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Sustainable Investing

Yes, Fancy Climate Summit Means Small Investors Must Be Vigilant, Too

Vote your shares, make sure your fund manager has a net-zero plan, and look at opportunities in climate solutions, experts say.

Jeff Eckel believes that most people--including mom and pop investors--don't really understand climate summits, including the one that just finished in Glasgow, Scotland. For example, people assume that such fancy, high-level meetings mean climate change is something that can only be addressed by governments, he says. Yet Eckel's business is growing swiftly, despite any government promises.

Eckel is CEO of Hannon Armstrong Sustainable Infrastructure HASI, a real estate investment trust that invests in solar and other renewables, and finances building upgrades that improve energy efficiency. He likes to point out that the company has created more than 200,000 jobs in 48 states, up from 95,000 across 40 states at the end of 2018. And over the past three years, it has returned 40.7%, nearly double the return for other REITs and for the Morningstar US Market Index.

That is what will draw investors, who are critical to solving climate change, Eckel says. Nearly 200 countries attended the Glasgow summit, called COP26, aimed to push the world toward progress on containing global warming to 1.5 degrees Celsius (2.7 degrees Fahrenheit) above pre-industrial levels. All eyes were on national governments to make increased commitments to reduce greenhouse gas emissions, which cause global warming, to net zero by at least 2050. And there was fodder for optimists and pessimists alike. There was a commitment to replanting forests, which are carbon sinks, and to slash emissions of methane, the most dangerous greenhouse gas. But language to phase out coal, the dirtiest fossil fuel, was watered down. Rich countries fell short of their goals to help developing nations transition to clean energy or protect them against climate change. And even though the countries will all meet again next year with the aim of declaring more robust goals, current pledges still fall short of achieving the 1.5 degrees Celsius target. (For a wrapup on the summit from our sister company Sustainalytics, read here)

"Our business doesn't depend on success at COP26. I don't have a heavy weight of disappointment," says Eckel.

The summit highlighted the critical importance of the private sector. "It heightens the responsibility of private sector finance to up their game," says Jackie Cook, director of sustainability stewardship research for Morningstar. Many asset managers, including those that run your funds, and investors have already declared official plans to achieve net zero in their own portfolios. That means they are pushing the companies and issuers they hold in those funds to slash emissions to net zero, meaning they take as much carbon out of the atmosphere as they emit. More will be needed.

Getting the world to net zero "is totally dependent on a market-based solution," says John Streur, CEO of Calvert Research and Management, a sustainable asset manager owned by Morgan Stanley. "It takes all three verticals to work," meaning government, companies, and individuals, "in order to have system change."

"The net-zero pledge is saying 'we believe in the market-based solution,'" says Streur. "We're not saying the government can take care of this."

In the coming months, as publicly traded companies draw closer to their annual meetings, expect them to be more open to proposals from shareholders about adopting official net-zero plans or about climate or other sustainability issues, says Morningstar's Cook. In the past, companies have prevented such proposals from being voted on by other shareholders, armed with permission from regulators. Now, "companies will be a whole lot more reticent to do that," Cook predicts. "When you get a big company asking [regulators for permission] to take a human rights proposal off the proxy, that doesn't look good."

As an individual, you can certainly take action to address climate change in your everyday life, through the products you use, for example. Leslie Samuelrich, president of Green Century Funds, says individuals should also press politicians and "engage as active citizens, voicing their concerns to elected representatives to ensure that the [net-zero] pledges the U.S. has made are fulfilled."

There's also plenty for individual investors to do. For one thing, start paying attention to the proxy ballots as they arrive--they will allow you to vote on key proposals. And then, make sure to vote them.

It's also critical now to look at your own fund manager's net-zero commitments--indeed, if they have one at all. Says Jon Hale, Morningstar's head of sustainability research for the Americas, "If you can't go to the website of a major fund company and easily see how it is protecting your portfolio from climate risk, that is a red flag."

Bryan McGannon, director of policy and programs at US SIF, the sustainable investment trade group, says: "You want to make sure the fund manager has a [net-zero] plan and is able to describe how they are going to meet those targets, and can look at the companies [in the fund] and see if those companies have a pathway to get there."

Sustainable fund managers generally pay more attention to climate than conventional funds, in addition to social and governance criteria. It's helpful to look at the Morningstar Sustainability Ratings for the funds you own. US SIF has information on various funds. You can also seek out climate-aware funds, which invest in climate solutions.

At the summit, nations made plans to phase out methane and coal. These are important signals for fossil fuels. Individuals should pay attention to the possibility that they own potentially stranded assets that may be worthless in future, just like buggy-whip makers after automobiles replaced horse-drawn carriages. "Look at your investments, check to make sure you don't have too much of your savings invested in activities that in the next five to 10 years because of high carbonization may not be profitable any more," counsels Gilles Moec, chief economist at insurer Axa.

Investors have had a huge appetite for renewables and other climate solutions such as electric vehicles. Consider Rivian Automotive RIVN, which soared after going public this month and then pulled back after it surpassed Ford F and General Motors GM in value. "Investors are understanding [the potential], politicians are not," says Eckel of Hannon Armstrong. "Investments in a low-carbon economy are becoming lower-risk every day. It still matters what price you pay. But these are not small industries anymore. There's a maturity to the industry that derisks the portfolio immediately."

For example, Samuelrich of Green Century, which doesn't invest in fossil fuels, is a fan of wind turbine maker Vestas Wind Systems VWDRY, solar panel and battery maker SunRun RUN, and Johnson Controls International JCI. All are potential beneficiaries of green infrastructure spending.

Keep a close eye on other innovations to reduce emissions. For example, heavy-emitting cement companies are looking for ways to decarbonize. Once they do that, the investment thesis for certain cement makers--say the first to figure it out--dramatically improves. "It isn't easy to make a sector call," says Calvert's Streur. "Much of it depends on the application of data and artificial intelligence on industrial processes."

Companies and financial markets are likely to innovate once carbon pricing--which puts a price on emissions--is the norm. That's more likely in parts of the world, now that the summit produced rules for the global trading of carbon offset credits. U.S. attempts to legislate carbon pricing have stumbled, but many analysts believe it's key to getting a price on assets. "The private sector and nongovernmental organizations want carbon pricing because it provides visibility," says Axa's Moec. Moec predicts that carbon taxes "gradually will be implemented in a lot of regions because it's the easiest way to deliver on the targets announced at COP26."

In the United States, as the government pushes businesses to cut emissions and adopt renewables, support for carbon pricing may grow. "When it becomes common knowledge that more jobs will get generated than destroyed with a price on carbon, then you can get a price on carbon," predicts Eckel of Hannon Armstrong.

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