The Footprint of Investing – Attention Boomers, this means You
By: Grant Brown, founder of Happy Eco News
The carbon footprint of investments and investing is huge and Baby Boomers can really move the needle. Do they want to?
When making decisions about our money, we often think about interest rates and returns, but most people never think about their investments’ carbon footprint, and they should. As an older Gen X, I am very interested in how I invest my money and how I can make it work for me in ways beyond traditional financial returns. I am part of a growing number of people learning how vital our financial decisions are to the planet.
As writer and activist Bill McKibben recently stated in an Outrage and Optimism podcast, the impact of money invested in traditional stock market accounts is shocking. A typical American with $125,000 in the bank generates more carbon from their investments than in all other areas of their life combined. Bill states that a recent study by 360.org indicates that “all the cooking, flying, heating, cooling, driving, in the course of a year is outdone just by the fact that your money is sitting there being leveraged to build pipelines and frack new oil wells.”
A lot of people don’t fully consider the impact of their investments. As a result, our banking and financial industries continue lending money to the businesses that are destroying our planet’s ability to sustain life.
Gen X is a small group with a limited impact on the overall investment landscape. The retirement-age citizens of western countries (Baby Boomers) are the wealthiest generation to have lived. Carbon-intense investment holdings have provided this wealth but also had a massive impact on the planet.
The average net worth of a baby boomer in the United States sits at $1.2 million, which, when extrapolated against the carbon footprint determined by McKibben’s group, means that, on average, the boomers have a financial carbon footprint ten times the amount they generate from their daily lives. All the Teslas and solar panels they can buy won’t move the needle compared to their money. If we want to make significant changes, we must convince these people aged 60 and older to invest in ways that help the planet. In so doing, we may achieve great gains quickly.
But when it comes to carbon-conscious investing, there are many things to consider. One crucial factor is the carbon footprint of specific investments. Simply put, the carbon footprint of an asset is the total amount of greenhouse gas emissions associated with it from all sources combined, less any positive impacts it makes.
There are many ways to measure the footprint. One standard method is to look at the emissions intensity of the underlying assets. This considers the emissions associated with each stage of the asset’s life cycle, from production and transportation to end-use.
Another way is to look at the emissions associated with the activities of the companies in which you are investing. This includes emissions from raw materials, supply chain, manufacturing, transportation, and any other business activities such as travel of staff and how offices are heated and cooled.
It is important to keep in mind that the carbon footprint can change over time. As new technologies are developed, the emissions associated with an investment may go down. Likewise, as climate change regulations become more stringent, the carbon footprints of investments may be worse than previously thought. Even changes to a local utility grid’s source of power generation can make a significant difference.
Many people focus on manufacturing; when we talk about the carbon footprint of an investment, we are referring to the total greenhouse gas emissions that can be attributed to that particular investment. To calculate the carbon footprint, we need to look at the entire investment life cycle – from initial production to final disposal (or recycling).
The most common way to measure the carbon footprint of an investment is by using the “cradle-to-grave” method. This approach considers all of the emissions associated with an asset over its entire lifespan.
To get started, we need to gather data on the carbon dioxide emissions for each stage of an investment’s life cycle. This data is sourced from a variety of sources, such as government environmental agencies or private companies that specialize in measuring environmental impacts.
Once we have this data, we can then begin to calculate the total emissions for each stage of the life cycle. For example, if we are looking at a coal-fired power plant, we would need to include emissions from mining and transporting the coal, as well as operating the power plant itself.
After all of the emissions have been tallied up, we can convert them into a common unit, such as metric tons of carbon dioxide.
Do different types of investments really make a difference? The answer is yes. For example, investments in renewable energy sources like solar and wind power have a much lower carbon footprint than investments in fossil fuels like coal and oil and the support your investment dollars bring to an industry can help make it more efficient sooner.
That being said, it’s important to remember that all investments have some level of carbon footprint. So, when making investment decisions, it’s important to consider not only the financial returns but also the environmental impact and ensure the investment is making sense and growing your money. Further, an investment can only do good for the planet if the company is healthy and profitable and stays in business for the long term.
ESG investing (sometimes called sustainable, responsible, or impact investing) is a type of investing that takes into account Environmental, Social, and Governance factors when making investment decisions. The goal of ESG investing is to generate both financial returns and positive social and environmental impact.
There is a growing body of evidence that suggests that companies with strong ESG practices outperform those without them. For example, a recent study by MSCI found that over a 10-year period, companies in the MSCI World Index with high ESG ratings had an average annual return of 9.6%, while those with low ESG ratings had an average annual return of just 5.4%. With financial returns almost doubling in ESG-oriented funds, the smart investor (even if they have no interest in climate issues) would choose the ESG funds for no other reason than to make more money.
When it comes to ESG investing, one of the key questions is whether or not it actually leads to lower carbon emissions. There is no easy yes or no answer to this question because the overall impact depends on a number of factors, including the types of investments made and the specific goals of the ESG investing strategy. However, there are some general trends that suggest that ESG investing can be an effective way to reduce carbon emissions.
One is that ESG investing tends to favour companies that are leaders in sustainability and have low-carbon practices. This is because companies with strong ESG ratings are typically seen as having a lower risk of negative environmental impacts. As a result, they are often rewarded with lower costs of capital, which gives them an advantage when competing for investment dollars.
Another is that ESG investing may increase engagement with investee companies and individuals such as fund managers or activist investors on environmental issues. This scrutiny can pressure companies to adopt cleaner practices with more accountability and lead to real reductions in carbon emissions.
Overall, while there is no guarantee that ESG investing will always lead to lower carbon emissions, the trends suggest that it is an effective way to make a positive long term impact.
As much of our population approaches retirement or has already left their working jobs, many are looking for ways to make their money work harder and earn more. But are ESG investments really the best use of limited resources? After all, most people have other priorities in retirement, such as travel and spending time with family.
While the study by MSCI did show a significant increase in ROI with ESG funds, it may be too soon to say if it outperforms traditional investing over the long term. But one thing is sure: it makes sense to be aware of how your money is invested, as it can have a significant impact on reducing your carbon footprint.
That’s because most ESG funds invest in companies that are leaders in reducing their emissions and other environmental impacts. They also tend to avoid companies with poor records on social and governance issues or without robust reporting and internal mechanisms to measure their footprints. Ultimately, this may pressure environmental laggards to step up and make positive changes – or get left behind.
So, if you’re concerned about the environment and want to make a difference with your investment dollars, ESG funds are worth considering. Just be sure to do your homework before making any decisions – and remember that no investment is without risk.
No matter how you measure or reduce your investments’ carbon footprint, one thing is clear: the people with money (baby boomers) have a lot of power to make a difference.