“Over the 40 years of my career in finance, I have witnessed a number of financial crises and challenges — the inflation spikes of the 1970s and early 1980s, the Asian currency crisis in 1997, the dot-com bubble, and the global financial crisis. Even when these episodes lasted for many years, they were all, in the broad scheme of things, short-term in nature. Climate change is different.”
Those were the words of Larry Fink. If that name is not familiar to you, he is the current CEO of Blackrock. If you aren’t familiar with Blackrock all you need to know is this, Blackrock is the largest money manager in the world. So when Larry Fink speaks, investors are wise to listen.
That quote came in January of 2020, and due to the crisis that would befall the world a few short weeks later, it didn’t get a lot of attention. It was included in an open letter from the from Fink to CEOs of the world where he warned that change is coming, and it’s coming faster than most people expect. This sentiment has long been held by environmentally conscious citizens seeking progress, but as the numbers start to shift, the big kids on the block of the investing world are starting to take notice.
WHAT IS CHANGING
The growing belief amongst institutional investors, is that the future holds a swing in which climate, not growth is the main motivator of people and governments. Things like clean air, and shortages of food and water will take precedent over peak employment. As more government dollars are directed to research and subsidies opportunity will abound for green industries to make leaps forward.
Going hand in hand with those subsidies will likely be heightened environmental regulations imposed on the corporations of the world. While this will not necessarily cause them to change their entire business model, it will reward the companies who are already doing their part by requiring less capital expense to adjust to the new rules.
The demand for environmentally responsible investing (green investing) has been rapidly growing in the retail sector. This can be easily seen by what is nothing short of an explosion in the amount of mutual funds and ETF’s marketed under the banner of ESG (Environmental, Social, Governance) and SRI (Socially Responsible Investing). Because of demand, a good number of ETF and mutual fund providers have come to the table with an ESG offering of their own (give the people what they want).
Until recently, the majority of fund companies viewed their ESG and SRI funds as niche investments built for the type of people who care about that sort of thing. Now however, the numbers are suggesting that many firms are realizing that so called “green companies” could end up being some of the worlds most valuable.
Once the institutional investment firms see the potential for profits, it usually means that a trend is here to stay. To go back to Larry Fink - “Climate change has become a defining factor in companies’ long-term prospects … But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.”
WHAT CAN INVESTORS DO
The good news for investors, is that there is no shortage of options if you want to begin investing in an environmentally responsible manner. As previously mentioned the options abound for mutual funds and ETFs trading in the ESG or SRI space. These funds restrict investment to companies that meet their criteria on various topics. The challenge for an investor can be to filter through the marketing and determine just how “green” an ESG fund is. Read our post on greenwashing to learn how to pick out the pretenders.
Ultimately the best way to ensure that you build a portfolio full of model citizens is to actually do the research into how each of the companies behaves when it comes to the environment. For some of you reading, that might sound like a great way to spend the next several weeks of your life. If it doesn’t you should check out the Balanced Capital Green Series.
When we built the Green Series of portfolios, we broke down over 1000 US companies and ranked them all in terms of how environmentally friendly they are. We used that data as the main criteria for the portfolios, not profits. The resulting portfolios are in our opinion some of the greenest investments you can find.
