If you’re considering advocating for your company to provide a climate-safe retirement option, the first question you will likely encounter is whether climate-safe investments make financial sense.
There is substantial research affirming that climate-safe investments make good financial sense and that the world's largest asset managers, including BlackRock, Vanguard and Fidelity, should offer climate-safe indexes as default retirement products, both to protect the climate and for the strongest returns for retail investors.
We’ve pulled together some further reading to demonstrate climate-safe funds, and the risks associated with ignoring such investments.
Alternative investments that screen for climate criteria have not had a negative financial return
- According to a 2021 report commissioned by BlackRock, analyzing the “overall fossil fuel divestment landscape”, of the funds that committed to divesting from fossil fuels within investment portfolios, all “found either a neutral or negligible impact or a slightly positive impact to their risk-adjusted returns.
- In 2021, the Morgan Stanley Institute for Sustainable Investing released a study titled Sustainable Funds Outperform Peers during 2020 Coronavirus, which found that in 2020 “sustainable funds, which focus on environmental, social and governance (ESG) factors, across both stocks and bonds, weathered the year better than non-ESG portfolios…”
- According to Morningstar’s 2021 Sustainable Funds US Landscape Report, “[s]ustainable funds comfortably outperformed their peers in 2020, especially equity funds.”
- In 2020, the NYU Stern Center for Sustainable Business released a report ESG and Financial Performance: Uncovering the Relationship by Aggregating 1,000 Plus Studies Published between 2015-2020. The authors conducted a meta-analysis of meta-studies, analyzing articles on both corporate financial performance and investment performance. It came away with multiple conclusions on the relationship between ESG and financial performance, generally finding a positive correlation. Regarding investment performance, the report found that, for “studies typically focused on risk-adjusted attributes such as alpha or the Sharpe ratio on a portfolio of stocks, 59 per cent showed similar or better performance relative to conventional investment approaches while only 14 per cent found negative results.” It also concluded that “ESG investing appears to provide downside protection, especially during social or economic crises.”
- In 2019, Morgan Stanley Institute for Sustainable Investing found that “Research conducted on the performance of nearly 11,000 mutual funds from 2004 to 2018 shows that there is no financial trade-off in the returns of sustainable funds compared to traditional funds, and they demonstrate lower downside risk.”
- Since its inception in 2012, the S&P 500’s Fossil Fuel Free Total Return Index has consistently outperformed the S&P 500 overall.
- The June 2021 report from the Institute for Energy Economics and Financial Analysis found that, “Vanguard funds destroy shareholder wealth with US$290 bn in fossil fuels creating a 5.6% performance drag.” (Read the press release here.)
Ignoring climate risk will have a negative impact on financial returns
- In his 2020 Letter to CEOs, BlackRock Chairman and CEO Larry Fink warned that “Climate Risk is Investment Risk: Our investment conviction is that sustainability - and climate-integrated portfolios can provide better risk-adjusted returns to investors. And with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward.”
- Swiss Re 2021 Report found that “climate change poses the biggest long-term risk to the global economy,” and “Climate Change Could Cut World Economy by $23Trillion in 2050”
- Board of Governors of the Federal Reserve System 2021 note: “Climate change-related financial risks pose both micro- and macro-prudential concerns…”
- David Comerford and Alessandro Spiganti, authors of The Carbon Bubble paper: “Credible implementation of climate change policy, consistent with the 2°C limit, requires a large proportion of current fossil fuel reserves to remain unused.This issue, named the Carbon Bubble, is usually presented as a required asset write-off, with implications for investors… if investors are leveraged, the Carbon Bubble may precipitate a fire-sale of assets across the economy, and generate a large and persistent fall in output and investment.”
Research pulled from:
- Project Drawdown’s 2021 report, Climate Solutions at Work: Unleashing Your Employee Power
- The Forum for Sustainable and Responsible Investment
- Forbes 2021 article, The Case For Fossil Fuel Divestment
- Wall Street’s Carbon Bubble: The Global Emissions of the US Financial Sector
Feature photo by LinkedIn Sales Solutions via Unsplash.