Measurement and standards can seem yawn-worthy in a broader discussion of investing for purpose, and yet in many cases, without them we often come up short of our desired outcomes. We see this in companies every day. When leaders set goals and hold the company to these goals with consistent data and measurement, they achieve much better results than when they make commitments and don’t have clear benchmarks to hit. It’s no different with investments. Smart investors set goals and monitor and track progress along the way.
With a climate crisis that’s worsening every day and finally receiving the attention it deserves, more and more investors are bringing a climate change lens to their investing strategies. These investors are electing to put their capital behind companies and in funds that are taking action to fight climate change and work toward a net zero emissions future. And many are looking to measure specific actions companies are taking to reduce their impact on our planet and fight climate change as well as hold companies accountable when they fail to make measurable progress.
From the 196 countries that signed the Paris Agreement — all committing to limit the warming of the planet to less than 2 degrees Celsius, preferably 1.5 degrees Celsius — to the companies across the globe that promised to reduce greenhouse gas emissions and target net zero emissions on aggressive timelines, we’ve seen a progression of positive statements and serious commitments. This is important momentum and should be applauded, yet at the same time, recent measurement and data have revealed that even more is needed from the corporate sector, and sooner.
A recent MSCI report suggests that 90% of all global public companies are not on track to reduce their emissions to keep global warming to 1.5 degrees Celsius, and last week’s IPCC report makes it clear that we all need to bring even more urgency and intentionality to achieve desired climate targets.
The bottom line is, companies that have made commitments need to do more, and too many companies are not pulling their weight. We need to see more drastic measures and on a defined timetable.
Today, investors have the power to help shift this paradigm. Over the past few years, we’ve seen the growing influence of shareholder engagement and the way that companies and funds have adjusted to reflect this more engaged environment. As more investors apply a climate change lens and use data to decide what companies, indexes, and funds to invest in — and those to avoid — they can use their capital to build a brighter future for our planet. And the best news? Many of the companies bringing a long-term focus to their decision making outperform their peers in terms of returns for investors.
While there are a growing number of tools and resources available to inquisitive investors who want to better understand how their own investments stack up, here are four questions you can ask to get started:
1. Has the company you are investing in signed on to a rigorous commitment — that is judged by a reputable outside party — and started making progress toward that commitment?
There are a lot of resources in this space. Notable organizations like The Climate Pledge, which has drawn commitments from 111 companies to hit Net Zero targets by 2040, and CDP, a non-profit that operates a database tracking large entities to monitor company disclosures, are good places to start. In this era of urgency, it is also valuable to check to see if a company has not only signed on to a significant effort like the Science Based Targets Initiative but also to continue to monitor their progress by reviewing available data sets.
2. How do a company’s climate commitments and actions compare to others in their sector?
To see how a specific company is doing against benchmarks and in relation to their competitors, one resource that could be helpful, particularly if you like Google Sheets, is the Carbon Removal Corporate Action tracker from American University.
3. How does the climate footprint of a mutual fund look as measured by a wide range of metrics?
With 45% of US households owning mutual funds, picking sustainable funds can have a tangible impact on the environment. For a good sense of how they stack up, see the Fossil Free Funds.
4. Does my asset manager have a strong commitment to net zero goals?
With 128 signatories and $43 trillion in assets under management, the Net Zero Asset Managers Initiative is an example of an organization that monitors what actions an international group of asset managers are taking to support the goal of net zero greenhouse gas emissions by 2050 or sooner. Asset managers play a key role and cannot be overlooked in guiding the discussion that ultimately leads to more engagement between investors and companies about climate change and sustainability.
In 2020, sustainable investing grew 42% to $17 trillion in assets under management. This represents one-third of total US assets under management. It is clear that today investors hold power to help drive a brighter future for our planet when they ask the right questions and demand more from their investment capital. As the urgent challenge of climate change is upon us, asking these questions has never been more important.