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Have Your [Earth Friendly] Cake and Eat It Too

September 4, 2019

In recent years, more individuals and institutions are focusing on sustainability – whether it be renewable energy, recycling or upcycling, reducing one’s carbon footprint – or how to align one’s environmental views and personal values with their investment decisions. The good news is that there no longer has to be a trade-off between an effective investment strategy and investing in a healthier, better world. By integrating sustainability considerations within a well-diversified and cost-effective investment framework, investors can pursue their goals without compromising on investment principles or accepting lower expected returns.

 

So, what does it mean to invest through the lens of sustainability? It can be a tough question to answer. The devil is in the details, so to speak, and no approach is perfect. The fact of the matter is, there aren’t enough publicly available wind or algae farms to invest in. So, while there’s no perfect approach to a perfectly sustainable portfolio, there is a lot we can do to reduce the environmental footprint of your investments based on what’s available to us.

 

The way we approach this challenge is by using funds that align with our data-driven investment methodology – pursuing areas of higher returns, minimizing fees and expenses, and ensuring proper diversification – and then layering in a focused set of environmental issues that reflect primary environmental concerns.

 

The funds we use employ a patented holistic scoring system, rather than a completely binary “in” or “out” screening process, in an effort to preserve diversification while recognizing those companies with positive environmental profiles. In this process, companies within major industries are systematically evaluated and compared across consistent sustainability metrics. Greenhouse gas emissions and potential emissions from reserves (a theoretical estimate of carbon dioxide produced if a company’s reported reserves of oil, gas, and coal were converted to energy, given estimated carbon and energy densities of the respective reserves) comprises approximately 85% of their rating, while the other 15% comes from concerns about land use and biodiversity, toxic spills and releases, operational waste, and water management, among other issues.

 

 

From this data, companies acting in more environmentally sound ways relative to their industry peers will be emphasized in the investment strategy, while companies with poor environmental sustainability ratings relative to industry peers may receive a lesser weight or may be excluded entirely. Using this strategy, the chart below shows a comparison between the U.S. sustainability stock portfolio and the Russell 3000 Index.

 

Comparing companies within sectors recognizes the interconnectedness of capital markets and the supply chain. Therefore, this could include retail companies that improve the energy efficiency of their facilities, utilities that produce electricity using solar or wind power, trucking companies that improve the fuel efficiency of their fleets or use alternative-fuel vehicles, or energy companies that increase efficiency, reduce waste, and improve their overall environmental footprint.

 

Using the combination of company selection and weighting may allow for substantial reduction in exposure to greenhouse gas emissions and potential emissions from fossil fuel reserves – important goals for many investors. Through one fund we often use, we can reduce exposure to emissions by 80.7% and reduce 100% of exposure to potential emissions from reserves in a client’s U.S. stock holdings, as seen below.

 

 

By starting with a robust investment framework, then overlaying the considerations that represent the views of sustainability-minded investors, we can deliver a cost-effective approach that provides our clients with the ability to pursue your sustainability goals without compromising on sound investment principles or accepting lower expected returns.

 

All this to say: You can have your cake and eat it too! Investing well and incorporating values around sustainability need not be mutually exclusive. We are excited about the sustainable portfolios we offer, and are happy to discuss this in more detail if it is something you are interested in!

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