Green Initiatives (ESG)
The sky over the Bay Area is covered with a smoke so thick that it is blocking the sun, leaving it orange and ominous. The image (even in a news article) is a wince-worthy reminder that we are in the year 2020, and the world is different.
With a record 900,000 acres of wildfires burning across Oregon, more than 10% of the state’s 4.2 million population have been evacuated, according to the Oregon Office of Emergency Management. That’s a lot of people, and evacuations aren’t anticipated to end there. In total, 12 western states are burning somewhere, with Oregon, California, and Washington most severely impacted.
“There’s certainly been nothing in living memory on this scale,” describes Daniel Swain, a climate scientist at the Institute of the Environment and Sustainability at the University of California in an interview with the New York Times.
Extreme weather is a new reality, and it matters a lot to the future of economies around the world. In January 2020, before the most recent fires, the Bank for International Settlements (an umbrella organization for the world’s central banks) predicted that the disruptive effects of climate change could usher in the next financial crisis.
This report was not a one off. According to the January 2020 Global Risks Report by the World Economic Forum, the top five global risks are climate-change related. Extreme weather, which includes floods, storms, wildfires and warmer temperatures, is putting millions at risk for food and water insecurity, property and infrastructure damage, and displacement.
Now, it’s September and we are looking from near or far at the hazy orange sky above the Bay Area wondering: what’s next?
Where climate change was once a theory that people accepted or not in the same way that they preferred cream or not in their coffee, things are changing fast. This is especially true among millennials, who are making no mistake about where their money is being invested, namely into sustainability-oriented funds.
In what might be considered a ray of hope in a strange world, their environmental investment dollars are starting to add up and smash investing records.
Here’s what environmental investing is and why it has more momentum than ever before.
What Is Green Investing?
In 2019, “estimated net flows into open-end and exchange-traded sustainable funds that are available to U.S. investors totaled $20.6 billion for the year,” according to Morningstar. “That’s nearly 4 times the previous annual record for net flows set in 2018.” This near exponential growth in investor interest is in part attributed to younger investors with a specific interest in the environment.
Perhaps even more impressive, in the first quarter of 2020, sustainable investing totaled $10.5 billion, keeping momentum despite the economic downturn ushered in by the pandemic.
So, where exactly are these dollars going?
It depends. When it comes to Environmental, Social, and Governance (ESG) investments can look much differently from one to the next.
For one, some investors have a specific interest in “climate change innovators.” According to MSCI, these are companies working to innovate and scale new technologies in a way that solves climate problems in new ways. Beyond investing in the next big technology that might lead us to a net-zero carbon world, investors are looking more and more at the environmental policies of the companies that they invest with across the board. These policies include water management strategies that use water responsibly and the prioritization of protecting biodiversity in corporate operations.
The relevance of biodiversity to our day-to-day lives is as close as the latest summer “Save the Bees” campaign. Honeybees are crucial for pollinating much of the global food supply, from apples to almonds. It’s estimated that bees are responsible for one of every three bites of food eaten in the United States. In addition to the use of insecticides used for many commercial crops, the destruction of habitat and decline in biodiversity have severely impacted this important species.
In other words, in today’s world, how businesses do business matters greatly, not only to the environment at large, but also to the long-term value of a company. To address that, companies are putting more effort than ever into describing how they meet sustainability standards in their business operations.
Why Invest in Sustainability?
In a letter to CEOs, Blackrock CEO, Larry Fink describes climate change as “a defining factor in companies’ long-term prospects.” According to Fink, “awareness [of climate change] is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.”
Fink anticipates a “significant capital reallocation” into sustainable strategies as millennials, who are currently pushing for institutions to develop sustainable strategies and who will eventually become the policy makers and CEOs of the world.
In other words, environmentally focused investing is the future.
Not only is it becoming more popular among millennials, it is paying off for investors. According MSCI, “There is a direct, dollar-value payoff for companies to better manage their ESG risks or meet stated sustainability commitments.”
Interestingly, since the arrival of COVID-19, awareness to and demand for ESG products is on the rise. Not only did the pandemic accelerate interest in these products, it gave them an opportunity to demonstrate their resilience, with ESG investments less impacted by the pandemic-driven market drop in the spring.
If you are ready for a certain investment in an uncertain world, environmental investing is a natural choice.
How to Invest in Green Initiatives
The environment, of course, impacts every one of us and touches every industry. Investing in such a broad theme can be challenging for investors. Fortunately, a search on Magnifi suggests that there are a number of ETFs and mutual funds that can help investors access this growing and all-encompassing sector.
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The information and data are as of the September 14, 2020 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.
FINSUM + Magnifi: How to Separate Good ESG Investments from Bad Ones
(September 2020)
Anyone who has invested in ESG will be well aware that under the surface, things can get quite murky. Most ESG funds—especially ETFs—hold stocks that many would never consider to be “green”. For example, oil and utilities companies. Therefore, it is important to understand that ESG ratings vary widely and are provided by a number of companies. This means that even funds who don’t advertise as being ESG-focused often have high scores (for example, see XLU, the popular utilities sector SPDR). Generally, there are three types of ESG funds: ESG-focused funds which use ESG as part of their security selection, impact funds that invest with a certain ESG goal in mind, and ESG sector funds. The first group is the largest by far.
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FINSUM + Magnifi: Why the Pandemic Means You Should Invest in ESG
(September 2020)
Any advisor who has been paying any attention to ESG lately will know the sector has been doing well. This is true not only on a returns basis, but also in terms of AUM growth. While many articles have covered this, one thing that is rarely mentioned is the real reason why. The true crux of the rise of ESG during COVID is the fact that at its heart, ESG is about risk mitigation. In particular, protection from environment, social, and governance risks. Therefore, the underlying mindset of ESG is closely aligned with the conservative and protectionist pandemic-era mindset that has prevailed over the last six months.
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FINSUM + Magnifi: Why the New Fiduciary Rule is a False Victory for Brokers
(September 2020)
There has been a lot of consternation about the new DOL fiduciary rule. Some of it from brokers, more of it from fiduciaries and investor protection groups. What has been much less covered, however, is the insidious rise of state level fiduciary rules that are threatening to create a national patchwork of regulations that could isolate the industry into little islands. Therefore, the introduction last week of a new fiduciary rule for Massachusetts is a big deal. It comes on the heels of nearly a dozen other state fiduciary rule proposals and highlights that many states are unsatisfied with the new federal rule and still want to take matters into their own hands.
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FINSUM + Magnifi: This Sector Will Benefit from “Decoupling” With China
(September 2020)
Over the last few years, President Trump has been leading a so-called “decoupling” with China, or a concerted effort to lessen the economic links between the US and China. This has involved many spats over trade tariffs etc, but this week the president is refocusing on the issue and reiterating that he intends to both lower the trade deficit and make the US less reliant on Beijing. If this move continues it could have profound effects on the economy. One sector that seems very likely to gain is robotics and automation. A central tenet of Trump’s push is to re-assert the US’ manufacturing prowess. As US firms bring production home, costs will become an issue because domestic manufacturing is more expensive. Therefore, they will likely turn to robotics companies to automate as much of the manufacturing process as possible.
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FINSUM + Magnifi: Go Long China Because Decoupling" is a Myth"
(September 2020)
There has been a lot of media coverage about the US’ “decoupling” with China. Most of this has been centered around President Trump’s push to lessen economic ties with Beijing. This has worried some investors as it could disrupt decades-long global supply chains and raise costs for US companies. However, an analysis of underlying economic activity reveals that, if anything, the US and China have grown closer over the last year. This increasing closeness has largely happened on the financial front, as Beijing has been allowing more and more access to US companies. For instance, since the start of 2019, PayPal, JP Morgan, Goldman Sachs, American Express and others have all secured deals that allow them varying forms of greater access to the Chinese market. This has coincided with increasing cross-border capital flows between the two countries.
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Real Estate
The headlines highlighting the rise of housing markets are as common as the “SOLD” signs on lawns in neighborhoods throughout the United States.
“Despite COVID-19, Philadelphia’s real estate market is booming.”
“Pandemic pushing Cape Cod real estate sales, driving prices up.”
But, who moves in the middle of a pandemic? Apparently, lots of people.
The world looks much different today than it did at the beginning of the year. Since the arrival of the coronavirus to the United States in January, people have adapted their lives and recalibrated their plans significantly. For many, that has included planning a move.
So, for all of the lost jobs and unknowns about how the economy will recover, the real estate industry is holding its own. Here’s what investors should know.
What’s Happening with Real Estate?
NYC real estate sales fell by 54 percent in the second quarter of 2020, amounting to the largest decline in 30 years, according to a report by Miller Samuel and Douglas Elliman. Orange County, California reported its biggest price decline since 2009, 5.2 percent. In other words, more and more people are saying goodbye to city living.
But, things in the suburbs are booming. After an initial dip in April, May showed strong market interest, according to realtor.com.With all of the uncertainty surrounding the pandemic, what is it that has moved people to start considering a move?
“Quarantine was the greatest accidental PR campaign for the value of real estate that I’ve ever witnessed. Now, people have been inspired to invest more into their homes and push their budgets just a little bit further,” according to Forbes real estate writer Ryan Serhant.
No doubt, after just a few months, people have new housing needs. Remote work is looking like the new norm. Outdoor space feels less optional. And suddenly many families with kids need to find space to not only work remotely, but also facilitate virtual learning for their kids. Welcome to 2020.
“Housing is a basic need, and the decision to buy one is usually prompted by entering a new stage of life,” according to housing website Curbed.
Add strong interest and new needs to attractively low rates, and the sales started. The average for 30-year fixed mortgages fell below 3 percent for the first time on record in June, prompting more people to consider buying. And so, the headlines and the “SOLD” signs followed.
So, If Everyone Is Working at Home, What’s Happening to Office Space?
For corporations, office space can account for the second largest expense following payroll. Companies know that. Moreover, these same companies realize that their offices are currently sitting largely unoccupied.
Companies are anticipated to reduce office space over the next three years, according to a report by CNBC. Similarly, a Reuters analysis of 25 large companies indicates that they plan to reduce office space over the next year.
According to a May report by Moody’s Analytics, “As employers have been compelled to execute remote working policies, national vacancies may break the 20% mark by 2021, and effective rents in some markets like New York may fall by close to 25%.”
But, not every business is turning in their notice just yet. Most office leases run from three to five to seven or 10 years, so some businesses are just stuck with the space.
That’s good news for investors, who aren’t feeling the pain.
According to Reuters, “concerns about declining office space use have not hurt commercial mortgaged-backed securities, with the iShares CMBS ETF up 4.4% for the year to date.”
Why the continued success?
Offices are useful for everything from building work relationships to expressing organizational values and aspirations, according to the Harvard Business Review. Companies, especially those with a nearly all-remote workforce at the minute, know that better than anyone. And so, commercial offices are probably not going away in their entirety. They will, however, emerge on the other side of the pandemic and are likely to look much different.
For one, office spaces might simultaneously scale down and become more dispersed, with flexibility to locate near clients and foster high-quality connections between staff, according to the Harvard Business Review.
Moreover, space will increasingly become mixed-use, extending its hours of life beyond the 9-5. This means offices that have retail, dining, and other features that invite community members, keeping the space busy beyond the workday hustle.
But, don’t expect a boom of new office space in the near future.
The Detroit Free Press reported in June about ongoing office space construction that might be at risk. In addition to the unknowns about the need for new, Class A spaces in the short term, the supply chains that delivers building materials have been impacted by the virus.
Part of the question is: will businesses decide to keep more remote work arrangements permanently, relocate their offices to less-expensive suburbs, or will they keep with the status quo?
Still, Real Estate Investment Is on the Uptick.
Despite all of the uncertainty, according to a Gallup poll, real estate remains a top investment choice for Americans. As the stock market looks more uncertain, real estate looks safer. Not to mention the historically low interest rates that have helped families move into new homes.
Roofstock, a platform for investors to buy and sell single-family rental properties, has experienced substantially increased web traffic since the coronavirus arrived, indicating that global investors are on the lookout for less volatile investment options.
The bottom line: real estate sales and investment is on the rise. The informed investor can find ways to invest in both residential and commercial real estate in unique ways.
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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as of the September 3, 2020 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access.Magnifi does not provide broker-dealer or custodial services.