By Dakota Parks for Northwest Florida's Business Climate
Sustainability is sweeping across the globe, changing the way we live, travel, shop, consume— and invest. As social and cultural consciousness toward protecting the environment and natural resources thrives, so too does the demand for green investing. Sustainable investing, often called impact, green or eco-investing, puts environmental sustainability at the forefront of investment strategies and portfolios. Since 2012, sustainable investment assets managed in the U.S. have more than tripled from $3.7 trillion in 2012 to $17.1 trillion at the beginning of 2020, according to the Forum for Sustainable and Responsible Investment’s 2020 trends report. This surge of assets not only accounts for 33 percent of total U.S. assets under management but also demonstrates the global forces changing the future of investments.
For Jacey J. Cosentino, a financial advisor for the Radcliff- Schatzman Group at Morgan Stanley, her focus on sustainable investment solutions allows her to help clients align their core values with the way they invest and grow wealth. It was this shift toward what she describes as compassionate capitalism that supports causes like climate change mitigation, diversity and inclusion, social equity, food and water scarcity and cruelty-free investing that first interested Cosentino in sustainability back in 2012.
“Sustainable investing can incorporate a theme, like climate change mitigation or social equity, or even screen out certain investments like fossil fuels, tobacco or companies that have had human rights violations,” Cosentino explained. “For me personally, I want to support companies that have fair wages, non-discrimination policies in place, methods in place to lessen the damage to our environment, waterways and communities or implement processes that remove negative impact to our environment all together.”
Climate change mitigation and legislative policies like the Paris Climate Agreement in 2016 and global leaders setting goals to eliminate greenhouse gas emissions are some of the driving forces to the rise in sustainable investing. As more and more people embrace a green lifestyle, they want to support companies and investment opportunities that promote a healthy environment and future.
Financial advisors, like Cosentino work with analysts to choose investments that consistently score high on Environmental, Social and Governance (ESG) metrics. The ESG categories can be broken down into the three pillars: Environmental criteria considers how a company performs as a steward of nature, which might include action on climate change or greenhouse gas emissions and reductions; Social criteria examines how a company manages relationships with employees, suppliers, customers and the communities where it operates, which includes labor standards and health and safety; Governance criteria explores a company’s leadership, executive pay, audits, internal controls and shareholder rights to include anti-corruption measures or tax transparency.
“Companies that focus on sustainability are less volatile and score higher on ESG metrics,” Cosentino elaborated. “Whether its fixed income, equities, private equity, REIT’s, or alternative investments, we have options to build out portfolios that echo the changes you want to see in the world.”
On a presentation co-hosted by local organizations 350 Pensacola and Healthy Gulf, called “Climate Change Investment Opportunities: Decarbonizing Your Portfolio,” Cosentino discussed how companies are pledging to decarbonize in an effort to reduce global greenhouse gas emissions, which coincides with investing in new technologies and renewable energy. According to data from the Morgan Stanley Institute for Sustainable Investing, 4 in 10 global companies across multiple industries have a confirmed emission target, including 37 percent of companies within the real estate industry.
“In my opinion, renewable energy is the new real estate,” she said. “Investments in solar, wind and hydropower through equities, ETF’s, mutual funds, SMA’s, REIT’s, bonds and alternative investments all offer an investor the ability to not only support the most pressing issue of our time, climate change mitigation, but also continue to invest in what they like best: real estate. Many of my clients are real estate agents and real estate investors and incorporate renewable energy into their investment portfolios. I have several clients who have chosen this route as opposed to buying another property. They feel good about supporting an industry that is truly changing our world.”
Investments in emerging technologies like renewable energy are key to curbing greenhouse gas emissions and climate change mitigation. A cross-team collaboration of more than 50 Morgan Stanley economists, analysts and strategists estimate that reducing energy- related carbon emissions—the largest segment of CO2 emissions—is possible utilizing five decarbonization technologies: renewables, electric vehicles, hydrogen, carbon capture and storage (CCS), and biofuels. In order to reach net-zero emissions by 2050, however, $50 trillion in investments is needed in these five technologies. In addition to the surge of investment opportunities, the price of solar, renewable energy and green technologies are becoming more affordable, which is driving more companies to adopt the infrastructure.
“I believe policy will also force certain industries to add solar, wind or hydropower to their methods of acquiring energy. Sustainable infrastructure is something I would incorporate into a diversified portfolio, especially knowing the statistics over the next 10, 20, 30 years and beyond,” Cosentino explained.
One of the biggest misconceptions in sustainable investments is that investors will forego returns to have a sustainable portfolio. Not only do returns in sustainable investments perform in line or better than traditional investments, but as Cosentino explained, during a down economy like the 2020 market experienced at the height of COVID-19, sustainable investments can even capture greater returns: “While COVID-19 induced a global recession and market volatility in the first half of 2020, sustainable funds—across stocks and bonds—in general, helped investors weather the period better than many of their traditional peers,” she said.
The Morgan Stanley Institute for Sustainable Investing found that U.S. sustainable equity funds outperformed their traditional peer funds in 2020 by a median total return of 4.3 percentage points and that U.S. sustainable equity funds’ median downside deviation was 3.1 percentage points less than traditional peer funds. As the world grapples with impacts of climate change and economic recovery after COVID-19, investors around the world are demanding environmentally conscious options.
Sustainable investing doesn’t just stop at protecting the environment, either. Through restriction screening, thematic exposure and impact investing, investors can tailor their portfolios to specific social impacts too, including socioeconomic issues, such as advancing racial equity and combating systemic racism through investment decisions. Other social lenses include supporting diversity and inclusion and promoting community economic development. To learn more about how sustainable investing is impacting the future, visit: morganstanley.com/articles/investing-with-impact.