2021 Lets talk about the planet – ESG Sustainable investing

Oooh … this planet is hot!

This is just last year … and the red colours show where planet Earth has been hotter than the long term average temperature. Clearly, for most of the world, 2020 was between 1°C and 5°C warmer than would be expected from the long term average. The reason this is happening is almost certainly due to increases in greenhouse gases since the industrial revolution.

… there’s a more than 95 percent probability that human activities over the past 50 years have warmed our planet.

From climate.nasa.gov based upon the Fifth Assessment Report Intergovernmental Panel on Climate Change (IPCC)

Another way to visualize the warming is to have a look at the past 110 years in Australia. The last decade was the hottest on record with temperatures almost 1 °C above average and one third of a degree warmer than the previous decade.

This is not a political view – but is just science. The world is getting warmer and more and more people and governments think we should do something about it.

The world’s leading climate scientists have warned there is only 10 years for us to act if global warming to be kept to a maximum of 1.5°C. If temperatures go beyond this by even even half a degree, this will significantly worsen the risks of drought, floods, extreme heat and poverty for hundreds of millions of people.

Slack Investor has tried to do his little bit in reducing his CO2 emission- but admittedly, I could do more. In addition to his puny personal efforts, by marshalling the the power of his investments, this might have greater consequences. He is not alone in this thinking.

Environmental, Social and Governance (ESG) principles

ESG has become a bit of a buzz acronym in corporate and investing circles and is linked with a set of factors associated with “responsible” or “sustainable” company behaviour. Global Warming (or Climate Change) is just one of these ESG issues – but Climate Change is the highest priority ESG issue facing investors.

To invest according to ESG principles is to undertake to exclude companies in their portfolios considered to be doing harm to the world, and often positively skew their portfolio weightings in favour of companies deemed to be doing good.

From the Sydney Morning Herald

A recent investment development has been the collection of environmental, social, and governance data. There are agencies such as Ethisphere and MCSI that rate publicly listed companies on their resilience to long-term ESG risks. But, most people just select a “Sustainable” or “Ethical” or ESG fund and let the fund manager do the company selecting.

Ethical Investing … its a murky world … but worth it!

While getting into an ethical investing fund or ETF is straightforward. Behind the door of each fund, picking which company gets into the fund sets up all kinds of dilemmas. The company selection process seems to be a bit of a “dark” art and can be done by positive screening (e.g, High ESG scores); or, negative screening with the exclusion of industries such as armaments, tobacco, gambling or thermal coal production. Screening might also be done at the company level, for instance, to exclude a mining company might have a dodgy environmental history. Each fund seems to have a different methodology. We hope that the fund managers get it mostly right. The sustainable/ESG funds that I looked at seemed to be dominated by Technology, Financial and Healthcare companies – these are the type of companies that Slack Investor invests in already. But mining companies should not be dismissed in this sustainable search as they will help enable the transition to the low carbon economy – but they too must rethink many of their practices and decarbonize production and reduce water usage.

… renewables power sources are built from non-renewable materials produced by businesses that tend to have larger carbon footprints and low ESG ratings. Mining firms produce many of the critical materials necessary to transition to a low carbon economy.

From Massif Capital – Failure to Impact (PDF):

For example, Massif Capital cite that to build a 400 kg lithium-Ion battery that might be found in most electric vehicles requires roughly 10 kg of lithium, 12 kg of cobalt, 24 kg of nickel, 36 kg of copper, 44 kg of graphite, and 160 kg of steel, aluminium, and various plastic components.

Sustainable Funds are Taking Off

It is not just the recent extreme weather related events such as the 2019 heat wave in Europe, or the recent fire events in Australia and California. There seems to be a surge in the amount of money coming into sustainable funds as investors are starting to think about climate change and sustainability and how this affects their investments.

A move towards sustainable investing can be done through your super fund. Each super fund will have some sort of sustainable option for your superannuation money. Or, you could invest directly through a managed fund or an Exchange Traded Fund (ETF).

If you don’t want to buy individual companies and research how sustainable/ethical each company is, I like the ETF approach and would look at ETF’s like Vanguard Ethically Conscious International Shares Index ETF (VESG) for International ethical exposure. It has a spankingly good low management fee of 0.18%. For local products, I couldn’t go past the SPDR S&P/ASX 200 ESG Fund ETF (E200). This ETF has only been going 5 months and has been doing well. It also has a low management fee of 0.13%

Move towards sustainable – and feel good about yourself – and we might just save this planet.