Pollution stock may return to fashion

A third way to look at the costs of doing the right thing from a climate perspective is in terms of return on investment. One theory underlying environmental investing is that if we put our money into companies that are well behaved, and take it from companies that don’t, we will make the world a better place by reducing the cost of capital for “green” companies and raising it for dirty peers. they.

But there is no free lunch here. A low cost of capital is good for the firm, but it implies lower returns for the provider of that capital. The more you pay for a stock, the lower the return you can expect from it. So yes, investing in good companies can make the world a better place, but the unpleasant fact here is that it costs money.

However, and this just goes to show that the ominous question cuts both ways, there’s plenty of evidence that “green” investments have recently outperformed “brown” ones. Proponents of ESG investing tend to suggest that this is because companies that value environmental factors highly in other respects are also “better” companies.

A recent US academic paper puts the better performer between 2012 and 2020 at 35 percent. May also. But assuming causality is more difficult. During that period, awareness and interest in the environment has increased dramatically.

Better performance may simply reflect increased demand for green investments and greater willingness to pay for companies that exhibit these characteristics. By definition, this reassessment cannot continue indefinitely.

A third, unpleasant question for large institutional investors is whether they should get involved with dirty companies to push them up their game or just stop investing from them.

Al Gore and his investment partner, former Goldman Sachs investor David Blood, got into the debate this week, calling on big investors to switch from carrots to sticks. They asked investors to give companies a clear warning that if there are no plans for decarbonization, they will move their capital elsewhere.

The problem with this approach is that it is far from clear that walking away will solve the problem, if it only makes it less expensive for less conscientious investors to take on polluting assets at a bargain price. Engagement feels like investors are part of the solution, however attractive the nuclear option may be.

The final unpleasant truth for us as individual investors is that sometimes unsustainable investments just have a moment in the sun.

Unfortunately, an inflationary environment like the one we might be in today has historically favored dirty sectors like energy. This makes sense. Energy has price power because we don’t get to choose whether to heat our homes or fill our cars.

Order now or never that Cop26 should go home isn’t going to get any easier if natural resource stocks start to look like a hot 2022 investment. That’s really going to be a pain.

Tom Stevenson is director of investment at Fidelity International. The view is his. He tweeted at @tomstevenson63.