Investors may be better placed to understand the financial implications of managing “E” in ESG when financed carbon emissions are measured and tracked.
For voluntary carbon credits to be effective vehicles for funneling private investments into high quality, effective and impactful projects, the credits must have integrity and investors must have assurance that are achieving their goals.
Many investors want to invest in alignment with their values, but may also have significant barriers to making portfolio changes, such as incurring taxes or de-alignment with overall financial goals. One approach to re-align investors to their values might be to focus their philanthropy on issues deemed important. Investors who care about climate change might note that the S&P 500’s carbon footprint is 64 metric carbon tons emissions per $1 million of investment.
Collectively the DOL’s and SEC’s proposed proxy voting rules create an opportunity for plan fiduciaries to exercise greater influence over corporate governance issues, including ESG matters. With these proposals ERISA fiduciaries may come under greater scrutiny for how they develop, monitor and implement corporate governance and proxy voting. Once there is greater transparency around how fiduciaries are exercising their governance responsibilities, participants may want greater say on what is in their best interests.
Advisor / investors can create custom values-based metrics on which to build a portfolio or fund-level profile against which they can judge whether an investment is more or less aligned with their objectives – financial and non-financial
Direct indexing is probably best suited to investors motivated by particular issues, beliefs or highly specific objectives. Improved tax management and efficiency can drive significant value, but maximizing this benefit requires understanding an investor’s specific facts and circumstances in a given tax year and long-term planning.