Ask an advisor: How can I invest to fight climate change?

August 30, 2023 5:06 PM

As climate-related disasters increase, many investors are increasingly concerned about the planet.

Welcome back to "Ask an Advisor," the advice column where real financial professionals answer questions from real people. The topic can be anything in the world of finance, from retirement to taxes to wealth management — or even advice on advising.

Not every investment decision is about making money. In recent years, more and more investors have prioritized ESG — short for "environmental, social and governance" concerns. In 2021, $18.4 trillion was invested in ESG funds, according to the consulting company PwC. By 2026, that number is expected to reach $33.9 trillion.

And as climate-related disasters proliferate — including the recent wildfires in Hawaii and Canada — many Americans are increasingly concerned about the "E" in ESG. One of them is a wealthy retiree in Colorado. Feeling responsible for the state of the environment her children will inherit, she wants to know how she can help.

Fortunately, she and her husband are able to live comfortably and still have money left over to invest. How can she use those funds to help heal the planet? For guidance, she turned to the experts. Here's what she wrote:

Dear advisors,

I'm a 65-year-old retiree in Telluride, Colorado, and I want my investments to do some good for the planet. My husband and I are already comfortably retired, so I'm not looking for financial advice for myself. But I worry about the world we're leaving behind for our children, nieces and nephews.

Specifically, I'm very concerned about climate change. How can we use our investments to offset this crisis?

Aside from our assets in commercial real estate, we have about $300,000 in the stock market, which is managed by our investment management team. The next time we meet with them, what options should I suggest? Even if it means a smaller return for us, how can we invest our money in a way that looks out for future generations?

Sincerely,

Climate-conscious in Colorado

And here's what financial advisors wrote back:

Don't forget charities

Pam Horack, certified financial planner and founder of

Pathfinder Planning

in Lake Wylie, South Carolina

In addition to finding ESG investment funds, you may want to consider donating to charities that specifically focus on saving the environment. As you are comfortable in your retirement, this approach does not grow your portfolio. However, you could receive charitable tax deductions. Also, you can be assured that your money will go directly to efforts to save the planet. You would not be dependent on for-profit companies that may or may not follow through with their ESG intentions.

Check the paperwork

Kristy Jiayi Xu, CFP and founder of

Global Wealth Harbor

in Walnut Creek, California

Since you are most concerned about climate change, you could ask your advisor to review an ESG fund's prospectus to screen for the investments that satisfy your goals. At the same time, because you have already retired, you may want to diversify your ESG investments across industries, sectors and asset classes so that your portfolio can maintain the investment allocation and risk exposure that is suitable for you. Also, many studies show that the performance of ESG investments sometimes exceeds that of conventional investments, so don't assume you'll need to accept lower returns to protect the environment!

Two approaches: Naughty and nice

Jay Zigmont, CFP and founder of

Childfree Wealth

in Water Valley, Mississippi

You are not alone. Many people, myself included, are now trying to make sure their investments match their values and concerns. Concerns around climate change are a common reason people start looking at ESG investing.

When looking at ESG, there are two common approaches: opt-in and opt-out. In the opt-in approach, a fund does a deep dive into each company and judges them by a set of ESG criteria to decide if they should be included. The opt-in approach tends to be more stringent, and may result in higher fees, as there is more work required.

In the opt-out approach, there is effectively a "naughty list," and if companies are doing bad things from an ESG perspective, they are out. It's easier and cheaper to knock out "bad" companies than to select "good" ones, since very few companies are perfect.

Which approach you take is up to you. Personally, I decided to follow an opt-out approach. I normally tell clients to invest in the entire U.S. stock market. As an alternative, you can pick an ESG ETF with an opt-out approach and invest broadly across the U.S. stock market, just with some of the bad actors taken out. In this approach there are slightly higher fees, and it is not perfect, but I believe it is a step in the right direction.

A wealth of options

James Osborn, founder of

Envest Asset Management

in Ridgefield, Connecticut

It's inspiring to hear your dedication to making a positive impact on the planet through your investments. Addressing climate change is a crucial step toward securing a better future for the generations to come.

Fortunately, the landscape of sustainable investing has expanded significantly in recent years. From green bonds and renewable energy funds to ESG-focused ETFs, these options allow you to align your investments with your values. If you're interested in companies involved in electric vehicles, lithium batteries, wind or solar power, there are ETFs tailored to those sectors. Broad-based index-based ETFs focusing on low carbon emissions provide another avenue for impact.

Incorporating sustainable investments into your portfolio not only aligns with your values to address climate change, but can also be tailored to fit your unique risk profile and retirement plan. By discussing these options with your advisor, you can ensure that the chosen strategies not only resonate with your values but also complement your financial goals and risk tolerance.