Climate Change Affects Everyday Peoples’ Everyday Lives Now
There is no shortage of disasters if you read the news. The Texas heat brought down the power grid after the Texas freeze put everyday Texans at risk in February of this year. The wildfire season looks to be a bad one in California again, with officials warning locals to brace for another punishing wildfire season. The culprit behind this wildfire season: drought. These and other regular climate change related risk events are affecting people in their daily lives. Something powerful occurs when this happens – we begin to seek out solutions.
The challenge is that an individual consumer typically cannot affect a large enough change to make much of an impact on the issues the consumer is experiencing as a result of climate change. Together, on the other hand, consumers can hold companies accountable in reducing their carbon footprint. Consumers are desperate to support businesses with an honest desire to reduce their impact on the earth.
Investors understand this. Flows into environmental, social and governance (ESG) funds have grown at breakneck speeds in recent years. Flows into these types of funds doubled during 2020 after quadrupling in 2019. Needless to say, the traditional investment management industry is not used to doubling or quadrupling their fund inflows each year.
The financial services industry is ready to adapt. JP Morgan just announced an acquisition of the ESG investing platform OpenInvest. This is the beginning of the adoption of ESG by the globally powerful incumbents.
It seems this is just the beginning. Canadian data shows only 1% of invested capital is in ESG funds. There is massive room for growth in this space.
The Obvious Reason This Trend is Permanent
People hate change. But they will gladly make small changes if they believe it will have an impact. Or just to show to their neighbors that they are conscientious people.
That means the valuation of a business stops being about the traditional value and expands to include the triple bottom line. Consumers become less price sensitive, and margins expand with relative ease. It helps if the business is also utilizing some innovation to deliver their product/service.
What Do ESG Funds Invest In?
The global problems we are facing will require massive shifts in how the world does business. The businesses pursuing ESG-friendly practices are much more likely to have an innovative solution. The old ways of doing things are stale. Think of fossil fuels compared to clean energy. The clean energy space features a much higher focus on R&D because the way forward is unclear. That means investors can get much more exposure to teams that, on average, will outperform “old economy” incumbents.
The new economy is circular. Single use plastics provide an easy example. Single use plastics will need to be phased out because plastic is hard to reuse and is difficult to decompose. Alternatives to plastic packaging use mushrooms, cornstarch, and even seaweed. These all decompose naturally but need to be developed to handle what we use plastics for. Even cardboard and paper packaging are a step in the right direction.
The EV boom shows how much consumers want to support products that feel less wasteful. One of the larger mobility-related climate change problems is air travel. For the average person, the carbon impact of one flight can be equivalent to going car-free for one year. That means the aviation industry is ripe for new technologies too. Things like biofuels and electrification, if funded appropriately in the coming years, could significantly reduce emissions from shorter (< 1,500km) flights.
Oh, and by the way consumers saved an excess of $5.4 trillion during the pandemic. They will spend plenty of this, but many are keen to invest their savings too.
Asset Management Industry
Something the asset management industry has talked about for decades is that the largest generational wealth transfer in history will happen as boomers pass their assets to millennial children in their estates or wills.
Millennials care about sustainability. They will even pay a premium for products that claim (and prove) to be sustainable. So, it is no surprise that Morgan Stanley found millennials’ interest in ESG investing has been increasing. Compared to all investors, millennials are more interested in ESG investing. Specifically, where all investors’ interest in ESG investing rose from 71% to 85% (from 2015 to 2019), millennials’ interest rose from 84% to 95% (over the same time period).
According to J.P. Morgan, ESG is the strategy set to receive the largest increase in capital allocation.
So, billions of investment dollars will flow to millennials, who will promptly invest that money alongside their existing investments, directly into ESG funds and products.
How to Benefit from These Trends
To make money as an investor here, you want to invest in ESG-friendly companies today. We know from watching companies like Tesla that the decision to invest is not always 100% based on valuation. In the case of millennials, they invest more with their hearts. Great! So, buy ESG companies now and when the largest wealth transfer in history occurs, sit back and watch your portfolio grow. These ESG companies will receive a sizable premium from the market.
Thank You for your loyal readership.
The Financial Star.