Sustainable Investing Trends
Sustainable Investing Refocuses Toward Mitigation, Adaption and Resilience in 2024
During 2023, we saw inflation, escalating geopolitical tensions and record-breaking weather. The first two may linger into 2024, but the economic and human impacts of extreme weather will be felt for decades.
Changing global weather patterns impose tremendous costs. Climate-related insurance losses regularly exceed $100 billion annually, according to Munich Re.1 Between 2018-2022, the U.S. experienced 89 weather disasters that each caused over $1 billion in damages. Texas alone suffered $375 billion in weather-related destruction.
We saw the hottest July on record in 2023, along with devasting wildfires and droughts, destructive hurricanes and floods. Property insurance premiums have increased by 20% or more to cover weather-related losses, and some insurers are abandoning high-risk markets. Many homeowners are canceling their insurance because they can’t afford the premiums, and landlords risk catastrophic losses as not all damages are insurable.2
We must adapt to this new reality as we pursue ways to fight climate change. While the challenges are urgent, we see opportunities for innovative companies in every sector to reduce greenhouse gas emissions or help avoid them entirely.
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The Global Shift to Renewables: Challenges and Innovations
As we transition to renewable energy, the global economy stands to benefit from new clean energy jobs. Renewables are now cost-competitive with fossil fuels. Bloomberg NEF research indicates that the cost of solar power is now only 11% of what it was in 2009, and offshore wind and battery prices fell 74% and 84%, respectively, from 2012 to 2022. Wind capacity, utility-scale solar and electric vehicle sales are all increasing.
Expanding the electric grid to support more clean energy will be a big challenge for the U.S. Solar generators take roughly four years to connect to the grid, with permitting responsible for much of the delay. After Russia invaded Ukraine, we note that many European countries streamlined their permitting processes to address bottlenecks for renewable energy — it can be done!
The U.S. Inflation Reduction Act of 2022 (IRA) shows how governments can boost clean energy innovation. For each ton of carbon dioxide (CO₂) the IRA’s incentives eliminate, global emissions will decline by over 2.5 tons.3 As the IRA lures cleantech innovators to the U.S., other governments are responding. For example, the EU proposed the Net-Zero Industry Act to promote clean energy technologies, while China’s clean energy subsidies, adjusted based on gross domestic product, are double those of the EU.
Navigating Water Risks: Global Trade Impacts and AI’s Surprising Connection
Water stress is a growing risk for many industries. Drought has caused a significant freshwater shortage in the Panama Canal, which supports roughly 6% of global maritime trade. With container ships backed up for miles, we recall that the 2022 Suez Canal blockage held up almost $10 billion of products daily and affected global supply chains for months.4
Water stress is also increasing due to the explosive growth of artificial intelligence (AI). Servers that run AI platforms use vast amounts of electricity (adding to CO2 emissions unless the power is green) and must also be cooled to function properly. Studies show that data centers consume more water daily than typical U.S. households require over an entire year, indicating opportunities for innovation. We also note that AI offers numerous opportunities but presents significant reputational, legal and workplace risks.
Expect More Sustainability Reporting Regulations in 2024
In confronting these challenges, we believe companies that treat employees as assets rather than liabilities will be more durable. Offering competitive compensation, benefits and workplace flexibility can lower turnover, support a robust corporate culture, enhance employee engagement, and drive profitability.
We believe these issues reinforce the need for companies to disclose sustainability-related risks. We expected global sustainability regulations to converge in 2023 — we were wrong. Still, we anticipate regulations to expand in 2024, although elections in the U.S., UK and Europe could be wild cards. Overall, we see clear evidence that sustainable investing is shifting in focus to emphasize mitigation, adaptation and resilience.
¹Stephan Kahl, “Insured Losses Hit $120 Billion as Extreme Weather Spreads,” Bloomberg, January 10, 2023.
²Veronica Dagher, “Americans Are Bailing on Their Home Insurance,” Wall Street Journal, August 28, 2023.
³Kate Larsen, Hannan Pitt, and Mahmoud Mobir, et al., “Global Emerging Climate Technology Diffusion and the Inflation Reduction Act,” Rhodium Group, July 6, 2023.
⁴Maria Elena Vizcaino, “Panama’s Canal is Drying Up and Its Bonds Are Getting Hit Hard,” Bloomberg, August 25, 2023.
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.
Sustainability focuses on meeting the needs of the present without compromising the ability of future generations to meet their needs. There are many different approaches to Sustainability, with motives varying from positive societal impact, to wanting to achieve competitive financial results, or both. Methods of sustainable investing include active share ownership, integration of ESG factors, thematic investing, impact investing and exclusion among others.
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.
International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. 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.