Policymakers, as well as investors, need to understand how investing in index funds can exacerbate climate change, according to Garvin Jabusch, chief investment officer of Green Alpha Advisors, an investment management firm based in Niwot, Colo., that focuses on sustainable investing that combats climate change.
Investors frequently do not know what assets are held in their index funds and the funds frequently are heavily invested in companies that contribute to the climate crisis, such as fossil fuel extraction, Jabusch said in an interview today with Financial Advisor.
“Eighty percent of all equity investments go to index funds,” Jabusch said. “Index funds are attractive because of the low fees and good return record, but they ignore the climate change crisis.”
Investors who have active managers can target their investments to companies that fulfill the investors’ social goals, including reducing the effects of global warming. As investors are discovering this truth, they are switching from passive to active management of their investments, he said.
Jabusch said he found that many members of Congress are even less aware of the need for active management of funds so that the impact of the investments is controlled as the investor wishes. He testified before the House of Representatives Select Committee on the Climate Crisis to help members understand how investing and climate change are connected.
Investing in companies that negatively affect the climate “do not make good, long-term holdings because there eventually will be a repricing downward for these types of investments as risks become known,” Jabusch explained. Firms that are not directly lowering their risk profile to take climate change risks into consideration will face contraction soon, he said.
Jabusch is an equity manager who focuses on tech innovation and IP leadership to achieve a sustainable portfolio. As portfolio manager of the Shelton Green Alpha Fund (NEXTX), Jabusch returned 43.7% to shareholders in 2019, beating 95% of peers, Green Alpha said. Jabusch added that he does not expect the same kind of results every year, but that the sustainable and innovation-driven new economy is going to continue to steal market share from the business-as-usual economy.
Green Alpha has been fossil-fuel-free since its inception and the managers select stocks using traditional, bottom up research paired with a macroeconomic growth thesis based on scientific, demographic and climate trends, Green Alpha said. The fund’s concentrated portfolio is heavily weighted in energy, industrials and technology.
A similar, short-term, downward repricing is now taking place in industries affected by the coronavirus, Jabusch said.
Members of Congress and other policymakers need to be aware of the connections between corporate risk and long-term profitability, he said. Congress and other financial agencies can require transparency in investments and can mandate that companies disclose their efforts to positively affect social and environmental problems, he said.
“The more aware policy makers are about the interconnectedness of these issues, the more they can push us to sustainable markets,” Jabusch said.