Behind the summer rally in sustainable funds

Source: milehightraveler / iStock via Getty Images

There’s nothing like a rising tide to float all boats, and for the beleaguered sustainable fund sector, also known unpopularly as ESG funds, this summer’s rally in U.S. stocks and the dollar has certainly played to form.

Sustainable funds are back in the higher rankings of the performance tables. Morgan Stanley released a report this week that the median return on sustainable funds in the first half of this year was 6.9%, vs 3.8% for what it called traditional funds.

But as Mark Hulbert wrote for Callaway Climate Insights last week, not all sustainable funds are alike, or even similar. The same strategy diversity and investment theme confusion that made ESG funds lightning rods for criticism last year when the market turned is still there.

For example, two of the best performing sustainable funds, the Fidelity U.S. Sustainability Index Fund (FITLX) and the Vanguard ESG U.S. Stock ETF (EVGV) are both up 20% year-to-date. Both are front loaded with tech stocks, such as Nvidia $NVDA , Microsoft $MSFT , Alphabet $GOOGL , and even Tesla $TSLA , which have rallied mightily this year as interest rates show signs of peaking and AI fever spreads.

By contrast, the Nuveen ESG Dividend ETF (NUDV), whose top holdings are Home Depot $HD , Bank of America $BAC and Coca-Cola $KO , is up only 2%.

One huge difference between 2020, when ESG ruled the performance tables, and this year is that investors have a much better idea what they are dealing with this year, not only from deeper disclosure about the sustainability focus of major U.S. companies, but the rising risk of climate change itself to certain markets and asset classes.

Sustainability funds are indeed back, but this time we are prepared.

A new investment tactic to reduce oil and gas production

. . . . Are anti-oil activists and investors going about it all wrong? Rather than pressure oil companies to stop producing for customers who will buy their product, investors and activists could pressure the customers, writes Mark Hulbert. Citing a new study from Columbia University’s Jeffrey Gordon, Hulbert examines the idea of attacking the demand side of the equation rather than the supply side. While oil companies naturally don’t want to be told to put themselves out of business, they might react to changing demand by speeding up their renewable transitions. . . .

Read the full column

Thursday’s subscriber insights

How U.S. supply chain snafus have put world’s biggest offshore wind company in crisis

. . . . Turbine titan Ørsted on Wednesday said it may see U.S. asset losses — known as impairments — of $2.3 billion, due to supply chain problems, soaring interest rates and a lack of new tax credits. The company warned it may abandon its American projects due to the challenges. An ill wind blows. Read more here. . . .

Taking notice of what Exxon says about energy in 2050

. . . . One of the big accusations against ExxonMobil in a series of lawsuits from American cities and states is that the company hid its knowledge about how the world was heating up and its part in it. So we might want to take note of what the company is saying now: That the world will fail to curb global warming within the parameters it has set. Read more here. . . .

Editor’s picks: Investing in the clean energy transition; plus, why hurricanes are getting stronger

Why hurricanes are becoming more dangerous

While human-caused global warming may not have an impact on the frequency of hurricanes, there is evidence that it’s making hurricanes stronger and more destructive. A timely report in Yale Climate Connections notes that studies have consistently shown no discernible trend in the global number of tropical cyclones. Yet researchers did find “substantial regional and global increase in the proportion of the strongest hurricanes – category 4 and 5 storms. The authors attribute that increase to global heating of the climate: ‘We conclude that since 1975 there has been a substantial and observable regional and global increase in the proportion of Cat 4-5 hurricanes of 25-30 percent per °C of anthropogenic (human-caused) global warming.’”

Fossil fuel subsidies are hurting the energy transition

After agreeing in 2009 to phase out dirty energy subsidies, G20 nations pumped $1.4 trillion into supporting fossil fuel use in 2022. A report from Context, part of the Thomson-Reuters Foundation, says that money should be redeployed to support a shift into renewables. The report cites analysis from the International Institute for Sustainable Development (IISD) that  shows that G20 governments provided a record $1.4 trillion to subsidize climate-heating fossil fuels in 2022. And a new paper by the International Monetary Fund (IMF) said that “adding in the cost of environmental damage from fossil fuels including climate change and local air pollution deaths – which it calls implicit subsidies – pushed up the overall value of fossil fuel subsidies to $7 trillion in 2022, equal to about 7% of global GDP.” Report author Bhasker Tripathi says, ahead of the G20 meeting scheduled for September 9-10 in New Delhi, that while positive for the transition, clean energy subsidies are still dwarfed by the amounts going into fossil fuels.

Does climate change exposure matter to stakeholders?

This work adds to climate finance research by studying stakeholder reactions to climate change exposure in the context of capital structure and product market interactions. The authors of the paper titled Does Climate Change Exposure Matter to Stakeholders? Evidence from the Costs of High Leverage use a sample of 2,547 U.S. firms from 2004 to 2020, and find that climate change exposure intensifies stakeholder-driven costs of high leverage. Overall, the results suggest that highly leveraged firms are vulnerable to climate change shocks, and subject to stricter scrutiny from their stakeholders. Authors: Sadok El Ghoul, University of Alberta – Campus Saint-Jean; Omrane Guedhami, University of South Carolina – Moore School of Business; Huan Kuang, Bryant University; Ying Zheng, Bryant University

Words to live by . . . .

“That this blue exists makes my life a remarkable one, just to have seen it. To have seen such beautiful things. To find oneself placed in their midst. Choiceless.” — Maggie Nelson.