The Truth of ESG Investing
*This is not financial advice. All content should be considered opinionated. We are not responsible for any of your gains and losses. I am neither a licensed or registered financial expert. Please see a financial advisor before making investment decisions.
Here's the podcast episode for this post
ESG investing has become more popular during this bull market as the public started becoming more serious about the environment. During the Obama Administration, the government gave generous subsidies to many green energy startups. While there were many startups of various sizes like Solyndra going bankrupt, other startups like Tesla succeeded. Those that succeeded lead the green energy movement.
As the adoption of green energy accelerates, returns in the green energy space have been impressive. While things like generous subsidies have made the growth in renewable energy controversial for some, green energy has become cheaper thanks to the R&D done in the sector. The efficiency of solar panels and the improvement in battery tech make green energy cheaper. When the green subsidies were made originally, they were made with the intent to decrease over time with the expectation that adoption for green energy will increase as more people adopt it.
Recently, the UC System's endowment fund has recently completed its divestment of investments in fossil fuels. The UC System, which happens to be the largest university system in the US. This is big for environmentalism since one of the largest endowment funds in the US has completed an action that supports environmental causes.
It gives a big message to the world of investing and the environment.
But the action by the UC System to fully divest from fossil fuel investments wasn't because they wanted to uphold high morals. According to a recent interview, it was because fossil fuel investments are seen as a risk to fund managers.
For those of you scratching your heads, while the energy sector does offer great dividend yields and a lot of value for investors, the world is phasing out the use of oil in favor of renewables and other alternatives for oil for a variety of things. The UC's fund managers have to prioritize their goal of fulfilling the pension's obligations in order to help pensioners get the funds that they were guaranteed. Because fossil fuel investments give a lot more risk than reward for the fund managers, they were obligated to get out of their fossil fuel investments.
The fund managers directed the investment funds from fossil fuel ventures to ventures that are in the green energy space. While morals haven't been on the top of their minds when making investment decisions, they have been investing in things with high moral status. The UC System's fund managers continue to pour money into ESG investments.
Reading the interviews of the UC System's fund managers gave me the perspective that ESG isn't all about chasing hype, alpha, and investing in things with higher moral status. It's also a way for investors to reduce risk in their portfolios as fossil fuels become irrelevant in the world.
Technology has gotten so far that fossil fuels are becoming irrelevant to the world. No longer are the days where investing in fossil fuels comes with safe returns. Now, investing in fossil fuels has become a gamble.
In the meantime, other university endowment funds are continuing to meet their goals of fully divesting away from renewables. Those goals are due years in the future.
Comments
Post a Comment