A version of this article was originally published in April 2020.
As the United States continues to struggle with multiple crises--the pandemic, racial justice, inequality, and misinformation--the past couple of weeks serve to remind us of the relentless climate crisis.
Vast expanses of the West Coast are on fire; smoky haze darkens skies across much of the country. All-time heat records have been recorded. Slow-moving hurricanes are inundating the Gulf Coast. A vast chunk of ice 50 miles long and 12 miles wide has broken off of Greenland. All this in just the first half of September.
What can you do about it? Clearly, with an election coming up, voting is important. And you can find lots of articles suggesting ways that you can lower your personal carbon footprint and be a more sustainable consumer. Seldom do these pieces mention investing. But if you are fortunate enough to be an investor, perhaps the most impactful thing you can do right now is to focus your investments around sustainability.
I say "fortunate enough to be an investor" because barely more than half of Americans own stocks. According to an April 2019 Gallup survey, 55% of respondents said they owned individual stocks or stocks held in mutual funds in their personal or retirement savings accounts.
Let's focus on mutual funds, including exchange-traded funds. About 350 sustainable funds are now available to U.S. investors, and they are more popular than ever, attracting record amounts of new money from investors last year and during the first half of this year.
When sustainable-fund managers decide on what stocks to include in their portfolios, one of their main considerations is how well the company performs on a range of environmental, social, and corporate governance issues, referred to as ESG issues. Companies that have large carbon footprints and no plan to reduce them, for example, are generally avoided. Those that are environmental leaders in their industries, on the other hand, are favored. Most sustainable funds have low exposure to fossil-fuel-based energy stocks, and many are completely fossil-fuel-free.
Sustainable funds also prefer companies that treat their own employees well; oversee their supply chains to ensure the safe and fair treatment of workers; respect their customers by producing safe and useful products, protecting their privacy, and avoiding misleading marketing claims; and are good citizens in the communities in which they operate--that's the S in ESG. And they prefer companies that manage themselves in an ethical and transparent manner, respect diversity, and embed sustainability throughout their business--that's the G in ESG.
By becoming a sustainable investor, you are directing your capital toward companies that are better ESG actors and avoiding those that aren't. But no company is perfect. That's why sustainable investors scrutinize corporate policies and behaviors and use their rights as shareholders to engage with companies about these issues. They also can sponsor shareholder resolutions to be voted on at companies' annual general meetings. In fact, ESG resolutions have attracted record levels of shareholder support in recent years.
Shareholder engagement can change company policies and actions. Over the past several years, many companies have agreed to produce reports outlining what they see as the risks they face from global warming and their plans to combat climate change.
As a sustainable investor, you will not be alone. Sustainable investing is a big, global movement that includes many of the world's largest institutional investors.
And in case you are wondering, sustainable funds can and should be expected to perform as well as conventional funds, which is important for your bottom line. In this year's volatile market, sustainable funds have held up better than conventional funds, and they have competitive returns over longer periods.
Going forward, your sustainable fund is an investment in the future being a place where companies treat not only the planet, but also their workers, their customers, and their communities with as much respect as they do their shareholders. In a post-pandemic world, those are the types of companies that are likely to prosper.
Sustainable investing is thus a win-win for you as an investor and as someone who is concerned about the climate crisis. Do it for your children and grandchildren but also do it for the 45% of your fellow citizens who don't have the means to invest. You can make the economy work better for them while also doing your part to mitigate the climate crisis.
Jon Hale has been researching the fund industry since 1995. He is Morningstar’s director of ESG research for the Americas and a member of Morningstar’s investment research department. While Morningstar typically agrees with the views Jon expresses on ESG matters, they represent his own views.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.