In mainstream circles away from financial markets, climate awareness has been on the rise for decades so it was only a matter of time before Wall Street got in on the act.
Evolution in this space is a positive for advisors because with climate change commanding so much attention in media and political circles, more clients are looking to express related values in terms of direct investing. Based on last year's record pace of inflows to funds focusing on sustainability, clients want access to climate-aware strategies and evolution is necessary to meet that demand.
Gone are the days when investing for sustainability and virtue solely meant embracing an environmental, social and governance (ESG) fund where the primary sales pitch is avoid alcohol, civilian firearms, gambling and tobacco stocks.
When it comes to virtuous investing, that methodology is yesterday's news and it's riddled with controversy and debate. Whether it's sustainability, climate awareness or other values-based investments, clients want more than just prosaic ESG methodologies.
Why Climate Considerations Matter
One of the primary benefits of climate-focused funds is that these products avoid some of thorny issues associated with standard ESG products, including ratings fluidity and social and governance controversies. Additionally, data confirm that companies and governments need to make tackling climate change a bigger priority. Simple economics confirm as much.
“A recent report estimated $69 trillion of negative economic impact directly related to global
warming,” according to Fidelity research. “In our view, the steps to blunt the impact of climate change and successfully navigate its effects will be one of the single largest economic drivers of the next century. But we see both near- and long-term investment opportunity and portfolio risk mitigation potential as people, companies, and governments worldwide take action.”
The green transition is in its early innings, but it's implications are wide-ranging. Companies and governments need to get in on the act and investors, including institutions, are demanding equity and fixed income solutions.
“In our view, this green transition is in the nascent stages but is likely an investing mega-trend where economic progress over the next century may be defined by climate investments,” adds Fidelity. “For investors who want to align their portfolios with their values, many companies are changing or even reinventing their business models, with positive potential implications for both their stock values and bond issuance.”
How to Steer Clients Right on Climate
Another benefit of climate investing is that it's easily conveyed to clients and with some assistance, advisors make the task even easier.
Fidelity breaks it down by highlighting three climate categories companies can fall into: Innovators, mitigators and good actors. An example of good actor could be a company from a carbon-intensive industry that's committed to reducing emissions and showing tangible proof its climate committed.
A mitigator is a company that provides products or technologies that are used to reduce carbon emissions. Mitigators can and do provide those services to good actors.
“Innovator companies are inventing the business models and industries of the future. They are working to 'green the grid' to help remove fossil fuels from the power grid, a critical component of getting to net zero,” notes Fidelity. “They are also part of a broad move toward electrification—everything from industries and supply chains, cars and public transportation, and residential and commercial real estate.”
Bottom line: Climate awareness isn't an investing fad. It's here to stay and clients want these exposures. Keeping it simple is the way to go.