While the sea ice is melting in the Arctic at the fastest pace in 1,500 years and the California forests are burning at a rate greater than at any time in recorded history, the silver lining peeking through is that the world’s most important investors are no longer missing in action on the climate challenge of our generation.
The World Bank has promised to stop virtually all lending for oil and gas projects in the developing world after 2019, sending a powerful message to global producers that financial institutions are reassessing the risks of fossil fuel development.
The manager of the largest fund in the world, the Government Pension Fund of Norway, has recommended that oil stocks be excluded from its equity benchmark index. This would essentially move all oil stocks from a mainstream investment to a speculative grade risk.
Swiss Re, the world’s second largest reinsurer, switched over the entire $130 billion (U.S.) it holds in liquid assets to track ethical indices, the latest move towards principled investments by the insurance industry.
The Caisse de dépôt et placement du Québec, the second largest pension plan in Canada with more than $270 billion in assets, is setting bold targets to shelter its portfolio against the impact of climate change, including plans to reduce the carbon footprint of the overall portfolio by 25 per cent by the year 2025, while increasing its exposure to climate friendly investments like wind power by 50 per cent.
BlackRock and Vanguard, which wield outsized clout (a combined $9 trillion) as the world's two largest asset managers, are putting pressure on companies to explain themselves on issues including how climate change could affect their business.
Even the perennial climate bugaboo, ExxonMobil, has been forced to succumb to these investors’ demands and will now report on the impacts of climate change to its business – marking a milestone in a 28-year effort by activist investors.
While the sun sets on old ways of investing in the old energy economy, the sun is rising in the new energy economy.
In its first full year of performance through June 30, 2017, the Clean200 (representing the 200 largest publicly traded companies making significant revenue from clean energy) generated a return of 16.5 per cent versus a decline of 1.2 per cent for its fossil fuel benchmark, the S&P Global 1200 Energy Index.
The 2018 Global 100 Most Sustainable Corporations in the World Index (scheduled for release January 23) added another year of healthy outperformance compared to its benchmark, the MSCI ACWI, showing significant outperformance over the 13 years since the Global 100’s inception in 2005.
And the Greenchip Global Equity Fund, which invests in companies that operate in targeted environmental sectors, celebrated its 10th birthday ahead of its benchmark and ranked as the No. 1 global equity fund over the past year in the RBC Pooled Fund Survey.
There are three ways an average investor can catch this train.
If you are a member of a big pension plan, you can write your fund and request that it offer a socially responsible and climate friendly option, ideally as the default (as the HSBC U.K. pension plan has already done). If your fund is a defined benefit plan like the Canada Pension Plan, you can write both the fund managers and your finance minister to ask that they let go of risky investments in certain fossil fuels and boost investments in renewables to ensure they do not miss the clean economy transition.
If you pick your own stocks and funds, there are lots of ideas in the Clean200 and Global 100, not to mention the solid income returns you can get from retail green bonds like Solar Share and CoPower in Canada.
If you prefer to invest in funds that are investing their money and the power of their voice for a more just and environmentally friendly world, we have crunched the numbers for over 600 equity funds available to Canadian investors, and present the synthesis as Top 10 Better World Funds.
| Fund | Type | 3 yr returns percentile rank (50%) | Better World holdings percentile rank (40%) | Fund manager voting score (5%) | Manager intentions score (5%) | Final score |
|---|---|---|---|---|---|---|
| Desjardins SocieTerra Cleantech Fund | Global Equity | N/A | 39.6% | 3.6% | 5% | 96.3% |
| NEI Environmental Leaders Fund | Global Equity | N/A | 39.8% | 2.9% | 5% | 95.3% |
| Renaissance Global Science & Technology Fund | Global Equity | 49.7% | 38.9% | 2.4% | 0% | 90.9% |
| Desjardins Overseas Equity Growth Fund | Intl. Equity | 47.9% | 39.5% | 3.6% | 0% | 90.9% |
| iShares Global Water Index ETF | Global Equity | 44.3% | 40.0% | 0.9% | 5% | 90.2% |
| Etho Climate Leadership US ETF | U.S. Equity | N/A | 39.3% | 0.0% | 5% | 88.6% |
| Evolve Automobile Innovation Index ETF | Global Equity | N/A | 39.2% | 0.0% | 5% | 88.5% |
| Investors Quebec Enterprise Fund | Cdn. Equity | 50.0% | 36.9% | 0.0% | 0% | 86.9% |
| North Growth U.S. Equity Fund | U.S. Equity | 41.7% | 39.1% | No score | 0% | 85.0% |
| Manulife Canadian Investment Class | Cdn. Equity | 48.4% | 34.2% | 1.8% | 0% | 84.3% |
Methodology:
1. The 3-year returns are per cent ranked against funds in same category, then weighted 50 per cent.
2. The fund's net market exposure to green versus red flagged holdings is per cent ranked against other funds from the same category, then weighted 40 per cent.
Green flagged holdings are companies that earn at least 20 per cent of their revenues from clean scores, or score top decile (90 to 100 per cent) on Corporate Knights Sustainability Rating methodology and have no red flags from the list below.
Red flagged holdings are those that have bottom decile scores (0 to 10 per cent) on CK Sustainability Rating, and/or are involved in or are laggards on any of the aspects listed below:
Nuclear energy; oil & gas, coal utility; pure-play thermal coal; thermal coal miner; utilities (>50 per cent renewable energy); access to medicine; animal welfare; corporate human rights; access to nutrition; conventional weapons; controversial weapons; blocking climate policy; sustainable cotton; tropical deforestation; child or forced labour violations; new energy finance; sustainable seafood; severe environmental damage; tobacco; sustainable palm oil; science-based targets; renewable energy commitments; gambling; pornography; for-profit prison; animal testing (non-medical); factory farm; small arms; GMO-pesticides; predatory lending; corporate crime (fines, penalties, convictions).
3. Focused small/mid cap equity – reclassified as "equity." "North American equity" is reclassified as "global equity."
4. The fund manager's voting record is assessed, and weighted 5 per cent. The fund manager’s voting records for 10 environmentally related resolutions were tracked and received a score if it supported the vote or no score if it didn't support the vote. The number of times a favourable vote out of all possible opportunities to cast a vote is calculated and weighted 5 per cent.
5. The fund manager's intention to exercise voting rights using responsible guidelines according to Responsible Investment Association – Canada is given a score of 5 per cent.
6. The final score is the sum of 1, 2, 4 and 5 above. If a fund is less than three years old and therefore has no 3-year return, its final score is based on 2, 4 and 5 above grossed up proportionately to 100 per cent.
7. Only funds with at least 66.6 per cent of their holdings covered in the Corporate Knights Research Universe are eligible for the ranking (all companies with revenues > $1 billion U.S.).
8. Where a fund has no data for any one of the four indicators, the weight of the indicators for which data is available is scaled proportionately to 100 per cent.
Sources: Fundata, RIA-Canada, Proxy Insight, Corporate Knights Research Database