Earth Day 2022: How to get the most out of your ESG investments

Posted: 22 April 2022 12:48 pm
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Experts reveal how you can maximise your environmental impact on World Earth Day 2022.

22 April 2022 marks the 52nd Earth Day, a movement that began in the 1970s in the US with the aims of conservation. It continues to grow with 192 countries including Australia celebrating the day.

This World Earth Day's theme is Invest in Our Planet. Given the nature of the day, Finder asked Morningstar's global director of sustainability research Hortense Bioy about the costs of transition to net-zero and how investors can get involved.

"Climate change poses real risks to companies and society at large," she said.

"The longer we wait the harder and the more costly it will be for economies to transition, and physical risks will materialise in physical damage and population displacement."

The challenge ahead

Getting to net-zero will be a long and expensive process.

According to the International Energy Agency, in order to reach net-zero by 2050 the world needs a huge decline in the use of coal, oil and gas. At the same time, there can be no new oil and gas fields.

Not only does the world need divestment, it will also be expensive.

Separate research by Bloomberg suggests it could cost as much as US$173 trillion, with most of the work needing to be done in the next 10 years.

What is the investing community at large doing?

Figures released by Morningstar show climate action and commitments are being accelerated among companies, asset management and investors.

Globally you'll find 860 mutual funds and ETFs that allow you to invest towards climate solutions.

Collectively these funds have doubled in 2021 to US$408 billion, boosted by increasing inflows and an acceleration in product development.

The research further shows that for the first time China overtook the United States as the second-largest climate funds market, more than doubling in size to about US$47 billion. Meanwhile, US climate fund assets grew by 45% to US$31 billion, and the rest of the world also doubled to US$6.3 billion.

When it comes to the rest of the world Australia is the largest market.

Morningstar highlights that assets under management grew by 67% in 2021 with low-carbon funds taking up almost 70% of the assets.

But you can help while still making money

Despite the myths around ESG investing, it can in fact be more profitable than simply doing the right thing.

A study released by the MSCI shows high ESG-rated companies were more competitive and generated abnormal returns, often leading to higher profitability and dividend payments, especially when compared to low ESG-rated companies.

Dividing the market into 5 segments, Morningstar highlights Climate Solution and Clean Energy Technology as the most likely to appeal to investors with the greatest risk appetite as they have the greatest opportunity to outperform.

"Because of their narrower market exposure and often mid- and small-cap bias, Climate Solutions and Clean Energy/Tech funds represent more-volatile investments," Bioy told Finder.

"Sharp price fluctuations in the clean energy sector over the past couple of years are testament to this."

However don't expect smooth sailing should you adopt this strategy.

"After registering their best annual performance in 2020, with returns of up to more than 200%, Clean Energy/Tech funds lagged the market in 2021," Bioy continues.

How can you have the biggest impact?

While return on investments is important for many, it is not the be all and end all when it comes to ESG investing.

In fact, many start environmentally sustainable investing because they want to have an impact on the planet.

Unfortunately though, there isn't one exact answer when it comes to having the biggest impact.

"It depends on how you define impact," she said.

"But there is growing consensus that low carbon strategies are the least impactful because low carbon intensity is often achieved by divesting from the most carbon-intensive companies and sectors.

"It's this whole debate about divestment versus engagement," Bioy says.

She notes that "by divesting from high carbon emitting companies, you may be decarbonising your portfolio, but you're not decarbonising the world. Divestment doesn't have real-world impact."

The director of sustainability research does however explain to investors they can have a direct impact through green bonds.

"Some investors would consider investing in green bonds as the most direct, effective and measurable way of delivering impact. Green bond funds invest in debt instruments that finance projects facilitating the transition to a green economy," Bioy concludes.

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