Explore the Thinking behind our investment approach

"Once mainstream market participants wake up to the risks and opportunities posed by the physical environment and our attempts to manage it, it will become one of the common lenses through which risk is evaluated.” – Alicia Karspeck, Ph.D.[1] At Gitterman Asset Management, we believe that climate change is our most critical systemic challenge. To that end, as well as being the biggest trend in the investment management industry, sustainable investing is also our highest purpose. We’re therefore committed to educating advisors so that they can participate in this shift and contribute to the purposeful direction of capital. In April, Cerulli Associates found that, notwithstanding client interest, “many advisors are still reluctant to offer ESG strategies in client portfolios.”[2] This is at a time when ESG strategies have been growing in availability, showing no signs of slowing. This only steepens the learning curve for advisors, especially as quality is not a given under rapid proliferation. Climate-specific investing, and, especially that which leads to tangible outcomes, such as the transition to net zero carbon emissions to align with the Paris Agreement, or adaptation to the myriad physical risks we are facing given just existing global warming, requires another leap in technical understanding. If advisors are not yet able to authentically serve clients with a general ESG interest, how will they serve clients who are specifically attentive to, and perhaps more knowledgeable about, climate? Certainly, in the numerous events we’ve held in partnership with RIA Channel, we see many of the same foundational questions showing up in the Q&A. A significant portion of our audience comes from large firms, which begs the question as to whether those organizations are prioritizing the necessary investments in advisor education? Without sufficient technical understanding, discerning between greenwashing and truly intentional investment products is tough. Marketing language, especially that propagated by big budgets (yet sometimes built on small ambitions!), may set off endorphins, but after that initial warm feeling, what are you left with? Tariq Fancy, former CIO of sustainable investing at BlackRock, recently shared that he was “rebuked…for going off script” when asked by a client what the impact of investing in low-carbon funds would be. His colleague, “told him that he should have stuck to the talking points by simply saying the funds are a way for clients to contribute to the fight against climate change, even though there wasn’t an explanation of how.”[3] Interestingly, sustainable investments recently “shrunk” in Europe, going from $14 trillion to $12 trillion from 2018 to 2020. This is not due to waning interest, instead it’s a result of more stringent definitions on what constitutes a sustainable investment under the E.U.’s SFDR. That’s not to say E.U. regulation has got it all right, but the subsequent change in assets does point to the wider problem of definitions and intentions. Put simply, voluminous data and elegant marketing do not automatically lead to a decarbonized world any more than a shelf full of unread books increases one’s intellect. We’re not saying this is easy – in fact, quite the opposite. In our industry conversations, experts who’ve been working in this space for years comment on how the level of information and new insights can be overwhelming. Prioritizing time to learn can also be a challenge for a busy advisor. Moreover, the trade-offs and complexities associated with mitigating and adapting to climate change should not be underestimated: as an industry and as a global society, we are going to make mistakes along the way. Learning is always a continual process and not an end. We can, though, avoid certain missteps, such as naively piling assets into inadequate products with cool monikers rather than diverting capital towards products with robust philosophies, demonstrable intentionality, and verifiable outcomes. Immersion in the subject matter, asking lots of questions, and retaining healthy skepticism in the face of clever marketing are three ways to mitigate this. Our upcoming event, The Great Repricing: Financial Advice in the Age of Climate Change, is aimed at helping advisors and other financial professionals achieve the former. We’re convening climate scientists, data providers, leading asset managers, and private companies, all of whom are focused on climate change from risks to opportunities. Join us for an immersive online experience, during Climate Week, from September 21 – September 24. For $99.95 you get four half-days (10am – 2pm ET of climate-focused content, opportunities to interact live with sponsors and select speakers, as well as access to the videos for 12 months.

As the summer heats up, we are taking a virtual trip around the world to introduce you to select managers in our SMART Investing Solutions suite. One goal of our diligence process is to find managers who make a positive impact through active shareholder engagement, alongside security selection. Green Century, a manager in our Fossil-Fuel Free managed mutual fund model, hosts an award-winning, in-house shareholder advocacy program. The firm engages over one hundred companies every year, pressing them to improve their environmental policies and practices on a wide variety of issues, from protecting tropical forests to reducing their climate impact. Among the firm’s noteworthy advocacy achievements is its campaign to prevent plastic pollution. Eleven million metric tons of plastic end up in the ocean each year1, which negatively impacts the environment in myriad ways, from harming wildlife to threatening human health. Green Century tackles this problem at the source by urging portfolio companies to reduce their use of plastic packaging In just the last year, Green Century secured plastic reduction commitments from five major corporations, including Coca-Cola and Mattel: Coca-Cola, named the “largest plastic polluter on the planet for the third year in a row,” agreed to reduce new plastic use by three million metric tons by 2025.1 Mattel “was extremely receptive” to engagement and will begin disclosing metrics illustrating their plastic footprint.1 To learn more, check out this video with Annalisa Tarizzo of Green Century: Convincing Coca-Cola and Mattel to reduce their plastic use.

So much financial advice is predicated on caring for your future self. Your present self must resist temptations today to protect tomorrow. But it’s hard. Granted, some of us are naturally wired for saving and discipline; however, others find it almost impossible to forego instant gratification. The long-term can be easy to ignore. Climate change poses similar, and bigger, psychological challenges. As climate scientist, Katherine Hayhoe, stated in a PBS interview, “It turns out, in the U.S., almost three-quarters of the people would say, oh, yes, climate change is real, it will affect future generations, it will affect plants and animals, it will affect people who live in countries far away. But when you say, do you think it will affect you, the number drops precipitously to just over 40 percent. That gap is our biggest problem, not the gap of people who say it isn’t real, the gap of those of us who say [it] is real, but we don’t think it matters.”[1] In his solstice update, Spencer Glendon refers to those who believe in climate change but don’t act because it’s a “someone else” problem. He goes on to state, “Collectively, we are inconceivably powerful while individually, we feel atomistic. We often don’t know whom to turn to when we are lost or frustrated or when something doesn’t work, and when people turn to us, we can confidently tell them that they are actually looking for someone else.”[2] But we are the people we’re looking for. There is nobody else. Katherine Hayhoe goes on to say that, “We have to prepare for the changes that are coming” across infrastructure, food, water, security, and other critical systems. Adaptation is part of our future irrespective of whether we can speed up mitigation via a swift low-carbon transition. She also encourages that “Every single one of us can make a difference.” So, how do we make a difference? Spencer says, “Stop doing things you know are wrong… Start by figuring out what you’re doing that is pretty obviously wrong.” But what is “obviously wrong” from a climate perspective? Is it eating food in restaurants that was flown halfway across the world? What about going on vacation via long haul flights? What about buying a brand-new pair of jeans or anything else that uses an enormous amount of water in manufacturing? And what are the trade-offs and second order effects from climate solutions? On that point, we previously wrote about some of the potential land-use trade-offs that may occur from shifting the U.S. energy mix to achieve net zero. At the very time we need to think deeply and openly discuss these big questions, we’re being continually distracted by the Internet, including ever more sophisticated digital marketing that taps into desires we didn’t even know we had. Our political climate, domestically and internationally, is fraught with mistrust and divisiveness which is hardly conducive to fostering collective ambition. We’re connected and simultaneously disconnected from the planet, from each other, and even from ourselves. These are challenging times with seemingly insurmountable obstacles, but there is always possibility. As Jeff has articulated before, “[we] have a tough road ahead, but we believe there are amazing feats along the way. Human potential is always in abundance.”[3]

Everyone and every organization can contribute something to the fight against climate change. That’s the message from Salesforce’s VP of Sustainability, Patrick Flynn. With a solid foundation in corporate philanthropy, Salesforce has recently supercharged its impact potential by leveraging its core products and services to support the transition to a low-carbon economy. Inadequate or inaccurate GHG emissions data are a key impediment to understanding the opportunities for reducing GHG footprints at the micro and macro levels. With its global ecosystem of customers and suppliers, and data modules, Salesforce has enhanced its platform to support emissions accounting at scale. By providing new tools, Salesforce is facilitating the capture of emissions data up and down the value chain, which, in turn, helps customers influence suppliers to take steps to make reductions. Click here to watch Jeff’s conversation with Patrick Flynn and to learn more about Salesforce’s climate policies and software innovations.

When it comes to the capital markets, the U.S. markets are the world’s largest and “among the deepest, most liquid and most efficient.”[1] Healthy, transparent markets are critical to ensure that capital flows to support innovation and job creation, which drive a robust economy and underpin individual wealth creation. However, the U.S. has been slow, diplomatically speaking, to create the conditions to ensure that the markets orient capital towards the most important environmental and social challenges of our time. In contrast, the E.U. is moving at a much faster speed. In a recent episode of TheIMPACT TV, Michelle Friedman, Executive Director (ESG/SRI strategist) of MSCI, refers to the E.U.’s Sustainable Finance Disclosure Regulation (SFDR) as the “most ambitious plan we’ve seen in terms of ESG regulation.”[2] SFDR is intended to shift capital towards sustainable opportunities, while mitigating greenwashing at the product and entity levels. According to SFDR, the volume of transparent sustainability data funds will increase, thereby influencing funds and fund families beyond the E.U.’s jurisdiction, while fund families will likely not want to create two levels of disclosure based on geography. We may even see multinationals broadly disclosing according to E.U. guidelines to avoid the onerousness of operating at multiple standards. In addition, financial advisors in the E.U. will be required to ask their clients about their specific sustainability interests as part of determining suitability for investments. While the SEC and other U.S. regulators are getting better educated on ESG, many advisors remain behind the curve on offering sustainable investing to their clients, despite growing client interest.[3] In fact, research institution Cerulli found that advisors “limit ESG investing to their high-net-worth clients…with more than $5 million in investable assets, leaving out the 56% of households with investable assets between $100,000 and $250,000 who said they would rather invest in companies that have a positive social or economic impact.”[3] In the E.U., on the other hand, “ESG really seems to be on track for becoming business as usual” according to Friedman.[2] The G7 Supports TCFD The Task Force on Climate-related Financial Disclosures (TCFD), which only released its recommendations in 2017, has fast gained support from financial services firms and governments. At last week’s G7 meetings in the U.K., finance ministers stated their support for mandatory climate disclosures, using the TCFD framework. This is another signal, ahead of COP26 in November, that climate risk is moving up the geopolitical agenda. Whether disclosure leads to far-reaching changes commensurate with the problem remains a big question, however a globally aligned understanding of the issues should support better international and domestic policy and drive more capital towards solutions and adaptation.

As we reported back in April, climate would be a significant theme in this year’s proxy season. Since then, Exxon now has three new board members nominated by activist hedge fund, Engine No.1 (initially, two board seats were announced but a third is anticipated). BlackRock, historically criticized for a lack of alignment between its outward ESG marketing messages and its proxy votes, supported three of the Engine No.1 nominees, and Vanguard voted for two. In fact, “many of Exxon’s top institutional investors voted in favor of Engine No. 1’s candidates, while retail shareholders tended to favor the company’s nominees.”[1] Proxy advisor, ISS, had recommended that shareholders elect three of the nominees stating that Engine No.1 “made a compelling case that additional board change is needed to provide shareholders with sufficient confidence in the sustainability of (Exxon’s) business.”[2] The proxy fight has cost Exxon and Engine No.1 $35 million and $30 million, respectively, making it one of the most expensive ever. While Exxon is a huge multinational corporation, Engine No.1 is a only six months old and has just $250 million in assets with a holding of just 0.02% in Exxon. Engine No.1’s May presentation regarding its campaign stated that “a lack of successful and transformative energy experience on the Board has left ExxonMobil unprepared and threatens continued long-term value destruction.”[3] It also accused Exxon of refusing to reassess its strategy in light of decarbonization pressures and instead avoiding the subject or dismissing its importance. The economic thesis underpinning the campaign is what helped Engine No.1 achieve this victory. The hedge fund highlighted Exxon’s financial underperformance and made a bet “on a confluence of events, including longstanding investor dissatisfaction with Exxon’s corporate governance and a growing appreciation on Wall Street for G.”[4] Clearly, this is a big development, but it remains to be seen what will unfold at Exxon as a result. However, as Charlie Penner of Engine No.1 stated, “If you can get Exxon to change, everybody else in the industry has to listen…There probably could have been easier targets…. But it’s about getting the most impact…”[5]