By Tim Nash, Corporate Knights
It’s easy to get lost in the narrative that the shine has worn off sustainable investing, but that’s not what we’re seeing. Here are our top fund picks.
Despite appearances, sustainable investments have quietly had a great year.
Given the poor performance of green energy stocks and the chorus of opposition against anything viewed as “woke,” it’s easy to get lost in the narrative that the shine has worn off sustainable investing. But that’s not what I’m seeing. The negative sentiment doesn’t match the tremendous progress that is being made.
Sustainable investments soared in 2020 and 2021, and that was certainly when the shine was on. They mostly outperformed traditional investments, and we also saw tons of new funds launch, giving sustainable investors more options. It was a different story in 2022. Sustainable investments underperformed as oil prices spiked and a pronounced backlash against ESG (investing that optimizes environmental, social and governance factors) emerged, especially in the U.S. Comparatively few new ESG-labelled funds have been launched in the last two years.
Despite record oil-company profits and a surge in military share prices stemming from instability in the Middle East, most sustainable investments have quietly outperformed in 2023. But big financial firms like BlackRock aren’t talking about it anymore. Most of the media attention has been focused on the ESG blowback while ignoring the successes. We used to be concerned about greenwashing, but now it seems that many companies are deliberately staying quiet in what some are calling greenhushing – the practice of downplaying or keeping quiet about their sustainability initiatives.
Green stocks have come back to earth
That’s not to say there haven’t been lows. The worst-performing area for sustainable investors was certainly in renewable energy. Clean energy stocks performed tremendously in 2020 and early 2021, but in hindsight this was clearly a bubble.
Companies became way too over-valued, and share prices that once surged have settled back down. It didn’t help that tech companies in general have had a rough time since 2022, and now higher interest rates are negatively affecting utilities with high up-front capital costs for large green energy projects.
Those of us who invested in 2019 or earlier are still doing well, but I feel terrible for people who jumped on the green energy bandwagon in 2020. Now that prices have fallen back to more reasonable levels, I think investors should take another look to see if now is a good time to buy.
Negative sentiment hasn’t affected capital flows
Despite the negative sentiment and falling share prices of green energy stocks, the inflows of capital are still tremendous. According to reports from Bloomberg New Energy Finance and the International Energy Agency, green themes like renewable energy, green buildings and electric cars are seeing double-digit growth in capital investments.
The green economic transition is unstoppable. We can argue whether it’s happening fast enough to avoid the worst-case climate scenarios, but there is no denying the investment flows that continue to pour into the green economy.
A big reason for the increased money flow was the passing of the historic Inflation Reduction Act in 2022. We saw the benefits in 2023 with huge growth in green jobs in the U.S. Even better, the majority of these jobs are in red states. It’s hard to argue against the green transition when your livelihood (or the livelihood of someone you love) is dependent on it.
In Canada, the climate policy conversation, sadly, has circled back to attacks on the carbon tax. Whatever your politics, I think we can all agree that a carrot is more popular than a stick.
Anti-ESG funds have stalled
There was so much pushback against sustainable investing in 2022 that we saw the launch of several anti-ESG funds with ticker symbols like YALL and DRLL. You’ve probably heard of Republican presidential candidate Vivek Ramaswamy, but did you know that in early 2022 he co-founded Strive Asset Management, which offers “anti-woke” investment funds?
Although these funds got off to a roaring start with lots of initial investment, they haven’t seen nearly the capital flows that actual ESG funds experienced. I tracked one fund – the Constrained Capital ESG Orphans ETF – which invested in companies that are usually excluded by sustainable investors. It launched in May 2022 but failed to attract investors and closed, or “de-listed,” in June 2023.
Language has been standardized
I’ve been frustrated by people misusing and conflating various sustainable investment strategies. Divestment is different from ESG, which is different from impact investing. Thankfully, we now have a partnership between the CFA (Chartered Financial Analyst) Institute, the UN Principles for Responsible Investment and the Global Sustainable Investment Alliance to harmonize definitions of sustainable investment approaches.
Check out quick descriptions of the five approaches in the glossary (below).
Now’s the time to act
Amidst the economic turmoil this year, green sprouts are growing. People are increasingly recognizing that our economic system is broken and are actively looking for solutions. One of the easiest solutions to implement is shifting your investments in a more sustainable direction.
It’s still a challenge to pick the good funds amidst the greenwashers, so look to these lists for inspiration. Make sure you consider the risks before carefully deciding how much to invest in each category.
Corporate Knights reviewed 2949 funds and rated the equity funds deemed responsibly managed in four categories, with 40 funds listed below. Download the complete list.
GLOSSARY – Five common approaches:
Screening
Applies strict rules to decide what companies are in or out of a fund. Negative screening – also known as divestment – is common for “sin sectors” like tobacco, weapons and (increasingly) fossil fuels.
ESG integration
Considers environmental, social and governance factors within investment decision-making to lower exposure to financial and reputational risks. ESG-integrated funds don’t screen out particular companies.
Stewardship
This can include engagement with a company’s senior leadership on a wide range of ESG issues and voting for shareholder resolutions.
Thematic investing
Selects only companies that contribute to a sustainability “theme” like clean energy, water or green buildings.
Impact investing
Investing with the intention to generate measurable social and/or environmental impact.