Investing amid climate change

A perspective from E*TRADE Securities 01/24/20

Amid the first wave of Q4 earnings, the National Oceanic and Atmospheric Administration made an eye-catching announcement: 2019 was the second-hottest year for the planet in the past 140 years. In fact, last decade was the hottest ever recorded, with the world’s five warmest years occurring since 2015.1

Most scientists agree climate change could have a wide range of serious consequences, including rising sea levels, extreme weather events (including droughts), and agricultural disruptions—all of which could significantly affect businesses and financial markets.

Despite the topic often being used as a political football, it’s notable that in a 2019 report the US Department of Defense deemed the effects of climate change a “national security issue.”2 And more recently, the Commodity Futures Trading Commission commissioned a report on climate-related risks to financial markets, to be released this year—a first from a US market regulator.3

With attention from the likes of world leaders, celebrities, and activists, the push to fight climate change doesn’t seem to be slowing down. And myriad public companies and fund managers have begun to move on the issue as well.

Let’s take a quick look at some of the latest developments.

The climate on The Street

There are indications corporate America and Wall Street are taking climate change seriously, some of which have occurred in only the past few days. For example:

  • Last September, Amazon announced its “Climate Pledge,” a plan to regularly report the company’s carbon emissions and modify its business strategies to reduce them.4 CEO Jeff Bezos said he expects the percentage of Amazon’s energy use derived from renewable sources to increase to around 80% by 2024, with the firm hitting zero emissions by 2030.
  • Microsoft recently unveiled its goal to be carbon negative by 2030 and committed to investing $1 billion in carbon reduction technology and innovation5—a first, and one of the most aggressive stances taken by corporate America. 
  • BlackRock—the world’s largest money management firm—published a letter citing the risks posed by climate change and the firm’s commitment to “environmental sustainability as a core goal.”6 Among its initiatives, Blackrock announced it would create new funds without fossil fuel stocks, divest itself of companies focused on coal production, and require the companies it invests in to disclose their climate-related risks and sustainability plans.

When an investment manager with $7 trillion in assets decides climate change will be a critical component of its decision-making process, it’s a good idea to take notice—because it may signal changes are taking place on The Street that are likely to have a long-lasting effect on the average investment portfolio.

The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.

BlackRock CEO Larry Fink, in his letter to CEOs7

The investor perspective

With nearly a third of carbon emissions coming from publicly owned companies,8 there are opportunities for individual investors to take a position on climate change as well. For those interested, here are a few themes for a greener portfolio:

  • A shift away from fossil fuels. A top concern among the climate conscious is minimizing the carbon footprint. Besides shifting away from traditional fossil fuel producers and industrials, investors could also look for companies that aim to offset carbon emissions with greener practices—for example, auto makers that commit to investing in electric vehicles.
  • Renewable energy sources. In addition to being a greener investment, some companies specializing in renewable resources like solar and wind power could potentially see an increase in value if demand grows.
  • Water. The climate crisis has begun to change the way Wall Street looks at H2O. It’s not just about utilities, it’s about companies involved in water conservation and purification. Interestingly, two of the largest water-related ETFs are both up more than 30% over the past year.
  • Sustainable business practices. Recent headlines have thrust a few larger firms into the spotlight, but with a little research, investors may be able to find other companies or funds that share similar values.

There are also tools E*TRADE customers can use to invest in socially responsible ways. From thematic investing options that highlight clean energy and water topics, to screeners that sort funds based on socially responsible characteristics, to managed portfolios that can be customized to include socially responsible funds.

Number of SRI-themed funds growing

Source: US SIF Foundation’s 2018 Report on US Sustainable, Responsible and Impact Investing Trends


The bottom line: The climate change conversation isn’t dying down anytime soon. As corporate boardrooms and the financial community put an increasing emphasis on sustainable business practices, investors may want to review their portfolios to consider whether climate change is a factor they wish to incorporate in a diversified portfolio.

 

 

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  1. National Oceanic and Atmospheric Administration, “2019 was 2nd hottest year on record for Earth say NOAA, NASA,” January 15, 2020, https://www.noaa.gov/news/2019-was-2nd-hottest-year-on-record-for-earth-say-noaa-nasa
  2. Bloomberg.com, “Pentagon Warns of Dire Risk to Bases, Troops From Climate Change,” January 18, 2019, https://www.bloomberg.com/news/articles/2019-01-18/in-dire-report-pentagon-warns-bases-imperiled-by-climate-change
  3. Reuters, “U.S. regulator homes in on climate risks to U.S. markets,” December 11, 2019, https://www.reuters.com/article/us-climate-change-market-risks/u-s-regulator-homes-in-on-climate-risks-to-u-s-markets-idUSKBN1YF2D5
  4. CNBC.com, “Jeff Bezos unveils sweeping plan to tackle climate change,” September 20, 2019, https://www.cnbc.com/2019/09/19/jeff-bezos-speaks-about-amazon-sustainability-in-washington-dc.html
  5. Microsoft, January 16, 2020, https://blogs.microsoft.com/blog/2020/01/16/microsoft-will-be-carbon-negative-by-2030/
  6. The New York Times, “BlackRock C.E.O. Larry Fink: Climate Crisis Will Reshape Finance,” January 14, 2020, https://www.nytimes.com/2020/01/14/business/dealbook/larry-fink-blackrock-climate-change.html
  7. BlackRock, 2020 letter to CEOs, January 23, 2020, https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter
  8. CDP, “New report shows just 100 companies are source of over 70% of emissions,” July 10, 2017, https://www.cdp.net/en/articles/media/new-report-shows-just-100-companies-are-source-of-over-70-of-emissions?utm_source=morning_brew

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