April 22 marked the 50th anniversary of Earth Day, a day dedicated to the protection of the planet. This year’s theme was climate action—i.e., taking steps towards restoring the planet. In honor of Earth Day, this article highlights a number of environmentally friendly investment themes, including clean energy, low carbon, and fossil fuel free.
By the end of 2019, climate change emerged as a global trend in investments, as major weather-related events increased in frequency and severity causing US$630 billion in economic damages worldwide. According to a Morgan Stanley survey[1], 78% of U.S. individual investors have taken notice and are interested in addressing climate change through their investments.
Clean Energy
One way to invest in environmentally friendly securities is through the clean energy lens. Clean Energy Canada[2] defines clean energy as ‘the technologies and services that increase renewable energy supply, enhance energy efficiency, improve the infrastructure and systems that transmit, store, and use energy, and deliver key energy services while reducing carbon emissions’. This includes companies that produce energy from renewable resources such as solar and wind. By nature, the clean energy sector tends to be heavily skewed towards Utilities and Industrials companies. Clean energy is synonymous with alternative energy, renewable energy, and green technology.
Low Carbon
As per the U.S. Environmental Protection Agency[3], greenhouse gases trap heat in the atmosphere. This primarily refers to carbon dioxide, but also includes methane, nitrous oxide, and fluorinated gases. Given the extent of carbon dioxide in the greenhouse gas pool, many investments in this category monitor carbon emissions. These strategies will either invest in companies that are the most carbon efficient, or will target a certain carbon efficiency relative to the benchmark. Often these investment solutions also pair the low-carbon mandate with a negative screen (i.e., excluding companies with business involvement in tobacco, weapons, or nuclear, etc.).
One method companies are embracing in an effort to keep their footprint low is carbon offsetting, a practice that gives businesses, individuals, and governments the opportunity to neutralize emissions they put into the environment. In its Climate Blueprint[4], Royal Bank of Canada outlined the goal of achieving net-zero carbon emissions in global operations annually, by committing to reducing greenhouse gas emissions by 2.5% each year, with a target of 15% by 2023, and increasing its sourcing of electricity from renewable and non-carbon emitting sources to 90% by 2023. This practice may result in some surprising companies (that could include Microsoft, Apple, and Johnson & Johnson) being large holdings in low-carbon investment strategies.
Fossil Fuel Free
In the context of investing, fossil fuel free generally refers to companies that do not own fossil fuel reserves or those without high fossil fuel usage. Fossil fuel reserves in many cases refer to economically and technically recoverable sources of crude oil, natural gas, and coal. Note that some mandates do not consider metallurgical or coking coal (used in connection with steel production) to be fossil fuel reserves. Solutions that use a fossil fuel free strategy employ negative screening, where they exclude companies that fall under this umbrella.
Bottom Line
Given the variety of investment solutions available within clean energy, low carbon, and fossil fuel free themes, we believe investors have access to the tools necessary to position their portfolio to celebrate Earth Day all year round.
If you’d like to discuss how you can implement these strategies into your portfolio, you can call me at 416-974-4059 or email me at samuel.gorenstein@rbc.com
[1] https://cleanenergycanada.org/about-us/
[2] https://www.morganstanley.com/ideas/climate-change-investment-megatrend
[3] https://www.epa.gov/ghgemissions/overview-greenhouse-gases
[4] http://www.rbc.com/community-sustainability/_assets-custom/pdf/RBC-Climate-Blueprint.pdf