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Happy Lunar New Year, everyone!
As ESG and sustainability become mainstream and baked into the investing strategies of many who are looking to align their values with their investments, it’s fair that more people will analyze it, question it and evaluate its true worth and potential. Some critics may even suggest it’s as fake a commitment to improving the world as the snow at the Beijing Winter Olympics.
This is a plus for the movement since it forces all of us to put on our critical thinking hats and brings forth more clarity and understanding. Skepticism also pushes market players and regulators to detect greenwashing and fraud, an area where there’s plenty of room for improvement. This conversation is good—let's keep it going.
As you listen to these discussions and think about what you might add at the next happy hour when this comes up, we think some points are worth repeating:
ESG and good returns are not mutually exclusive: There’s extensive data to back this up. You can also ask Norway’s sovereign wealth fund, the world’s biggest owner of stocks and an uncompromising ESG screener. Its deputy CEO recently said ESG and returns now go hand-in-hand.
ESG and sustainable investing have real-world positive impacts: Whether it’s net-zero commitments in response to the threat of divestments, the world’s largest asset manager backing more ESG shareholder resolutions, giants like Costco being pressured to use science-based climate targets, or the proliferation of green bonds and diversity disclosures, investor demand for sustainability is triggering real change at America’s most powerful corporations. It’s also led to a surge in clean technology and social impact-focused startups going public, and caused regulators to consider new rules for disclosures, proxy battles and pension funds.
ESG investing ≠ screening by values: ESG is a way to measure risk to company bottom lines. Since its criteria are social, environmental, and governance issues, it may look similar to values-based investing, but it’s not the same. Because ESG funds try to hold shares in companies of any sector best positioned to succeed long-term in a rapidly changing and warming planet, some flying the ESG flag may not align with all your values. Diligence and research still must be done if you don’t want to be too disappointed by finding certain companies in your portfolio. We’ve got your back on this and will keep adding resources to make this research as easy as possible.
Sustainability is here to stay: While greenwashing is definitely real and a problem, it’s a mistake to dismiss a fundamental shift in the market, industry, and society as a whole as a marketing ploy or asset bubble. The climate emergency, as well as key issues like human rights, transparency, and diversity and inclusion, are front and center in the minds of regulators, consumers, workers, and—because it’s good for the planet and their pocketbooks—investors.
News you can use
- Globally, investors poured $142 billion into sustainable funds last quarter—12% more than Q3—bringing total assets to $2.47 trillion. US funds saw a record $70 billion net inflows in 2021, although that slowed in the final three months. You can view the US funds that attracted the most money in Q4 here.
- The gaming industry resembles Pac-Man right now, with a spate of takeovers in preparation for the metaverse. Already this year Microsoft is buying Activision, Take-Two is buying Zynga, and Sony is buying Bungie. Are consolidation and tech monopolies bad for gamers and the art form? The FTC will have to make a call. In the meantime, we’ll keep playing free Wordle no matter who owns it.
- Ford is reportedly planning to invest $20 billion to convert its factories worldwide to electric vehicle production. It’s already committed $30 billion to EVs and will launch the much-awaited electric version of its F-150 pickup this year.
- The future of work is already here for HR recruiters. In a global survey by job site Monster, nearly half (49%) said flexible working schedules help them retain talent and 42% said they are a cost-saving solution. All this while another study shows the average worker saved an hour every day in January by not commuting!
- February is Black History Month in the US. It’s a time to celebrate and honor the contributions of Black leadership in all sectors, including finance, and acknowledge the past and continued struggles against racial injustice. Now’s a great time to learn about the first banks owned by and serving Black Americans, the many leaders who broke barriers in business and finance and Black Wall Street.
The other greenhouse gas
Pronounced “meh-thane” or “mee-thane”, depending on which side of the Atlantic Ocean you’re on, methane is an odorless, colorless gas found abundantly in nature and created as a result of human activities. You’ve probably heard of it in relation to cow farts and burps (insert your favorite nephew’s jokes here), but it’s truly everywhere – wetlands, landfills, paddy fields, coal mines, volcanoes, vents in the sea floor… even termite guts are a major source.
So what’s the problem? Well, two things:
- Methane is a greenhouse gas with earth-warming properties that make carbon dioxide look weak. While it only lasts in the atmosphere around a dozen years, compared to CO2’s 300 -1000 year lifetime, it’s 84 times more potent over 20 years. Official estimates attribute around 30% of global warming since pre-industrial times to methane.
- Methane emissions are out of control due to human activity, mainly livestock and the oil and gas supply chain. Natural gas is the “cleanest” fossil fuel, but its main ingredient is methane, which is released during extraction, storing, transporting, and burning (a new study says from our gas stoves too!). It’s also a byproduct of oil production. According to one major study, the oil and gas industry emits 13 million metric tons of methane a year, which is 60% higher than the EPA’s estimate. Harvard research says the EPA may be off by 50%-90%.
While reaching net-zero carbon is of chief importance, in its “code red” report the IPCC also recommended “strong, rapid and sustained reductions” in methane to limit global warming, and the UNEP says it’s the quickest way to slow climate change. Scientists and activists see reducing methane in the oil & gas industry as low-hanging fruit within the climate effort – we already have the technology to reduce waste gas, detect leaks, and plug sources, these fixes are not very expensive (gas captured can be sold to cover costs), and they offer near-immediate benefits. Reducing methane is also likely to produce quicker results than convincing people to give up burgers and steak.
What’s been lagging are regulations and corporate disclosures and actions, something the Biden administration is attempting to change. As one part of this effort, they announced $1.15 billion for states to plug abandoned oil and gas wells earlier this week.
For now, sustainable investors can stay informed on methane leak reports, company reduction targets, and shareholder proposals. We’ll help keep you updated! Here are some resources you can explore:
- Clean Air Task Force and Ceres used 2019 data reported to the EPA to track the top emitters in drilling and fracking. Many are publicly traded companies, and interestingly, five of the 10 biggest polluters were little-known operations offloaded by giants.
- A 2017 report from As You Sow scores 28 companies based on their methane emissions management.
- For impact-seekers, the Environmental Defense Fund identified 215 firms involved in mitigating methane emissions. Most are small businesses and startups, but the list includes some public players like Flowserve, Ametek, Emerson, and Gardner Denver.
Correction triggers and bears, oh my!
We know it’s frustrating trying to decipher the markets right now. But take comfort in the fact that stock markets have been confusing most of the time, to most people, going back centuries. We know because the oldest book describing one published in 1688 was titled… wait for it… Confusion of Confusions.
So don’t be too hard on yourself during this rollercoaster of rational and irrational moves. Spot the similarities in modern-day stock trading to 17th century Amsterdam’s in this book, and refresh your understanding of corrections and bear markets:
Correction: A market correction is a drop in the value of a benchmark index by more than 10%, but less than 20%, from its recent record high. They can be triggered by any economic or political news and are usually short-term declines before the price starts climbing once again. As of Wednesday, the Nasdaq index is in correction territory but the S&P 500 has not been there since March 2020.
Bear Market: When the price of a benchmark index falls 20% or more, it’s known as a bear market. They occur when something is causing extreme pessimism among shareholders.
How common are corrections and bear markets? There have been 24 corrections for the S&P 500 since November 1974, and only five of them became bear markets, according to the Schwab Center for Financial Research. The bear markets began in 1980, 1987, 2000, 2007, and 2020.
How long do bear markets last? Since 1966, the average bear market has lasted 15 months (from peak to trough) and cost investors 38.5% in value, says Schwab. The most recent one triggered by the COVID pandemic lasted just 33 days (-34% return). In comparison, the average bull market, a period when stocks are rising, is 2,069 days with 209.2% returns. It pays to stay invested. Literally.