50 Shades of Green

50 Shades of Green

Nov 22 2021?| Jeffrey Mackie

Everyone has their own views on environmental investing and how to weigh investment performance vs personal ideals. How far do you take it?

There are many approaches to applying personal values to investing… everything from the mercenary “I don’t care about what I invest in, I just want to make as much money as possible” on one end of the spectrum, to the altruistic ‘impact investing’ approach, summed up as “I don’t care what I make or don’t even care if I lose money, as long as it makes a positive environmental impact” on the other. Most people fall somewhere in between, as investors generally don’t like to lose money or make poor investment returns on purpose, but also want to have some say as to where their money is invested.

In the past, a common request from investors was to omit companies like tobacco or weapons manufacturers from their investment selection, as these types of companies are generally viewed as unsavory from an ethical standpoint. Tobacco and weapons manufacturers make up a relatively small portion of the overall economy, so avoiding these types of companies is relatively easy and doesn’t have much impact on overall investment returns. With environmental issues now at the forefront, the common request nowadays is to omit ‘fossil fuels’ from portfolios. This is a much more complicated issue as the upstream energy sector makes up a large portion of the TSX index. The other piece of the issue that is largely ignored is that nearly every company in existence uses energy in some part of its business.

Aside from individual investors, university endowments and pension funds have made the policy decision to avoid ‘fossil fuel’ producers from their investment portfolios. In many cases, the decision is put to a vote by students and faculty of the university and has seen support of 75% or more for the move away from ‘fossil fuel’ investments by their institution. Does this mean that the university should also take out 75% of the parking spots in the student and faculty parking lots? Or turn off the heat in the buildings and provide only cold water in the showers in the gym for 3 out of every 4 hours during the day? The irony is that the same pension fund or endowment will continue to own shares in airlines, shipping companies, railroads, steel producers, cement producers, power generators, automotive manufacturers, or really any other company that consumes energy, which is basically every company either directly or indirectly. Even the server farms of technology companies like Google, Facebook (now known as Meta) and Microsoft consume massive amounts of electricity which comes from a variety of sources, including fossil fuels. It is almost as though the world has been led to believe that the production of oil or natural gas is the only environmental issue that matters and simply avoiding owning shares in these companies will solve climate change. The reality is far more nuanced and complicated.

The latest theme in the investment world is around the concept of ESG or Environmental, Social and Governance. This feel-good acronym rates companies on the basis of their environmental footprint, social impact and governance structure of the board and company management. As a result, many ‘ESG focused’ investment funds have been launched in the past few years to fill the investor demand. Many funds avoid the energy sector entirely, while others include only the companies with the highest ESG scores.

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