Time for a Different Climate Endgame

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Last week's report on the climate crisis, released by the UN Intergovernmental Panel on Climate Change (IPCC), is undeniably grim. We’ve got less than a decade to make the world carbon-neutral — and even then, some negative consequences of climate change are already baked in. Much like the end of Avengers: Infinity War, it’s easy to feel like Thanos has already snapped his fingers and changed the course of humanity.

But there’s still time for a different endgame. Though we probably can’t develop the technology to travel back in time (spoiler alert), investors can put their own capital into companies and funds that prioritize climate change, including the multi-trillion dollar market for decarbonization. Already, investors and money managers have committed to align $43 trillion with net zero carbon goals by 2050; pushing up the deadline to 2030 will require a massive commitment.

What does that look like? Investors can start by asking four key questions to vet the climate commitments of current and potential investments. From ETFs to equity crowdfunding, investments in technology that get us closer to net zero emissions are worthy, and increasingly accessible, portfolio additions. But on top of changing the emission status quo, some say we could also see the next best thing to time travel: sucking the existing carbon out of the atmosphere.

The report is a serious warning for all of us — and an invitation to get up and make an impact. #InvestorsAssemble

Should you be worried about inflation?

You’ve probably seen “inflation” mentioned in the news a lot lately and wondered whether, like the Delta variant, it's here to ruin your fall plans.

Put simply, inflation is the cost of goods and services going up. It’s a normal part of the economy, but things can get ugly if prices rise too fast. This can happen when the money circulating in the economy increases or there is insufficient supply and production problems. In such scenarios, your money’s buying power falls, which is why inflation is often called “the silent thief.”

If you have started to notice gas, electricity, and avocado toast (jk, jk) putting a bigger dent in your wallet, you aren’t imagining things. The government’s inflation measure, the consumer price index (CPI), has been climbing sharply for months. Prices for everyday goods were up 5.4% in June and July from the same time last year. (See also: shrinkflation)

By historical standards, the inflation rate is still low. Many won’t even remember a time when it was a real problem. But for various pandemic-related reasons, like the reopening and supply bottlenecks, we are witnessing the steepest increase in costs in over a decade. The Federal Reserve, the overseer of the economy, insists this bout is temporary and once these COVID effects pass we can get back to a normal rate of around 2%. But not everyone is convinced.

So is there a reason to worry? It depends.

If you’re looking to buy a car or home or book a vacation right now, you’ll be paying a higher sum than usual due to shortages. Mortgage rates may also rise if inflation stays elevated. If you earn wages or interest on savings/bonds/certificates of deposits (CDs), they won’t rise as fast as expenses. Stocks, real estate, and commodities tend to keep up well. However, shareholders worried the Federal Reserve will be forced to tighten money supply soon if inflation gets too high, may sell. The key is to diversify, diversify, diversify.

Finding the right prescription

It doesn’t take the perfect pair of Warby Parker glasses to see that gender lens investing is a growing segment of ESG investing: more than $3 billion in public markets and $5 billion in private markets is now invested with a focus on gender (aka “gender lens”).

The most visible gender lens that investors apply is putting their money in companies with women in leadership roles. It’s a commitment that’s badly needed. A scant 41 of the Fortune 500 CEOs are women, and only 2 are women of color; just 2.3% of private venture capital went to women-led startups last year.

But the C-suite or founding team is not the only lens that investors can use to advance gender equality — and that’s where the gender lens can amplify lots of smaller elements that add up. Does the company offer flexible work options, reimbursements, or other benefits for employees with dependent care obligations? Does the company work with suppliers or contractors that employ women at living wages with benefits? Is the company offering a product or service that addresses gender bias?

These questions, of course, are just the beginning. Applying a gender lens can get very nuanced and complex very quickly. We’ll be sharing deeper dives on what each lens means, as well as strategies for getting started, in future newsletters.

When does ESG news move stock prices?

ESG has come a long way. What began as a fringe idea (the term was coined in 2004) is now a mainstream investing strategy. A firm that properly manages these issues, like employee satisfaction or emissions, is viewed as less risky and better placed for the future. That is why when a company makes an ESG-relevant change or analysts and regulators discover new information, the accompanying news coverage and your Twitter feed may send its stock price up or down.

And the stock market is a tough crowd, according to researchers at Northwestern University and Harvard Business School. They looked at data from 2010 to 2018 for over 3,000 companies and found that big, short-term price reactions are only seen when the news is considered “financially material” or affecting the bottom-line, not reputation or any other factor. Another takeaway is that both positive or negative sentiment in the media about company behavior can influence prices. As one of the authors pointed out, the market is not viewing ESG as a “value-destroying issue.”

In fact, investors tend to react more strongly to positive news than negative. On days when positive news made it to at least five news articles, stocks outperformed the larger market by an average of 2.2%, compared to a 0.7% decline in share price for negative material news. Still, we know from other studies that major controversies tend to be a drag on stocks for a long time.

As for themes, investors are most concerned with customer experience. This includes things like product quality/safety and data security and privacy. They rewarded companies by pushing stocks 1.9% higher or punished them with a drop of 1.1% relative to the market. Smaller but significant reactions were seen for negative environment news (e.g. energy management, air quality) and positive business model innovation news (e.g. supply chain management).

Need more evidence that ESG news matters to the stock market? The big ESG data provider used in this study, Truvalue Labs, was bought in October by one of the financial industry’s favorite sources of information, FactSet. Also, this Bank of America infographic is frame-worthy.

Before you go -

NASDAQ’s push for board diversity got a big boost when the SEC approved the exchange’s new rule requiring listed companies to have at least one female board member and one board member who is a person of color, identifies as LGBTQ+, or is otherwise part of an underrepresented group.