From the CIO
Over the last decade, interest in incorporating environmental, social and governance (“ESG”) considerations into investment portfolios has steadily grown. The range of investment opportunities has broadened and deepened, providing investors with both easy stepping stones to transform a diversified portfolio as well as more deeply impactful choices.
The more recent entry of larger investment companies into the ESG universe has created concerns about “greenwashing,” which creates confusion around relative performance benefits. In addition, there has been specific pushback from state governments seeking to protect their existing fossil fuel industries, including new laws that have muddied the momentum of the shift to renewable energy.
Overall, we view this back and forth as positive for investors, and positive for longer term environmental concerns. At its core there is a conversation underway about the financial impact of what have historically been considered non-financial considerations such as environmental externalities. In the context of concerns about global warming, our public policy process is stair-stepping its way forward to focus on specific metrics addressing externalities. Input from all sides creates more transparency.
All future-focused energy scenarios require us to rely on a blend of renewable and fossil fuel energy sources for the near future. There are challenges in reducing fossil fuel production and limitations on ramping up renewable energy generation, all of which is reflected in the conversation about ESG investing. Below we highlight some aspects of the debate that has been underway, and the way the socio-political conversation has broadened understanding of ESG investment as a choice.
Kate King, CFP®
Chief Investment Officer
Retirement Plans Gain Access to ESG
A step forward for ESG investors was a recent law change that broadened options for employees to invest ESG funds within their 401k and 403b plans. The Department of Labor has long held that “fiduciaries [in employer-sponsored retirement plans] could not sacrifice investment returns or assume greater investment risk to advance collateral social policy goals.” Recent changes to DOL regulations now recognize instead that “risk and return factors may include the economic effects of climate change and other environmental, social or governance factors” on investment choice.
Ups and Downs in Green Bond Pricing: What is a “Greenium”?
In bond markets, many green bonds issued in recent years have been able to issue debt to investors at slightly lower yields, responding to investor demand that a bond include positive “green” impact in addition to providing a stream of interest income. This “greenium” accrued to municipal issuers such as cities and states; 32% of green bonds issued in the first half of 2023 had a greenium.1
Following a long run up in issuance of green bonds that financed specific renewable energy projects, the withdrawal of investment assets and underwriting business has reduced overall green bond issuance. In the first quarter of 2023, corporate ESG debt amounted to only 2.5% of total corporate debt issuance in the US, down from 6% in the first quarter of 2022. The “greenium” for high quality debt also decreased in last 2022, declining from 60 basis points midyear to nearly zero at year-end.
Redirecting Corporate Financing of Fossil Fuels
Directing capital investment to – or away from – specific purposes is an effective way to support existing industry, to innovate new technology, to expand markets, or to scale both manufacturing and services. One key effort to support the shift to greener energy has been ESG managers requesting banks to stop funding new fossil fuel projects. These efforts have gained traction, but pushback to green investing has been widespread among more conservative states with incumbent fossil fuel industries.
In one example, the state of Texas passed legislation in 2021 banning Texas municipalities (including the state itself) from working with any banks that limit their business with producers of firearms as well as in energy industries – this includes banks such as Citigroup, JP Morgan Chase, and Goldman Sachs. As a result, Bloomberg estimates that Texas is paying .19% more than the state of California to issue new bonds.2 In Florida, where a new state law prohibits Florida municipalities from issuing any bonds related to ESG projects and bans ESG ratings for bonds, municipalities are paying .43% more (than California).
In addition to municipalities in Texas and Florida, other states have also limited access to banks and other investment companies that have “boycotted” the fossil fuel industry. This list includes Kentucky, Arizona, Louisiana, Missouri, Arkansas, Utah and West Virginia. West Virginia specifically excluded Goldman Sachs and JP Morgan due to lack of financing for coal companies.
Resources
1 Climatebonds.net, “32% of Green Bonds Achieved a Greenium in the First Half of 2023,” September 20, 2023.
2 Economist Intelligence, “Anti-ESG sentiment in the US weakens ESG markets,” June 29, 2023.
 | About Kate Campbell King, CFP®Kate Campbell King is the Founding Partner and Chief Investment Officer at North Berkeley Wealth Management. Kate provides clients with a unique approach to their financial decision-making. |
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