Clouds hang over a wind turbine as the sun sets near Szudzialowo, Poland on Nov. 12.Matthias Schrader/The Associated Press
Many investors are familiar with the benefits of including green stocks and bonds in their portfolios: They are using their savings to back companies that can lower carbon emissions while also generating compelling returns over the long term.
But green investing is also taking a few knocks – in particular from some academics and professionals who believe that investors are being inundated with financial products designed to capitalize on a hot trend and generate revenue for Wall Street and Bay Street.
While these criticisms don’t refute the virtues of green investing, they suggest that investors may need to increase their diligence at a time when interest in sustainable investing is strong.
One criticism that reverberated through the investing landscape earlier this year came from a notable insider – Tariq Fancy, the former chief investment officer of sustainable investing at BlackRock Inc., the world’s largest asset manager.
In a long essay posted on Medium, and picked up by media outlets worldwide as insights from a Wall Street “whistle-blower,” Mr. Fancy argued that sustainable investing promoted by Wall Street was merely a distraction: It rewarded firms selling products but did little to confront a warming planet.
“I sincerely believed that while sustainable investing was not perfect, it was a step in the right direction in the critical question of how business and society should intersect in the 21st century. Unfortunately, I now realize that I was wrong,” Mr. Fancy wrote.
He argued that ESG scores – or ratings based on how companies measure up on environmental, social and governance principles – varied considerably based on who was doing the measuring. What’s more, it was unclear whether companies with higher ESG scores would see their share prices outperform.
And in one of his more searing criticisms, he said Wall Street’s efforts to sell green financial products was “more a marketing narrative than any reflection of reality.” He doubted whether an exchange-traded fund that focused on, say, green companies would support growth in the sector.
“Because they collect baskets of shares already traded in public markets, investing in such a fund does not provide additional capital to more sustainable companies or causes,” Mr. Fancy wrote. (Attempts to reach Mr. Fancy at Rumie, the Toronto-based global education technology non-profit he founded and now leads, were unsuccessful.)
Sustainable investments can certainly cost more, though, in terms of fat fees that investors must pay in the form of management expense ratios.
The iShares Global Clean Energy ETF, a BlackRock ETF that provides exposure to companies that produce renewable energy, has an expense ratio of 0.42 per cent – multiples higher than the slim 0.03-per-cent expense ratio for the broad iShares Core S&P 500 ETF, which tracks green and not-so-green companies alike. Even so, the Clean Energy ETF has attracted nearly US$6.6-billion in assets.
But apart from paying substantially higher fees, some evidence suggests that investors may have little to show for their interest in saving the environment from polluters.
A recently released report from the EDHEC-Risk Institute, a department within the France-based business school, looked at the extent to which climate-aware institutional investors can influence corporate carbon emissions. The authors, Gianfranco Gianfrate, Tim Kievid and Angelo Nunnari, studied 6,392 firms in 68 countries between 2007 and 2018.
Their conclusion: On average, there was no meaningful carbon footprint reduction during the decade, and the reduction was slight even among the biggest polluters.
Already, skepticism toward sustainable investing appears to be rising among some investors.
A survey of 800 U.S. individual investors by the Morgan Stanley Institute for Sustainable Investing, released last month, found that 79 per cent of investors are interested in sustainable investing, down from 85 per cent in 2019 when the survey was last conducted. Although 99 per cent of millennial-aged investors are interested in sustainable investing – a new high – the share of those very interested dropped to 57 per cent from 70 per cent.
Is green investing on the ropes? Maybe not.
Mr. Fancy expects that the real drive to solve climate change must come from a higher authority than capital markets, which tend to chase profits. He believes that governments must take the lead.
The good news here: Some observers expect that the recent COP26 climate change conference in Glasgow, Scotland, attended by 120 world leaders, suggests that green investing can thrive as governments renew efforts to limit carbon emissions.
“We’ve seen the messaging coming out of COP26 and from Mark Carney” – the United Nations special envoy on climate action and finance – “that this is going to involve a massive push from both the public sector and the private sector,” John De Goey, portfolio manager at Wellington-Altus Private Wealth, said in an e-mail.
“We’re only in the first or second inning of this ball game,” Mr. De Goey said.
He’s not alone in seeing optimism in the climate summit. Huw van Steenis, senior adviser to the chief executive officer of UBS, wrote in the Financial Times last week that new accounting standards for determining carbon footprints – a product of COP26 – will deliver what he called “a new phase of climate-aligned investing.”
It might take more legwork, but investors will gain a better understanding of what it means to be green and find winners that can thrive in the long term.
“Climate change has brought a new level of complexity to the scenarios that investors need to weigh up,” Mr. van Steenis wrote. He added: “The transition tailwinds will provide them with large investment opportunities for decades.”
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