Investing in a Changing Climate

Impact Reflection | August 27, 2021

During a recent family camping trip to Hendy Woods State Park, I witnessed firsthand how the extended drought in California is changing our local environment. In past years, my two kids and their friends spent hours jumping from a rope swing into the idyllic river flowing below. This year, we instead found a stagnant pond teeming with algae. The once flowing river normally fed by snowmelt from the previous winter was gone.

California has experienced drought conditions since 2011, and the cumulative impact of these dry years has created negative effects on our shared environment as well as our shared health. Extreme heat has broken records in the Northwest, and led to an increase in deaths from heat stroke. Along with hotter temperatures, the dry and gusty wind conditions are literally fanning the flames of extensive wildfires from California up to British Columbia. Precious tree cover that would otherwise reduce carbon dioxide levels is burning, releasing additional carbon instead. Towns are destroyed, and air quality is jeopardized for vast geographies depending on wind direction.

Coordinating Change

The global conversation about climate change has been underway for many decades; we are now seeing a range of impacts that give a sobering sense of the problem, from wildfires and heat waves to polar ice melt, flooding, and ocean acidification. The Intergovernmental Panel on Climate Change (IPCC) report released earlier this month stated that even if countries sharply cut emissions immediately, we should still expect global temperatures to likely rise by 1.5 degrees Celsius in the next two decades. [1] The next gathering for global conversation will be at the 2021 UN Climate Change Conference at the end of October. The focus will be on strategies for slowing the pace of warming via coordination of government policy, private sector commitments, and individual actions.

A commitment to the transformation of vehicle technology provides a good example. Following the release of the IPCC report, President Biden signed an executive order setting targets for electric vehicles, hydrogen fuels cells, and plug-in hybrid vehicles to make up 50% of US sales by 2030. Simultaneously, the EPA proposed an updated target that would mandate all new vehicles have a minimum fuel efficiency of 52 miles per gallon by 2026.

Both these goals require major changes from current auto manufacturers, and many have already made public commitments.[2] New vehicles promised from legacy auto companies over the next few years include the top selling vehicle in the US, the Ford 150 pickup truck. By 2030-2035, many legacy companies have a commitment to phasing out internal combustion vehicles entirely. Meanwhile, companies like Chargepoint and Electrify America are rapidly building out charging infrastructure across the country, as well as providing in-home charging installation.

Transparency Leads to Transformation

The SEC is pushing forward new climate-focused efforts as well, with proposed regulations on climate disclosure for US companies that have been backed by the White House. Increased disclosure creates transparency that allows both consumers and investors to better understand companies’ environmental impact. Mandated climate reporting has been advocated by ESG-focused mutual fund managers for many years, and they hope this information will help shift the flow of capital toward companies with better environmental policies and will support their engagement with change.

In the private sector, a growing number of companies are choosing to be transparent with their environmental goals. Approximately 20% of the world’s 2,000 largest public companies have made a pledge toward net zero targets to balance their carbon emissions.[3] Tech companies are leading those efforts: Microsoft has pledged to be carbon neutral by 2030 and Google has committed to be exclusively powered by renewable energy by 2030. Carbon heavy industries are moving at a slower pace, but still heading in the right direction, with oil majors Shell, BP and Total each announcing plans to be net zero emission by 2050.[4]

North Berkeley’s Approach

Consumers, investors, and concerned citizens can more easily choose an active role when they have better information. Our mission is focused on creating a sense of calm for our clients so they can approach financial decisions with confidence. For clients interested in climate friendly investing, we focus on a number of ways they can choose financial security while having an impact with their investments.

Removing companies that are climate offenders. This process of “negative screening” seeks to exclude investments in companies that are exacerbating the climate problem through carbon extraction or emissions. People are taking steps to reduce their carbon footprint in their homes and in their spending decisions, and we help extend this effort to their investments. Disentangling their portfolios from holding certain stocks, such as major oil & gas companies like Exxon Mobil or coal-fired utilities, is a high priority. As of July 2021, institutions have divested more than $14T from fossil fuel companies and the trend appears to be accelerating.[5]

Investing in companies making a positive impact on the environment. It’s not just about removing the ‘bad’, but also prioritizing investments in ‘good’ companies. “Positive screening” channels investment toward companies or projects that have quantifiable ESG benefits relative to industry peers. This includes companies that are improving water usage efficiency in industrial agriculture, developing renewable energy technologies, or reducing the amount of waste created by their manufacturing processes. Investing in these companies makes it easier for them to raise additional capital and attract talented employees via a higher market value.

This category of seeking out investments in companies creating positive change can also extend into the realm of private investment opportunities. We offer access to carefully curated illiquid investments – ranging from renewable energy production to creating healthy soil through organic farm conversion – that can have higher impact and complement one’s core portfolio.

Engaging companies to create positive change. When a mutual fund is able to aggregate the voices of all its shareholders it can have an outsized voice on key issues. We work with many funds that prioritize shareholder engagement as a way to create real change and pressure companies to broaden their commitment to all stakeholders.

Many years of effort to compel measurement and assessment of carbon emissions at Exxon came to fruition earlier this year, with three new climate-aware board members elected by progressive shareholders. Since that vote earlier this year, Exxon has made promising statements committing the company to support the goals of the Paris Climate Agreement and discussing a pledge to reduce its net carbon emissions to zero by 2050. This engagement work happens behind the scenes of the portfolio, but can often make the most significant changes to corporate policy.[6]

Beyond the Portfolio

The enormity of climate change and its cascade of impacts means that any material progress will inherently require a myriad of solutions. Government policy, private sector companies, individual households, and investors around the globe are all needed. Beyond the portfolio, there are environmental implications to how we bank, how we spend, and how we travel that all factor into this process of intentional change. The challenge is often taking a first step, and having faith that you are part of a larger kaleidoscope of efforts.

Climate change affects all of us, from local swimming holes to global investment decisions, and we are motivated to provide our clients the opportunity to incorporate their goals around climate change as part of their portfolio

References

[1] IPCC Report – AR6 Climate Change 2021: The Physical Science Basis IPCC

[2] Annie White, “Here Are All the Promises Automakers Have Made About Electric Cars,” Car & Driver, June 26, 2021.

[3] A Fifth Of World’s Largest Companies Committed To Net Zero Target. Forbes.com

[4] There is already evidence that these pledges are having an impact, a SBTi (Science-Based Targets initiative) analysis of 338 large companies with science-based pledges reduced their carbon emissions by an average of 25% between 2015 and 2019.

[5] Overview of Divestment Commitments GoFossilFree.org

[6]  Read about another example of companies pressuring Kellogg’s to remove certain pesticides from their cereal supply chain: “Cultivating Systemic Change” on the North Berkeley Wealth Management Blog

Matthew Gatt, CFP - Lead Advisor 

About Matthew Gatt, CFP®

Matt serves as a lead advisor and works with clients to articulate their financial lives. He is also passionate about impact investing and helping clients align their investments with their personal values.

Read more about Matt

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This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

By |2021-09-10T15:49:47-07:00August 27th, 2021|