Ways to Invest to Slow Climate Change
Green investing is the wave of the future and here's how to do it
A few years ago, Lee Hilliard and his wife Linda, of Manchester, Conn., were torn over what to do with their investment portfolio. The 72-year-old retired media consultant and his wife, who's 64, had come into some Chevron shares from Linda's inheritance in 2016 and then again after her mother died in 2018, and they disagreed over what to do with the oil company stock.
For Linda, the shares were part of her father's legacy and hey, they were paying decent dividends to boot. But Lee was uncomfortable.
Not all companies that are "doing good" are going to do well.
"I'd been feeling badly about the oil stock," he recalls. "As climate change becomes more impactful, I would say over the past five years I really started to pay attention and thought that it would be better not to invest in a fossil fuel company and maybe to take that money and put it toward something greener."
He's in good company. The Global Sustainable Investment Alliance estimates that about a third of all managed assets worldwide are now invested with some form of sustainability consideration in mind. If it is even close to that proportion, that's a seismic shift.
Why Green Investing Is Blooming
In the early days of "green investing," that is, putting your money where it could help the environment, one of the raps on this strategy was that by definition, it limited diversification in your portfolio. Not all companies that are "doing good" are going to do well.
But recent events like the unprecedented heat and wildfires in the western U.S., catastrophic floods in Germany and China, and —for the first time ever — an extreme heat advisory from weather authorities in Great Britain, have only added to the drumbeat of reminders that severe climate impacts have arrived.
As these events expose the risks to businesses worldwide, it's become clear that investing with an eye toward climate change has arrived as well. In the first quarter of 2021 alone, investors poured $178 billion into "green" investment funds globally.
"It's real. You need to know about it," says Lucas Mansberger, an investment strategist and senior manager selection analyst at Greenleaf Trust, a Kalamazoo, Mich.-based firm. (Despite its name, Greenleaf does not focus exclusively on "green" investments.)
"You can see that environmental issues like the heat waves out west, the rising sea levels — they're beginning to be material and salient to companies and to investors in a way that they weren't twenty or thirty years ago," Mansberger said. "And because that's happening, you see more attention from the investment community."
A year ago, when the COVID-19 pandemic was stealing most of the headlines, CNBC proclaimed that a new green investing "megatrend" was in the works. The pronouncement was triggered in part when Larry Fink, CEO of the global investment juggernaut BlackRock, predicted that the imperatives around climate change would trigger a "fundamental reshaping of finance."
Fink, whose firm had $7 trillion under management at the time, warned that, "companies, investors and governments must prepare for a significant reallocation of capital."
Ambitious Climate Goals of the Biden Administration
Fast-forward to 2021, when the Biden administration has made climate a centerpiece of its agenda, setting out the most ambitious environmental to-do list in the nation's history. Goals include cutting greenhouse gas emissions in half by 2030, a carbon-free electrical grid by 2035 and becoming a net-zero-carbon nation by 2050.
If President Joe Biden is able to muscle his sweeping climate program through Congress — or even a portion of it — tens of billions of dollars in programs and incentives will be unleashed to benefit companies in the business of "decarbonizing" America and the world. The current infrastructure plan alone includes $73 billion to upgrade the nation's electrical grid and expand renewable resources, and more than $15 billion earmarked for electric vehicle charging stations, purchases of electric and hybrid school buses and other clean transit projects.
"The required investments are going to be much more far-ranging than that," predicts Manberger. "Investments in climate resilience, generally for coastal communities. Upgrading infrastructure for changing weather patterns. Physical infrastructure. We're in the first few innings of that."
But how can individual investors take advantage of this?
One way is to "follow the money," investing in certain stocks and mutual funds and exchange traded funds (ETFs) that own them.
For example, the Biden administration is seeking —reportedly with bipartisan support — a 10-year extension of clean-energy tax credits, which will provide a boost to players in the solar and wind energy arena. According to a recent report from RMI, a pro-clean-energy think tank, "the most important year to phase out fossil fuel infrastructure and invest in clean energy solutions is this year."
But if investing in carbon-reducing companies and technologies seems like a slam dunk, take a breath. As with all investments, there are no guarantees.
"You need to do a little bit of homework, first with respect to sustainability goals, and second on your investment goals and needs."
In 2019, the Hilliards funneled some of the proceeds from selling their Chevron shares into stocks of three young companies in the electric vehicle (EV) sector. One took off big. Their other two are languishing, currently worth less than they paid for them.
Their experience highlights one of the hazards of trying to pick winners in a maze of new technology aimed at supporting a low-carbon economy. One recent projection by a Chinese manufacturer of EVs, reported in The Economist, foresees an explosion in the market, with as many as 300 companies making vehicles — followed, of course, by a major shakeout that will leave a handful of survivors.
Where to Find Investing Opportunities
Mansberger says that in the midst of this energy renaissance, investment opportunities are proliferating, but it's a minefield.
"We generally don't recommend that our clients go out and try to pick the individual winners and losers," he says. "But if you do want to do it, don't put in more than you can reasonably lose because many of these companies on the forefront of these technologies are in these dynamic industries. They're going to be volatile."
Advisers like Mansberger recommend spreading your risk through mutual funds, ETFs and other diversified investments in the green sector.
It also helps to start with a little introspection.
"You need to do a little bit of homework, first with respect to sustainability goals, and second on your investment goals and needs," says Mansberger. "What are the reasons you're interested in green investing? What is it you're trying to accomplish? What are you most interested in?"
Next, check an online database to see which funds target sustainable investments.
He adds that fund-tracker Morningstar now provides information about the sustainability of a fund's holdings.
One thing is clear: The one-time cottage industry of green investments is now a force to be reckoned with, and that's simply a reflection of where the world is heading.
"It's not about 'do-gooderism' anymore," says Mansberger. "It's about the future of our economy."