Wall Street Sides With ESG
Last year, asset flows into U.S. sustainable funds reached a record $51.1 billion, up from $21.4 billion in 2019 and nearly 10 times higher than in 2018. Clearly, environmental, social, and governance (ESG) investing—not long ago seen as a fringe approach—has not only gone mainstream but has kept momentum in its meteoric growth.
In part, that growth has relied on the world’s biggest asset managers continuing to validate ESG considerations—and climate risk in particular—as fundamental to the investment process. BlackRock, a financial behemoth with $8.7 trillion of assets under management (AUM), continues to acknowledge the threats of long-term, globally linked trends like the physical effects of climate change. In his most recent annual letter to CEOs, BlackRock CEO Larry Fink reinforced the firm’s commitment to net zero emissions by 2050 and again highlighted climate risks.
This past year, devastating wildfires, hurricanes, and the failure of the Texas power grid dramatically exemplified what issues investors may increasingly face going forward. Meanwhile, investors who manage these risks of climate transition, Fink explained, position themselves to capture “a historic investment opportunity.” In the letter, Fink detailed the firm’s steps to incorporate ESG and climate change considerations into all aspects of the investment process to achieve better risk-adjusted returns.
Given the firm’s size and influence, we expect other investment firms to continue to follow BlackRock’s blueprint when it comes to ESG investing.
When The Grid Goes Down
In February 2021, freezing temperatures led to widespread failure of the Texas power grid. At the height of the crisis, about 4.5 million Texans were without power, and several deaths were blamed on the adverse weather. Some of1those historically opposed to the shift toward renewable energy blamed green energy for the devastation, as photos of frozen wind turbines circulated on the internet.
In reality, the Texas grid remains 65% dependent on natural gas and coal, with a smaller (20% to 22%) share connected to wind energy, according to the Energy Information Administration. The grid crashed in part because of a lack of winterization among electricity generators and natural gas producers. Ironically, detractors of renewable energy may have purposefully overlooked the most fundamental point: The extreme weather that caused the damage is the direct result of climate change.
While unfortunate, the events in Texas served as a clear example of how our changing climate will continue to impact lives, businesses, and the overall economy—at an increasingly greater scale. From an investment perspective, that’s why Seeds focuses not only on how companies lessen their environmental footprints but how they protect themselves to now ever-present climate risks. Companies with significant physical infrastructure exposures, for example, will likely require proactive efforts to adapt business models to reduce risks. Meanwhile, companies focused on renewable energy, energy efficiency, green infrastructure, and rapid decarbonization may represent stronger long-term investment opportunities relative to peers.
Biden Pushes For Offshore Wind Expansion
Among President Biden’s expansive agenda toward renewable energy, the administration announced plans to increase offshore wind generation off the east coast. The new plan calls for the installation of 30 gigawatts (GW) of offshore wind power by 2030, enough capacity to serve 10 million homes. The administration plans to help speed the deployment process by accelerating permitting and providing federal loan guarantees for wind projects.
In addition to driving a green energy transition, the plan could create more than 70,000 direct and indirect jobs. Key states targeting growth of offshore wind include Connecticut, Maryland, Massachusetts, New Jersey, New York, Rhode Island, and Virginia. So far, these states have commitments to install 30 GW of offshore wind by 2035, though only about 11 GW has been awarded to date. Vineyard Wind, with 800 MW capacity, is likely to be the first utility-scale windfarm by 2023.
The growth of the U.S. offshore wind industry could serve as a positive for Seeds portfolio companies, including Orsted (DNNGY) and Vestas Wind (VWSYF).
Former BlackRock Employee Calls ESG “Greenwashing”
In an opinion piece recently posted to USA Today, former Blackrock Sustainable Investing CIO Tariq Fancy argued ESG investment offerings are no more than a marketing ploy aimed at attracting new assets. His controversial comments called ESG a “distraction” and a false hope for addressing the real problem of climate change, even likening ESG investing to prescribing wheat grass as a cancer treatment. Mr. Fancy argues we must advocate for more government action to combat climate change rather than relying on the role of free markets and investors. (For our full response, read: A Former BlackRock Employee Said ESG Isn’t The Answer To Saving Our Future. He’s Sort Of Right.)
The Government Steps In
What surprised us most about Fancy’s op-ed is that he framed ESG investing and government intervention as mutually exclusive approaches to solving our climate crisis. And yet, we believe investors should have options to invest along with values while, at the same time, governments enforce stricter rules to limit bad corporate behavior. Investors moving billions away from poor ESG performers have already and will continue to influence how companies operate. And the U.S. government is beginning to look at changing corporate requirements for things like climate reporting because investors have so loudly made these issues mainstream.
The SEC has made clear its intent to address increasing issues of greenwashing to better protect investors seeking values-aligned portfolios. On Feb. 4, 2021,acting SEC Acting Chair Allison Herren Lee explained in a public statement:
“Now more than ever, investors are considering climate-related issues when making their investment decisions. It is our responsibility to ensure that they have access to material information when planning for their financial future. Ensuring compliance with the rules on the books and updating existing guidance are immediate steps the agency can take on the path to developing a more comprehensive framework that produces consistent, comparable, and reliable climate-related disclosures.”
What Is Seeds Doing?
The pivot to a net zero economy is a key consideration in all Seeds stock portfolios. Through active management and our rules-based ESG integration framework, we seek to invest in companies that can benefit from the growth of climate-related investments and evolving technology while limiting our exposures to companies less prepared to face the future.
In addition, Seeds launched fixed income strategies to better empower advisors in delivering more holistic asset allocations that align with investor needs and financial goals. Seeds Core Fixed Income (“SCF”) is a managed portfolio, consisting of taxable bond funds, that seeks market rate or better returns and aligns with Seeds’ sustainable investment philosophy. Seeds also announces a new partnership to offer the Alliance Bernstein Municipal Impact Fixed Income Portfolio (“AB Muni Impact”), which is a core tax-exempt bond strategy with a positive impact. AB Muni Impact aligns with Seeds’ investment philosophy of investing for both values based and financial outcomes.
To learn more read the Seeds Investment Commentary