Larry Berman: The challenge of ESG investing
It’s clear to us that despite best efforts and recognition climate change is a major issue for the world, the hurdles are high in terms of the developing world need for cheap energy (read coal). From our perspective, the logical transitionary energy source investment should be nuclear. It’s by far the cleanest way to generate relatively low carbon emissions on a huge scale. There are clear risks as we have seen with Chernobyl, Fukushima, and Three Mile Island to name some of the high profile disasters, but if we can’t get there fast enough with the renewable and battery storage technology today, nuclear is probably the best (fastest) option. Bottom line, it’s technology improvements that will get us there and that requires big investment. As governments debate spending and budgets, in theory, there should be no limit to what the world should spend to get us there. If the US can’t show strong leadership here, we should not expect China and India to do their part either where costs are much higher.
Since the Paris agreement at COP21, the world has not made much progress slowing climate change. In fact, it’s speeding up. Getting to carbon neutral (net-zero emissions) by 2050 will cost tens of trillions. COVID set the world back significantly in that 10s of trillions were spent fighting the disaster.
When it comes to investing in climate change, there is a huge push globally into ESG (Environment, Social, Governance) focused investing. It’s been a growing them for the past decade. The Principles for Responsible Investing is an independent advocacy organization that works to:
- to understand the investment implications of environmental, social and governance (ESG) factors;
- to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions.
The PRI acts in the long-term interests:
- of its signatories;
- of the financial markets and economies in which they operate;
- and ultimately of the environment and society as a whole.
The PRI is truly independent. It encourages investors to use responsible investment to enhance returns and better manage risks, but does not operate for its own profit; it engages with global policymakers but is not associated with any government; it is supported by, but not part of, the United Nations.
On the Environment side of ESG, our investment thesis is to overweight the nuclear (uranium sector) URA (mining) and NLR (electric utilities) ETFs are good ways to play it. Adding to this, the renewable clean energy sector ICLN and ZCLN ETFs are good ways to play it.
Overall, ESG investing will be a big focus in the coming years. Some argue that ESG will eat into profit margins. We agree unless the consumer votes that they will support companies that are more ESG focused and possibly pay a bit more for them. Some companies are making that bet and other are not. ESG focused investing over the past 20-years has not shown much in the way of additional return, but that trend may be changing.
Tune in this week on Nov. 4 at 7 p.m. ET for our Fall 2021 Investors Guide to Thriving Virtual Roadshow where we will start mining for ETFs and stocks for investors to consider as investment to play the climate change theme.
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