The Supreme Court last week limited the Environmental Protection Agency’s ability to regulate greenhouse gas emissions to combat climate change, and that may leave eco-conscious investors wondering what they can do.
Certain investment managers offer funds aimed at promoting values such as environmental preservation and social good, and those funds have become more popular in recent years.
However, trying to choose a so-called environmental, social and governance fund, especially one that aligns well with your interests, can seem like a challenge at first.
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“I think it can be very difficult to know where to start,” said Fabian Willskytt, associate director of public markets at Align Impact, a financial advisory firm that specializes in value-based investing.
But there are some simple steps investors trying to make a climate impact can take to get started and invest with confidence.
Court says Congress has regulatory authority
A power plant that burns coal.
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In a 6-3 ruling, the Supreme Court on Thursday removed some of the EPA’s authority to control planet-warming carbon emissions from US power plants.
Chief Justice John Roberts and the five other conservative members of the court said that Congress, not the EPA, has the power to create a broad system of cap-and-trade regulations to limit emissions from existing power plants to help transition the country from coal to renewable energy. (A cap-and-trade system is a policy mechanism to reduce emissions.)
Fossil-fueled power plants are the second-largest source of the country’s carbon pollution in the US, after transportation.
Chief Justice of the United States John Roberts and Supreme Court Justice Elena Kagan on February 4, 2020 in Washington.
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“Limiting carbon dioxide emissions to a level that compels a national transition away from using coal to generate electricity may be a ‘sensible solution to the current crisis,'” Roberts wrote. “But it’s not plausible that Congress would give the EPA the authority to adopt such a regulatory scheme on its own.”
While the decision still leaves room for the EPA to regulate emissions more broadly, it is seen by many as a major setback for the Biden administration’s agenda to combat climate change. Meanwhile, climate legislation proposed by Democrats has stalled in Congress.
“Today, the Court strips the Environmental Protection Agency (EPA) of the power given to it by Congress to respond to the ‘most pressing environmental challenge of our time,'” Justice Elena Kagan wrote in her dissent. , along with the other two liberals at court.
What are ESG funds?
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Funds that allocate investor money according to ESG issues held $357bn at the end of 2021, more than four times the total three years earlier, according to Morningstar, which tracks data on mutual and exchange-traded funds.
Investors poured $69.2 billion into ESG funds (also known as sustainable or impact funds) last year, an annual record, according to Morningstar.
These funds come in a variety of flavors. Some may seek to promote gender or racial equality, invest in green energy technology, or avoid fossil fuel, tobacco, or weapons companies, for example.
Women and younger investors (under 40) are more likely to be interested in ESG investing, according to survey data from Cerulli Associates. Some 34% of financial advisors used ESG funds with clients in 2021, up from 32% in 2020, according to the Financial Planning Association.
There are now more than 550 ESG and exchange-traded mutual funds available to US investors, more than double the universe five years ago, according to Morningstar.
“An individual investor has much more [ESG options] and they can build a portfolio in ways they couldn’t do 10 years ago,” said Michael Young, manager of educational programs at the Forum for Sustainable and Responsible Investing. “Almost everyone [asset] The category I can think of has a background option, so we’ve come a long way.”
But fund managers may use varying degrees of rigor when investing your money, which means the environmentally focused fund you bought isn’t necessarily as “green” as you think.
Here’s an example: Some fund managers may “embed” ESG values when choosing where to invest money, but they may only play a supporting (and not a core) role. By contrast, other managers have an explicit ESG mandate that acts as the lynchpin of their investment decisions.
But investors may not know the difference.
The Securities and Exchange Commission Proposed rules in May that would increase transparency for investors and help make selecting an ESG fund easier. The rules would also crack down on “greenwashing,” whereby money managers mislead investors about ESG fund holdings.
All of this might leave you thinking: How do I get started? And how can I be sure that my investments really align with my values?
There are some simple steps investors can take, according to ESG experts.
One way to start is by looking at the asset manager, which serves as a good “shorthand” for investors, according to Align Impact’s Willskytt.
Some companies focus on ESG and have a long history of investing in this way, which are encouraging signs for people who are serious about values-based investing, he said.
Investors can get a sense of a company’s commitment by looking at its website and seeing if it lists ESG as a primary focus, he added. From there, investors can choose from the funds available from that company.
“It’s definitely a red flag if you can only find the most basic of [website] information,” said Jon Hale, director of sustainability research for the Americas at Sustainalytics, which is owned by Morningstar. “This suggests that commitment may not be as high as with other funds.”
Examples of ESG-focused companies include Calvert Research and Management Y Impax asset managementWillskytt said. Nuveenwhich is owned by TIAA, also has a relatively long history of ESG investing, he added.
Morning Star classified Calvert and Pax, along with four others (Australian Ethical, Parnassus InvestmentsRobeco and Stewart Investors) as leaders in ESG asset management, according to a Level of ESG commitment assessment issued in 2020. (However, not all cater to individual US investors.) Another six, including Nuveen/TIAA, ranked lower in the “advanced” ESG category.
“If you have confidence in the manager, the funds will be more or less strong from an ESG perspective,” Willskytt said. “Then it’s about finding the flavors that work for you.”
However, there is a drawback. Despite the growth of ESG funds, investors may still not be able to easily find a fund that matches a specific issue, depending on the niche. There are plenty of climate-focused funds and broad ESG funds that represent many different value-based filters, for example, but it’s harder to find something like a gun-free fund, experts said.
The majority (70%) of sustainable funds are actively managed, according to Morningstar. They may have a higher annual fee than the current funds in your portfolio (depending on your current holdings).
Investors who want to learn a bit more about ESG before taking the plunge can review a grade on the fundamentals of the Forum for Sustainable and Responsible Investment.
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Investors can also start by browsing some free mutual fund and ETF databases.
Sustainable and Responsible Investment Forum It has one which allows investors to classify ESG funds according to categories such as asset class (stocks, bonds and balanced funds, for example), issue type and investment minimum.
However, this list is not exhaustive: it includes funds from Forum member firms. (However, the company’s membership can be a reliable screen for the asset manager’s ESG rigor, Young said.)
how do you sow is another organization that can help investors find funds that are fossil fuel free, gender equal, gun free, prison free, gun free, and tobacco free, for example. maintains Ranking of the best funds by category.
Alternatively, investors can also use the As You Sow website to gauge how well their current investments align with their values. They can type in a fund’s ticker symbol, which generates a fund score according to different value categories.
Other firms also assign ESG ratings to specific funds. Morningstar, for example, allocates a certain number of “balloons” (with 5 being the best score) so that investors can assess the fund’s ESG outreach. Morningstar has a ESG Screener that also allows investors to screen funds according to certain ESG parameters.
One caveat: global system and other third-party ratings do not necessarily indicate an asset manager’s ESG intent. In theory, a fund could have stellar ESG ratings by accident, not because of a manager’s approach.
Investors can use fund databases to identify ESG investments they might like and then research the asset management company to see how committed the company is to ESG in general.
For investors who are not as do-it-yourself oriented, working with a financial advisor well-versed in ESG may be the surest way to know that your investments are more aligned with your values and fit with your overall portfolio and investment goals. investment. Advisors may have more advanced selection tools at their disposal relative to a retail investor, for example.