In 2018, investors may care as much about a company’s carbon footprint as they do its product lineup.
That’s according to an analyst at Morningstar, who predicted that issues related to climate change would be one of the primary trends in so-called “sustainable” investing this year.
“I think more and more investors are recognizing that climate risk is something that they want to know more about from companies,” said Jon Hale, director of sustainable investing research at Morningstar.
Hale noted that this trend would merely accelerate one that has already been occurring. He pointed to Exxon Mobil XOM, +1.66% , which recently said it would “enhance” climate-related disclosures going forward, following pressure from major shareholders. It was also reported that the energy conglomerate would join with other big energy companies in an effort to reduce pollution from natural gas production.
“Investor stewardship is something we definitely are going to see more of in 2018 partly because of the climate-risk disclosure,” he said in a Morningstar newsletter.
Fund firms consider the climate topic and other social investing issues increasingly in their own self- interest. In September 2017, Vanguard released a public letter addressed to the directors of all public companies, calling on them to improve climate disclosures, among other factors, like gender diversity on corporate boards. The asset-managing giant described climate change under its risk-oversight category, calling it “an example of a slowly developing and highly uncertain risk—the kind that tests the strength of a board’s oversight and risk governance.”
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It called for “materially-driven, sector-specific disclosures” on climate issues—for example, a company’s carbon footprint—that it said “will better illuminate risks in a way that aids market efficiency and price discovery.” The firm described these initiatives, which are sometimes defined as “socially responsible investing” strategies, as “an economic imperative, not an ideological choice.”
“As significant long-term owners of many companies in industries vulnerable to climate risk, Vanguard investors have substantial value at stake,” the letter read.
While major passive-investing firms have become vocal about using their stakes in companies to help bring about this kind of change, individual investors have also shown a heightened interest in ESG investing, or allocating one’s money to companies that score highly on environment, social, and corporate governance issues.
According to Morningstar, the number of U.S. users seeking ESG data more than quadrupled in the first half of 2017, a trend that was attached to President Donald Trump’s election. Investors have adopted ESG investing as a counterweight to an administration they see as hostile to environmentally-friendly policies, Morningstar inquiries have found. In June, Trump withdrew the U.S. from the Paris climate accord, a global agreement to reduce greenhouse gases, something scientists say is crucial for avoiding the worst-case scenarios of climate change. Trump has also pledged frequent support for the coal industry, a dirtier form of energy that has seen falling demand for decades amid a shift to alternative energy sources.
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