Investing with the Environment in Mind

As residents of New York City, we are all exposed to environmental pollution and social conflicts on a daily basis. More than 2,000 New Yorkers are estimated to have died prematurely in a single year from the effects of pollution from vehicle emissions — even before the COVID-19 pandemic, according to a study published in 2021 by Environmental Research Letters. At least 1,400 of those deaths were in the New York City metropolitan area. Interestingly, fewer than half of the estimated deaths in New York State were caused by pollution that originated in the state itself, while 42 percent were instead linked to harmful emissions from Pennsylvania, New Jersey and Maryland. In those states, the biggest polluters were light-duty vehicles, including SUVs, and passenger cars. A cleaner, safer environment would improve the quality of life for all of us.

An increasingly popular path to being part of the solution is to make sure that you support companies whose values align with your own environmental concerns. Environmental, social and governance (ESG) allows consumers, investors, and other constituents to have increased transparency in evaluating companies. This can involve which consumer products and services you buy or which companies you invest your money in as a shareholder, through the purchase of stocks and bonds for your personal investments. Consumers are able to evaluate the sustainability of their purchases and how much good or damage they are doing to society and the environment, and investors are able to see the long-term value of their investments.

ESG scoring relies on independent ratings that help you assess a company’s behavior and policies when it comes to environmental performance, social impact and governance issues.

The “E” or environmental portion of ESG considers how a company performs as a steward of the physical environment. The “E” takes into account a company’s utilization of natural resources and the effect of their operations on the environment, both in their direct operations and across their supply chains. The environmental factor might focus on a company’s impact on the environment or the risks and opportunities associated with the impacts of climate change on the company, its business and its industry. ESG reports serve to outline how a firm deals with: climate change and carbon emissions; air and water pollution; biodiversity; deforestation; product innovation; green research and development; and related issues.

The “S” or social factor might focus on customer satisfaction; data protection and privacy; gender and diversity; human rights; and health and safety.

The “G” or governance factor includes everything from issues surrounding executive pay to diversity in leadership as well as how well that leadership responds to and interacts with shareholders. This component may reflect a rating of how well executive compensation is tied to performance in meeting the goals it sets forth, including environmental ones.

A Company’s Actions

ESG reporting encompasses both qualitative disclosures of topics as well as quantitative metrics used to measure a company’s performance against ESG risks, opportunities, and related strategies. ESG reports are communication tools that play an important role in convincing observers that the company’s actions are sincere.

The majority of companies that are listed on major stock exchanges publish annual ESG reports. The reports are released to show their current levels of corporate sustainability and can often be found on the a company’s respective website and/or SEC filings. The information is provided voluntarily, but it’s recommended to reveal the company’s commitment to meeting ESG criteria. In addition, there are growing considerations to include mandatory ESG data reporting in corporate laws.

Independent third-party rating agencies use ESG factors to assess companies on their environmental footprints by assessing factors including: greenhouse gas emissions, water use, waste and pollution, land use and biodiversity. It is estimated over eighty percent of the world’s largest companies are reporting exposure to physical or market transition risks associated with climate change and a similar share are engaging in reducing corporate emissions.

Climate Transformation

The speed and scale of climate change over the next two decades are projected to go beyond anything that has been witnessed to date. The climate transformation that is already being seen around the world is taking place in the context of a 0.7 degrees Celsius increase in global warming relative to the pre-industrial age. According to the Intergovernmental Panel on Climate Change, the global economy must reduce its greenhouse gas emissions to net-zero by 2050 to keep the planet from warming more than 1.5 degrees Celsius and to avoid the most catastrophic impacts of global warming.

The majority of ESG standards and disclosure frameworks currently focus predominantly on climate issues. Climate change has also remained the core focus of most national legislation. Over the last few years, various guidelines for ESG reporting have emerged, including voluntary standards, reporting frameworks, and national legislation. But these have all introduced slightly different requirements for businesses, leading to calls for a global ESG reporting standard.

There are many approaches investors can take towards developing and integrating ESG “scoring” data in their investment strategy. One approach is screening investments for ESG specific characteristics. Negative screening means excluding one category or sector of stocks from a portfolio. For example, companies associated with tobacco, alcohol or weapons. Positive screening techniques work to identify and highlight organizations that are actively functioning to further environmentally sustainable and positive social practices, rather than simply avoiding bad behavior. Investors can also implement an ESG strategy by investing based on defined sustainability themes. This approach enables investors to invest in a specific aspect of ESG, such as companies focused on environmental solutions (renewable energy, sustainable agriculture) or social issues (gender/ racial equity, diversity).

While important progress has already been made, improving the quality, transparency and usefulness of disclosures related to environmental issues is an urgent challenge. ESG information and scoring can provide a better way to invest responsibly and address and improve many of the problems we experience on a daily basis as New York City residents.

David Rosenstrock is the Director and Founder of Wharton Wealth Planning, LLC (www.whartonwealthplanning.com). He earned his MBA from the Wharton Business School and B.S. in economics from Cornell University. He is also a CERTIFIED FINANCIAL PLANNER™. David lives in New York with his wife and their two very active children.

For more information: david@whartonwealthplanning.com