Is Your Green Investment a Safe Investment?

In partnership with Bloomberg Media Studios

With an overwhelming array of green investing products now in the market how can investors determine what’s hype and what’s green?

Recent record-high temperatures, wildfires and increasingly frequent “hundred-year” floods have made it hard to ignore climate change. Accordingly, more and more investors want to make sure that their investments both meet their financial goals and do something to lessen their impact on the environment. 

“Clients are looking for climate-change plays,” says Lisa Sampson, Sr. Specialist, Business Planning & Analysis. “Advisors hear questions from clients like, how can their portfolios help combat climate change? How can they divest from fossil fuels? What solutions do we have that can help them do that?” 

Today, there is no lack of options for environmental, social and governance (ESG) investing, with leading companies trying to out-green each other and sustainable investment products flooding the market. But with this plethora of choices, how can investors determine what’s hype and what’s actually green? 

“Everybody’s raising their hand right now, saying, ‘Of course, we incorporate ESG.’ OK, prove it—how well are you incorporating it? Understanding what you’re investing in is the easiest way to combat greenwashing,” says Sampson.

ESG can root out risks 

In a few short years, green investing has gone from niche to mainstream. Concern about climate change is driving much of this interest. But green investing is also a way to mitigate climate risk, which includes the physical risks of more frequent extreme weather events, and also includes transition risks as the world converts to a lower-carbon economy. For example, utility companies trying to get through a transition period could get left behind, as was the case with the world’s largest coal producer, which filed for bankruptcy in 2016 amid stricter environmental regulations and declining coal prices. 

“Having an idea of how companies are managing raw material risks, whether it’s related to carbon, or water or land usage, is all very relevant when it comes to environmental investing,” says Lauren Sepolen, Head of Credit Research.  

Research shows that companies that score high in ESG factors also have, on average, stronger financials. In the first quarter of 2020—a volatile period when the pandemic first breached U.S. shores—funds with the highest ESG ratings outperformed both funds with the lowest ESG ratings and the broader market. 

“A big part of green investing is thinking of managing risk as a core investment strategy,” Sepolen says. In recent years, sufficient data has accumulated to enable analysts to now compare, in increasingly granular detail, how companies are managing various climate risks. 

William Morgan, Vice President and Associate Portfolio Manager, focuses on managing responsible investment in equity models, and looks at revenue exposure to clean energy versus fossil fuels. 

“One of the biggest risks that fossil fuel companies have is litigation. And then smaller, pure alternative energy companies have basic risks from the fact that they’re the newest startup companies, and there’s just inherent risk there,” he says.

Finding truly green investments can be tricky 

For investors, greenwashing is another risk. Governments are just beginning to set standards for what makes companies and investments “green,” and these evolving guidelines can be confusing. As of now, there’s little else to do besides dig into the investment details—also known as exercising due diligence. 

With green investing, “active management is so important—digging through something that’s labeled green, whether it’s a fund or a bond, and making sure it actually meets some degree of standards,” says Sepolen. 

Morgan, who manages a multi-cap social portfolio strategy, avoids any companies involved in the coal industry, and compares utilities based in part on their involvement in clean energy sources such as wind. 

Sepolen, who focuses on fixed income, says her group performs their own internal analysis to assess sustainability. Every bond deal is independently scored to identify best-in-class investment opportunities. “We take a look at the entire bond universe… and assess a deal’s specific use of proceeds in addition to the issuer profile,” she explains. From there, analysts also look at unique investments that stand out from an environmental standpoint. 

Investment Managers on BNY Mellon Wealth Management’s platform take different approaches to green investing as they look at different industries and types of securities, and the firm has developed a thorough due diligence process to examine ESG investment factors. 

During the investment due diligence process when looking at various portfolio holdings, “the investment manager should be able to explain why they’re in the portfolio,” says Sampson. Because there’s still very little standardization of company ESG factor reporting, holdings can be difficult to compare—but “they should at least be able to tell you the story as to why this holding meets their ESG standards.” 

BNY Mellon’s products and solutions have long incorporated ESG factors into their investment processes and decision-making, and the firm is growing its suite of such products and has dedicated investment targets. In 2020, BNY Mellon offered 13 funds with an explicit ESG component in their investment approach, and administered 100 new green bond issuances, totaling $38.718 billion. The firm is also a leading administrator of greed bond funds by deal volume. 

With such an overwhelming array of green investing products now in the market, a sound first step for investors is to work with their advisor. 

“It’s important for investors to be able to articulate what they want, but when they can’t, it’s equally important for their advisor to ask the right questions to draw out that information,” Sampson says. “Our goal is to help clients invest in line with their values while also achieving their financial goals.”

  • This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. The Bank of New York Mellon, DIFC Branch (the “Authorised Firm") is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorised Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Centre, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: 240 Greenwich Street, New York, NY, 10286, USA. In the U.K. a number of the services associated with BNY Mellon Wealth Management's Family Office Services– International are provided through The Bank of New York Mellon, London Branch, One Canada Square, London, E14 5AL. The London Branch is registered in England and Wales with FC No. 005522 and BR000818. Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, One Canada Square, London E1C 5AL, which is registered in England No. 1118580 and is authorised and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd. This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors. This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. BNY Mellon, National Association is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA") and the BMA does not accept responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. BNY Mellon is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA") and the BMA does not accept any responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. The information in this paper is as of April 2021 and is based on sources believed to be reliable but content accuracy is not guaranteed. © 2021 The Bank of New York Mellon Corporation