Green
Visualized: The Top 5 Questions on Sustainable Investing for Advisers
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.
Environment
How Carbon Dioxide Removal is Critical to a Net-Zero Future
Here’s how carbon dioxide removal methods could help us meet net-zero targets and and stabilize the climate.
How Carbon Dioxide Removal is Critical to a Net-Zero Future
Meeting the Paris Agreement temperature goals and avoiding the worst consequences of a warming world requires first and foremost emission reductions, but also the ongoing direct removal of CO2 from the atmosphere.
We’ve partnered with Carbon Streaming to take a deep look at carbon dioxide removal methods, and the role that they could play in a net-zero future.
What is Carbon Dioxide Removal?
Carbon Dioxide Removal, or CDR, is the direct removal of CO2 from the atmosphere and its durable storage in geological, terrestrial, or ocean reservoirs, or in products.
And according to the UN Environment Programme, all least-cost pathways to net zero that are consistent with the Paris Agreement have some role for CDR. In a 1.5°C scenario, in addition to emissions reductions, CDR will need to pull an estimated 3.8 GtCO2e p.a. out of the atmosphere by 2035 and 9.2 GtCO2e p.a. by 2050.
The ‘net’ in net zero is an important quantifier here, because there will be some sectors that can’t decarbonize, especially in the near term. This includes things like shipping and concrete production, where there are limited commercially viable alternatives to fossil fuels.
Not All CDR is Created Equal
There are a whole host of proposed ways for removing CO2 from the atmosphere at scale, which can be divided into land-based and novel methods, and each with their own pros and cons.
Land-based methods, like afforestation and reforestation and soil carbon sequestration, tend to be the cheapest options, but don’t tend to store the carbon for very long—just decades to centuries.
In fact, afforestation and reforestation—basically planting lots of trees—is already being done around the world and in 2020, was responsible for removing around 2 GtCO2e. And while it is tempting to think that we can plant our way out of climate change, think that the U.S. would need to plant a forest the size of New Mexico every year to cancel out their emissions.
On the other hand, novel methods like enhanced weathering and direct air carbon capture and storage, because they store carbon in minerals and geological reservoirs, can keep carbon sequestered for tens of thousand years or longer. The trade off is that these methods can be very expensive—between $100-500 and north of $800 per metric ton.
CDR Has a Critical Role to Play
In the end, there is no silver bullet, and given that 2023 was the hottest year on record—1.45°C above pre-industrial levels—it’s likely that many different CDR methods will end up playing a part, depending on local circumstances.
And not just in the drive to net zero, but also in the years after 2050, as we begin to stabilize global average temperatures and gradually return them to pre-industrial norms.
Carbon Streaming uses carbon credit streams to finance CDR projects, such as reforestation and biochar, to accelerate a net-zero future.
Learn more about Carbon Streaming’s CDR projects.
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