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How to Pursue Climate-Focused Investing

What’s good for the long-term viability of our world also has the potential to lead to positive investment outcomes.

02/27/2023
Building with solar panels.

Concerns about climate change are helping to fuel growth in investments that focus on environmental, social and governance (ESG) issues—also known as “sustainable” investing. Although ESG and sustainability encompass much more than fighting climate change, the risks and opportunities associated with a changing climate have become increasingly clear.

Climate Change Directly Impacts Global Economics

A report from the Deloitte Center for Sustainable Progress reveals that inaction on climate change could cost the world’s economy $178 trillion over the next 50 years; in contrast, the global economy could gain $43 trillion over that same time period by rapidly accelerating the transition to net-zero.¹

Many countries recognized the social and economic reasons to tackle a changing climate and signed the Paris Agreement, a legally binding international treaty. Signatories committed to take actions that help meet the goal of limiting the average temperature increase globally to 1.5° Celsius (2.7° Fahrenheit) by 2030.

According to the Climate Policy Initiative, the amount of money needed to fight climate change will have to increase by 590% compared to 2019/2020 levels.² Much of that will come from governments, but some must come from the private sector. And individual investors can make important contributions by investing in companies that are helping to address this challenge.

Here are some ways you can pursue climate-focused investing.

Use Your Voice as a Shareholder to Pressure Greenhouse Gas Emitters

Almost every economic activity—from construction to agriculture to the clothing industry—generates greenhouse gas emissions. While it may seem like a good idea to simply avoid investing in industries that generate a lot of greenhouse gas, that would limit your ability to diversify your investment portfolio.

Furthermore, divesting from companies that could make a big difference in the fight against climate change by reducing their carbon footprint would leave you with no “voice” in pressuring company management to do a better job in this arena.

Every year, shareholders have the right to vote on proposals at a company’s annual meeting, proposals to reduce carbon emissions or fight climate change in other ways are among the most popular. These proposals can also be attention-grabbing­­—not long ago, this type of proposal required ExxonMobil to add climate-friendly representatives to its board of directors.

American Century offers a number of sustainable investing strategies that integrate environmental and other ESG-related issues into the investment process. As stewards of our investors’ capital, we not only vote on shareholder proposals across these strategies, but also have the opportunity to engage with company management throughout the year to discuss concerns and encourage positive change in environmental practices.

Investing in funds like these offers investors a way to show companies that ESG issues matter to them. In the long run, we believe this is far more effective than reducing our shareholding or divesting from companies or entire industries.

Consider Green-Focused/Alternative Energy Investments

Consider allocating some of your money to companies that are helping to promote green energy. An easy way to do this is to look for mutual funds and exchange-traded funds that invest in stocks of companies focused on alternative energy, clean water solutions and climate technologies.

One resource for researching individual companies is the nonprofit As You Sow, which publishes its Carbon Clean 200 list of companies recognized for using green energy. You can also look for companies that pledge to preserve forests, support sustainable farming and limit emissions as ways to combat climate change.

In addition to stocks, you might consider green bonds issued by governments, corporations and other organizations. These are fixed-income investments used to fund earth-friendly projects like protecting forests and wetlands, de-carbonizing transit systems and building climate-friendly infrastructure. As a bonus, green bonds sometimes come with tax perks for investors.

Look for green bond ETFs and mutual funds, as well as broader ESG funds that include green bonds. It’s a similar idea to buying Liberty Bonds during World War I—a chance to support a cause you believe in while having the potential to earn a fair investment return.

Identify Climate Innovators

Seek out companies that are creating innovative processes and products to fight climate change and help the environment in other ways. Innovations in passive heating and cooling systems, renewable energy technologies and reducing food waste can help achieve global climate goals.

High-profile companies in this area include makers of electric cars, wind turbines and solar panels. Less well-known innovators include:

  • Real estate companies focused on energy-efficient buildings, often heated and even cooled by the sun

  • Plant-based food producers (meat production is a major contributor to greenhouse gas emissions linked to climate change)

  • Companies that make systems to convert farm waste to energy

These are just a few examples of innovative ways companies are helping to fight climate change while aiming to generate profits for their investors.

Recognize Climate Change Fighters Pursuing Transformative Solutions

So far, we’ve talked about investing in businesses that are helping to reduce carbon emissions. Others are going a step further. A number of companies—including a few that are publicly traded—are developing ways to remove carbon from the air on a large scale. If successful, these efforts could be game-changing.

In the future, you may be able to invest in other innovations such as geoengineering efforts that could block some of the sun’s rays. Geoengineering is still so new that most projects are still in the research stage. Other companies are figuring out how to install solar panels on farmland in a way that allows crops to grow while using the space to produce green energy. For now, these are interesting areas to watch.

Seek Out Climate Resilience Visionaries

A 2021 report from the United Nations warned of a major gap in the funding needed to help people adapt to a changing climate that is already affecting how they live. For example, we must figure out how to

  • Grow more food without increasing the use of chemical fertilizers that contribute to greenhouse gas emissions.

  • Secure enough clean water and build safer housing in a world where severe, damaging weather events are becoming more frequent.

Some of the approaches mentioned above, such as ESG-focused funds and green bonds, may include investments related to climate resilience. Examples of climate resilient solutions include:

  • Early weather warning systems

  • Coastal barriers

  • Water desalinization

  • Hydroponics and vertical farming

How to Stay Informed on Climate Change Issues

As you invest, stay informed on developments in the fight against climate change. Keep up on American Century’s perspective on ESG issues and other sustainable investing insights.

Learn more about ESG investing with our practical guide.

Get Help From a Consultant

Our Investment Consultants are available to answer questions about sustainable investment options.

The Turning Point: A Global Summary. Deloitte Economics Institute, May 2022.

Global Landscape of Climate Finance 2021. Climate Policy Initiative, December 2021.

Many of American Century’s investment strategies incorporate sustainability factors, using environmental, social, and/or governance (ESG) data, into their investment processes in addition to traditional financial analysis. However, when doing so, the portfolio managers may not consider sustainability-related factors with respect to every investment decision and, even when such factors are considered, they may conclude that other attributes of an investment outweigh sustainability factors when making decisions for the portfolio. The incorporation of sustainability factors may limit the investment opportunities available to a portfolio, and the portfolio may or may not outperform those investment strategies that do not incorporate sustainability factors. ESG data used by the portfolio managers often lacks standardization, consistency, and transparency, and for certain companies such data may not be available, complete, or accurate.

Sustainable Investing Definitions:

  • Integrated: An investment strategy that integrates sustainability-related factors aims to make investment decisions through the analysis of sustainability factors alongside other financial variables in an effort to make more informed investment decisions. A portfolio that incorporates sustainability factors may or may not outperform those investment strategies that do not incorporate sustainability factors. Portfolio managers have ultimate discretion in how sustainability factors may impact a portfolio’s holdings, and depending on their analysis, investment decisions may not be affected by sustainability factors.

  • Sustainability Focused: Focused: A sustainability-focused investment strategy seeks to invest, under normal market conditions, in securities that meet certain sustainability-related criteria or standards in an effort to promote sustainable characteristics, in addition to seeking superior, long-term, risk-adjusted returns. Alternatively, or in addition to traditional financial analysis, the investment strategy may filter its investment universe by excluding certain securities, industry, or sectors based on sustainability factors and/or business activities that do not meet specific values or norms. A sustainability focus may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underperform or perform differently than other portfolios that do not have a sustainability investment focus. Sustainability-focused investment strategies include but are not limited to exclusionary, positive screening, best-in-class, best-in-progress, thematic, and impact approaches.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.