Love this part: "If there is an unexpected worsening of the climate, investors in green assets (e.g. companies) will benefit." It's a funny thought because it implies, that the owners of green assets have an interest in the situation not improving.
@@LaTerreurDuRang10 it is an incentive to reduce their cost of capital. They could instead raise their prices and carry on. I think tobacco companies are a good analogy. Their high cost of capital did not slow them down.
Um, what the heck? I had two comments, the first one much longer. It's gone! Darn it! I had a lot of thoughts about this aspect of the video, and what was written in this thread. I don't agree that "Green investors are betting on the situation getting worse without doing anything to improve it." I don't believe that follows. But I'm not going to try to reconstruct my earlier comment. 😢
The idea of brown companies that could become greener in the future as possible value plays is intriguing. If Blackrock or Vanguard makes a new index fund that screens for such value plays, I'd be very interested in seeing how it does.
Some ethical investment firms have advocacy funds that invest specifically in "brown" companies with a view to pushing them towards lower emissions, etc, via shareholder motions, etc,, which as an individual investor is difficult to do. That might be the best way to invest in brown businesses transitioning to green while making a contribution to that change.
Great episode and I really enjoyed the Rational Reminder podcast on the same topic! Adding timestamps is a really nice touch for when I come back to your videos in the future! Please keep doing this if it's not too much trouble :) I appreciate you and your work, Mr. Felix!
Excellent summary! Makes me worry even more when I read that boards of major pension funds now start to abandon investments in brown companies all together. F.e. the largest pension fund in the Netherlands announced recently it will step out of fossil fuels entirely, and they will be selling their stakes in companies like RDS. Imo this doesn’t serve the interests of the policy holders at all and shows that the boards of these institutions are confused about their role which is first and foremost to safeguard the pension obligations for decades to come. Instead, they should remain invested in brown companies and effectively use their voting rights to force the companies to accelerate their sustainability agendas.
@@ivankauf But your ETF reflects the influence the 90% have on the market, thus stifling your possible outcome. I recommend an ETF that only reflects the choices the most successful 10% investors make. ;-)
I always appreciate your thorough analysis on the different topics you present, but I must admit that after watching all of your videos over the years, what I'm really waiting to hear on each episode is that owning a total market index fund is still the most sensible. And of course this episode was no exception! 12:36 Thank you again!
One example of markets pricing regulatory risks: Darling Ingredients was one of the best performing US small cap stocks during 2020. Why? Darling Ingredients makes biofuels. Its price surged as a Democratic victory in the US 2020 election, which could bring new environmental laws, became more and more likely according to polls.
I find the fact that everything is "price" to be rather disheartening, because it eliminates the chance to get a good "deal" on anything. It eliminates the advantage of doing anything over anything else. Why buy a green company when it doesn't offer any advantages over a brown company? Why buy a brown company when it doesn't offer any advantages over a green company? Speaking of green, perhaps I'm getting cynical in my old age, but when I was young my thought was, "Solar panels, free/cheap energy from the sun!" Only it's not free and it's not even cheap, because the intrinsic value of what is being produced causes the price of the solar panel system to rise until "equilibrium" between production costs and the alternatives, so what's the point of even bothering with solar panels any more?
The point is that there's more to be gained than just financial return. Would you prefer to live in a world in which companies are being given incentives to get greener? Or one in which there are no brakes on destroying the planet? And do you care about future generations?
@@sharonminsuk But better regulation and proxy voting is much more effective than 'green' investing. By limiting yourself to green companies you're not only limiting potential returns but also potential influence.
@@alankoslowski9473 Why one or the other? Regulations are not incompatible with green investing, so as long as they both have a positive effect, doing both is going to be better than either one or the other. And proxy voting is *_part of_* green investing, properly understood. "Green investing", and the larger domain of "social"/"ethical"/"ESG"/"impact" investing in general, is not limited to just avoiding certain companies. That is just one in a toolbox of techniques, and proxy voting is a major one of those other tools. It is integral to the strategy. More than just proxy "voting", in fact. I invest with several social investing shops, and they work proactively to actually develop the shareholder proposals that get voted on. Also, as institutional investors, they have the size and power to actually meet with company management and discuss these issues, sometimes achieving gains before a proxy proposal even comes to a vote. This is what "shareholder activism" really involves. And every share these funds buy in a given company (hence every dollar I invest in one of these funds) increases their shareholder activist power. The whole enterprise is really more nuanced than you're suggesting. Also, there is no evidence that avoiding "brown" stocks actually harms investor returns. I don't think that's quite what's meant by what Ben said in this video (though I'd love for him to weigh in). I think that's an old myth that has been long ago debunked.
@@sharonminsuk There are no regulations. If you look at world Co2 emissions they have always increased every single year, and there is no end in sight (the only end will be when world population levels off in some decades consistent with demographic trends). Despite this, life expectancies and standard of living continue to increase. At most regulations just offshore emissions EG USA to China (the reason there are few American factories anymore). They cannot be eliminated or even much reduced per capita. Climate change is, always was, and always will be, fake. It is a tool for politician's to line pockets and create slush funds. The proof is that ultra liberal states like California and Canada do not enact strict CO2 caps unilaterally on themselves, which they logically would if they truly believed climate change. This proof that climate change is false is irrefutable.
Hey Ben! Vanguard and BlackRock specifically opposed many, MANY ESG measures in their holdings. In most cases they could have been the swing votes. Someone on RR linked the paper. Just thought I'd throw this info in as a counter point to your final thoughts. Yes, in theory, owning the company let's you "vote" to help it get greener but retail investors are so small (as reflected by their minimal impact on prices..) that in effect we don't really get to actually vote in those companies.
I think my earlier attempts at posting exactly this got removed because I included a link, but indeed I (and maybe others) posted about this earlier in the RR. You can find the comment, and links to the two reports, in the Episode 156: Climate Change vs. The Stock Market - Discussion Thread, where it is as of now the latest comment.
Thank you for this! I didn't know BR and V's actions specifically, but this doesn't surprise me. It was hard to hear them being held up as the real promoters pushing industry to be green, when there are institutions (pure ESG fund shops) going out of their way to do this.
Money flows shape the future. If people invest in brown companies to take part in their "transition" (assuming that's possible), they decrease the cost of capital for the brown companies. This in turn decreases the motivation for brown companies to change, crippling our future. I understand that you always maximize returns Felix, but that's not how all money flows, GME, AMC, have proven that. I chose to invest my money where I see the future and where I want the future. Gains come from my correct assessment of the future, not by looking at the past (or research that looks at the past). Not attacking your style, I love your videos. Just food for thought :)
GME and AMC are a consequence of short-term market manipulation. Analyzing historical data is the best method for successfully predicting future returns. Considering this, investing based on how you see and want the future to transpire seems like delusional wishful thinking.
@@alankoslowski9473 you're 100% right - and yet I live and sleep much better knowing that my money is doing good. You need to be delusional and think wishfully to be a lot better than the rest and only few are. So far my strategy has been very rewarding, but research and time work against me. Let's see :)
Great video! Ben, why have you removed your video where you explain that REITs exposure can be achieved via two other asset classes? really would like to watch that again!
Yes, but the world is not moving towards a fossil fuel free future. All auto manufacturers are significantly reducing their EV infrastructure as they are now seeing the costs far outweigh any economic or climate benefit, and the two largest polluting countries in the world (China & India) have ZERO interest in participating in this “green future” as they know it puts them at a substantial economic disadvantage on the global stage. “Clean energy” is far from efficient and far from cheap. It sure sounds good though. Like “free” healthcare and “free” education. I have yet to hear from any “expert” what their brilliant ideas are in the entire manufacturing process and disposal process of 1500 pound batteries that wouldn’t contribute to pollution far more than it would seek to reduce it by implementing them in the first place.
Hi Ben, interesting video as always! I have an unrelated question that I was hoping to get your opinion on (hope you see this). Is it better to market buy or limit buy? My friend says limit buy is a form of market timing so you should never do it, while to me it seems like it's adding efficiency to the market which would benefit you, so it is a good idea (if you do it near the current price).
If canada wants to reduce co2 , the best way is to build high rise condos and intensify number of people per area. I don't think putting solar panels on each house is a good idea. Canada and the USA should first switch to an European style of living before buying wind turbines from Vestas
I agree. Expected human behavior is certainly a significant market factor. If enough people adopt a more environmentally lifestyle, reflect this. If more people live in higher-density areas, drive less or not at all, etc, the market will eventually reflect this. Unfortunately, many people prefer low-density rural living to dense urban living. Most North American areas are also designed to encourage cars as the primary means of transportation.
North America simply just has more land area than Europe. North America adopting European style of living just won't work because European style already fits into the their lifestyle; North Americans would have to squeeze into a smaller area (like sleeping in a small area of a king size bed) as well as a huge negative lifestyle change.
@@alankoslowski9473 Agreed but not everyone has the same preferences and definition of convience. Sounds similar to Socialism being told what to like and where to live.
@@stevenporter863 Social structure affects preferences. For instance, most people in North America prefer to own a car because most areas encourage car ownership by building ample roadways while minimizing walkways and public transit. In areas with more ample and safe pedestrian, bike, and public transit options car ownership is lower since they're unnecessary for many.
Would love follow up videos on impact of sea level rise and displacement, as some major financial hubs are coastal. Also other than hedging against cc, would love your take on companies servicing requirements arising due to cc
@@BTx933 _"For markets to be efficient would require that their participants be educated, rational and unemotional."_ Most investors endeavor to behave as such. Of course they aren't always successful because no one is. But market prices reflect the consensus of all investors based on the best available information, and change with new info. As such, while they aren't perfectly efficient, they're about as rational and efficient as can be reasonably expected.
@@BTx933 those conditions are maybe required for the markets to be perfectly efficient , but nobody has ever claimed they were - not even Eugene Fama. Market efficiency isn’t an on and off switch - it’s a dimmer switch. It’s about how much information is reflected in prices - not whether every participant processes the info rationally and perfectly. If those assumptions were required for a financial theory to have any relevance then we would have to throw out almost every theory we have in finance and economics - even simple laws of supply and demand. As it stands the weight of the evidence would suggest markets are pretty efficient - it’s the best model we currently have for explaining the market. To use terms such as ‘obvious myth’ is more what I find laughable.
Green stocks are a risk because of their overpriced nature. As Ben explains in the video, they are priced for their hedge. However his statement that owning companies in transition is a way to effectively influence climate change is only true if your investments are part of a fund that is using their power to own adequate shares to influence shareholder votes, and then exercise that right. Otherwise you are passively following the index and your money is having no effect one direction or another on climate change. And the large asset managers (e.g blackrock) that he said were influencing climate change in these companies are actually some of the slowest to make any movement with respect to shareholder voting to influence climate policy. It is happening but extremely slowly. The real impact investors are those "activist investors" who are funds designed to own enough shares to trigger voting rights, and then influence the companies that way. Relying on Ben's suggested method is basically meaning you investments are having no impact on climate. Which given the current state of the game means supporting pumping the atmosphere full of carbon.
Great video, as always, thank you. A suggestion for the next topic of research/video/rr podcast episode: investing in Venture Capital-good idea or not? I know the endowment model covered it partially, but it mixed in PE, VC, hedge funds & other asset classes. Perhaps a focus on just pure VC might be interesting.
Would be interesting on this topic a video on investing in uranium as a form of hedge against climate change. After all if countries must meet their carbon targets they will need to make several changes. And Uranium is, safer and cleaner per KW produced than most other form of energy production.
I would like to se video about investing in carbon credits. Specially about investing in Global Carbon Index. Looks like good opportunity, as carbon allowance prices need to rise to meet a 1.5°C global warming limit
Feeling really unsure about ESG or SRI investing now. Thanks for the great video as always. Another important point ist the difference between ratings leaving the companys unsure about how to improve. So the benefit for society may not be as great as one thinks with ESG funds
@@BenFelixCSI yes exactly. Thanks for referencing that video. I thought back to exactly that referenced topic of yours ;p It would be interesting to get a overview of the EU new green taxonomy vs MSCIs ESG and the other rating agency's Systems. There will probably be many papers published about it you could cover. Otherwise it is a good idea for a thread in the RR community. Furthermore, I am worried about the hidden costs of higher turnover in strategies as ESG. My Xtrackers ESG best in class carbon weighted strategy seems to be about 40% annual turnover which is alright I guess. But still hard to rate as an amateur.
@@NATOnova Ben referenced the correct video I think. There is only about 0,6 correlation(?) between some systems like ESG or SRI. If I remeber correctly atleast. So it really differs from agency and system what is seen as environmentally or socially "good". I would recommend the corresponding Rational Reminder episodes oder Bens Videos
That's not his point. He acknowledges climate change is a legitimate concern, but these concerns influence your investment allocation since climate change risks are priced in based on available info.
@@alankoslowski9473 I'll start worrying about climate change when one single prediction comes true. There are hundreds of them, from certain islands being under water to certain glaciers being melted by 2020. Some predictions came and went in the 80s and 90s. Print this out, put it on your wall and look at it in 40 years.
So glad I became part of the rational reminder community. Thank you very much for providing us with sich valueable Informations. Greetings from germany!
I think the number may be closer to 35-40% but it's depressing either way, I agree. Tribal politics / culture war always override facts with these people.
O&G producers going to be one of the best investments of the next decade. I don't think the market is nearly as efficient as you seem to think it is. Fade the emotional money always.
Maybe, but not necessarily through equity markets. Depending on how taste preferences and regulatory picture pans out, O&G producers may end up with much higher costs of capital than they have now. So the bonds they'd issue may have higher coupon rates, and that cost would undermine the value created by their lessened stock price. In other words, though you might expect them to become good value picks because taste depresses their price, earnings would be hampered by higher debt costs (as well as regulatory compliance, etc).
One problem is that many of the ESG investment trends recently have correlated with the momentum plays of the last decade and benefited greatly from that. This has re-enforced the emotional good feelings these types of investments have brought those practicing them, and resulted in the classic getting paid to "do what is right" scenario. There is no assurance this correlation to a generic momentum strategy will hold to the future, and in fact all the active bets and quants seem to be against most of these investments continuing that correlation. Lastly, there is a very real issue of diminishing returns to the Government sugar that can support the Brown-to-Green transition, especially as even the ESG sentiment sways once the Green stocks start to be viewed as the establishment.
That's assuming climate change will happen predictably gradually over a long time, rather than in fits and starts and including positive feedback. How certain are you of that?
If nobody is above average, nobody can be below average. If after controlling for other factors brown companies do not produce excess returns than by the same logic, controlling for the same factors green companies also should not have lower expected returns.
Lots of people are above and below average. That’s how an average works. All green and all brown companies equal the market expected return. This still holds if all brown companies have higher expected returns than all green companies.
That’s not the point I want to make. Owning green stocks does nothing to improve climate outcomes. We need government intervention and the largest asset owners to exercise their power as shareholders.
No, it's better to just ignore ESG entirely and focus on factors that are likely produce higher returns. Unless they're highly profitable and have a low share price, polluting companies won't necessarily have higher returns.
@@alankoslowski9473 Maybe historically, but it seems nowadays US markets are mispricing systemic risk due to the perverse signals that the Fed is sending the market. So, although the data shows that systemic risk is usually the risk that the market rewards you for taking, these days that doesn't seem to be the case; therefore, it makes sense to hedge that risk somehow.
@@TXLionHeart Even if that's true it doesn't necessarily mean focusing on polluting companies is prudent. Again, just focus companies with higher expected returns (low share price, highly profitable, etc) regardless of ESG characteristics.
@@alankoslowski9473 Of course, but it happens to be that a lot of the companies with good price-to-fundamentals ratios have low ESG scores -- probably because the big guys are afraid that investing in them may hurt their reputation.
@@TXLionHeart That could be, but I think it's probably more concern about future viability. For instance, many petroleum companies are highly profitable, but have a low P:E. I'd guess this is because many investors are concerned about future prospects related to decarbonization. But if a company is highly profitable it seems likely its share price will recover robustly, though it isn't certain if and when that might happen.
Companies will have to get greener. I think investor’s will continue to move toward ESG investing over time. It seems like almost every new study that comes out about climate change suggests a more dire situation than the previous one and every year there’s more extreme weather.
true, however even within oil companies some will get ESG label vs other wont... check out how big Total has become in solar, wind and charging networks... and potentially part of the future Airbus if batteries. And Total is just one example, one could look into others (shell etc.).. there you get very low valuations, fraction of the prixe vs pure ESG plays while still having massive ESG exposure
Can you explain. Companies "exposed" to climate change VS companies "causing" it? Seems to me, anyone who has legitimately studied the Environmental crises, we need pretty draconian legislation fast.
It shouldn't matter. It's like an oil company (causing) and a car manufacturer (gas powered non-EV, exposed). Even if it's only the first that gets regulated, the second suffers as well. Another example is electric utilities that have nuclear power plants. They are the opposite of causing, they are helping, but nearly all nuclear plants are near large bodies of water and may get flooded (exposed).
12:36 You know, I like your content, but this is purely your opinion... Do you have studies about what is better for climate change, investing in already green companies or investing in not already green companies? I don't care about investemnt return, so long as I still have about a 2% return, so I only care, what is better for the climate. Of course, you're an investment channel, but more and more, I feel, you just care about returns and only focus on that, what about looking at it from the exact opposite angle and first focus on climatchange and see, if you can still have a positive expected return, even though you might underperform a diversified global market portfolio.
I don't think that's the right question to ask. Is there evidence that avoiding investing in "brown" companies, as an ESG focused investor would do, has any impact on their operations? "Sin" companies have been around in various forms for a long time (gambling, pornography, alcohol, tobacco etc.). There is plenty of evidence that the increased cost of capital has benefitted investors willing to "sin" but it is also clear that these businesses have continued to operate successfully. Societal pressure and regulations have had much bigger impacts on these industries than funds that avoid owning sin stocks. ESG is newer so we have less long-term data to scrutinize, but the theory is the same. Real change will not come from green investors selling their shares in oil and gas companies to some other investor who is willing to own them. It will come from government intervention and asset owners exercising their power as shareholders through proxy voting and engagement. This makes the case for holding "brown" companies even more interesting if the proxy votes will be used toward fighting climate change, as Vanguard and BlackRock have said they will. Not owning the shares gives you a hedge against unexpected worsening in climate change, but it does not do anything to improve the global problem. This is a good article referencing BlackRock's former chief investment officer for sustainable investing discussing why "green" investing is not helping anybody other than the companies marketing green products. www.theguardian.com/business/2021/mar/30/tariq-fancy-environmentally-friendly-green-investing _“If I was on a panel and someone asked me what’s the best way to tackle climate change? Should I buy an ETF or should I call my congressperson and demand legislation and a price on carbon? The truth is someone is better off calling their congressperson.”_
9:07 here aswell: what about only: Should we build portfolios, that load more heavily on carbon-intensive Firms? Why even add the last part? Are investment returns all there is in this world? 9:20 could make sense... when it comes to making money, but why does it always have to be about that? Explained in one sentence: You look at what happens to asset markets because of climate change, you never look at what happens to the climat because of asset markets.
@@BenFelixCSI Thanks for the fast answer! Again, no studies ;) I admit, I don't know the answer to whats best for the climate, but I don't post a video about it and reference the opinion of a CEO from a big company... (who didn't quote any studies aswell) What about this theory: Investing in green companies makes it easier for them to get capital, as their companies are expensive. Therefor investing in those companies helps them grow, which should be good for the climate, as they are green companies. This is just my thought-process about it: I don't have a study. But it is not my video and I didn't tell others how they should invest ;)
For an emerging phenomenon like ESG investing there are no empirical studies on how businesses are impacted by investors’ preference for owning ESG stocks. There are theories suggesting a difference in cost of capital, but a higher cost of capital does not necessarily bring the change that ESG investors hope to see. It does create an incentive for businesses to look greener, but it also opens up the risk of companies “green washing” which means hitting the metrics that will improve their ESG score without really changing their business. The other big issue here, which I covered in my video on ESG investing, is that there is no agreement on what “green” is due to differences in ESG rating agencies’ definitions. I think that ESG investing is a sales tactic that allows fund managers to charge more for products that make investors feel good without bringing about any real change. The only argument for ESG from a portfolio construction perspective is that “green” companies may be a hedge against climate risk, but that is theoretical and the effectiveness depends on how well a “green” fund captures the companies that hedge against climate risk. Edit to add: Vanguard and BlackRock publish their proxy voting and shareholder engagement actions aimed at addressing climate risk. Other than government intervention, asset owners exercising their power is the most direct action to change corporate behaviour.
@@BenFelixCSI Thanks again for the answer! It seems, youtube doesn't wanna show my comment with a link, so here it is again, with the link fractured: Don't worry, I don't put my money into ESG-funds... I do something way worse: active investing I want my money to be only located into companies I totally agree on and I think, many people should do that (follow their views, ofc not mine ;) ), as that would truly be voting with your money, as many investors say about capitalism. Just buying a global ETF is not "doing well and doing good", it's doing well and doing neutral: you don't tell companies how to behave, you tell them, everything is ok. At least mentioning something like this would have been nice: ht tps: //jo urnals. sagepub. c om/d oi/full/1 0.117 7/10 86026620919202 [fractured, if you wanna open, gotta delete the spaces] They do state, that investor impact needs to be more studied upon, but not addressing it at all in such a video is pretty one-sided in my opinion. (only focusing on financial gain and not on environmental impact) I agree, that there are multiple views on ESG, therefor ESG-funds don't really make sense, that doesn't mean however that you should only invest with a neutral aspect in regards to ethics. One could invest actively into as many companies as one ethically agrees with. So basically, making a fund yourself without paying a yearly fee as in ETF's or actively managed Funds. There are also multiple ethical viewpoints, but that doesn't mean, you shouldn't have a ethical viewpoint yourself... Or do you tell others: "there are many philosophies on how to behave, therefor one should adapt every philosophy that ever existed"? The fund-industry is pretty absurd anyways, if you look at it from an ethical point of view. In other life-aspects, people don't go to institutions and want a bundle for example on how to behave, which the institution has put together. Pretty much everywhere else they think for themselves and have their own views, but with stocks everyone just thinks about the monetary gain and not the other impacts it could have. And of course, after investing into a company, it's always good to vote, just like in politics. "It does create an incentive for businesses to look greener" So it does have an impact: Companies want to get added to the ESG-Funds to get more expensive. So, if everyone, like in a true democracy votes only on the company they believe in, it will affect some change in the companies to be accepted by most people. And it is in everyones responsibility to not fall for cheap sales tactics, just like in consumerism. Of course, many people just want to feel good, so they don't research the funds/ companies as much, but that's also the case in politics, that's a problem in democracy, it's still the most fair/ philosophically sound solution in politics, why shouldn't it also be in investing? Maybe an Idea for a video: Other than monetary gain for oneself, are the other aspects in the world that get impacted though investing into asset markets? Of course, there are few studies done on this topic, but with your influence, it may cause a ripple effect, so the research on the topic could get a boost.
Associating sea level rises to any form of asset pricing asinine. That's like linking one's financial success to how much hair is on their head or how tall they are.
So you'd be okay with buying a 30 year municipal bond issued by Atlantic City? Or Miami? Or New Orleans? How is New Orleans supposed to return your principle at maturity if it is underwater and/or flattened by hurricanes?
Ben. With working from home comes no commute. You must have more free time than before. Meaning your RU-vid channel can get back on track with more videos?
This “clown” deals with clients worth millions. Just because the video went over your head and triggered you because “climate change” doesn’t mean you have to be a bully; grow up. He’s not even selling anything in the video, just providing free information.
