, hurricanes, droughts, and other extreme weather events, as well as invasive species and insect outbreaks upsetting forest ecosystems.
At the 2022 UN Biodiversity Conference (COP15) held in Montréal, nations across the world committed to the 30X30 plan, which called for the conservation of the world’s land and marine ecosystems by 2030. Alongside other commitments to end deforestation and grow the world’s canopies, there is still hope for the world’s forests.
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