5 investment ideas to celebrate Earth Day 2018

Legg Mason, Inc., the global asset management firm, has $159 billion of total long-term AUM (as of March 31, 2017) invested in Environment, Social and Governance (ESG) products and strategies.  To celebrate Earth Day 2018, its investment affiliates have provided five ways in which ESG factors can be used to identify solid investments that care for the future of our environment. Long tracked by institutions, ESG factors are an increasingly critical priority for retail investors.
There are several ways that professional investors ensure that their investments can positively and directly impact the environment on behalf of clients. This ranges from direct conversations with management at publicly traded corporation to ensure they have a positive green footprint to investing in sovereign bonds for countries that are increasing their usage of renewable energy.
Here are five investment ideas across major asset classes to consider this Earth Day:

1. Sovereign Bonds

“ESG factors will become a greater differentiator of sovereign bonds in the future,” according to J. Patrick “Pat” Bradley, Senior Vice President of Investment Research at Brandywine Global.  “In our analysis, we look at political situations such as the guerrilla conflict in Colombia, which beyond the obvious social and governance concerns, could impact deforestation or promote illicit logging. These potential risks are certainly factored into our investment analysis.  When selecting government bonds, investors should consider what countries are doing to move away from areas of environmental concern, such as the use of nuclear power, and then weigh the potential impact of those changes on not only the health and welfare of its citizens but also any potential economic impact on the country’s production and growth prospects.”
Bradley added, “For example, Portugal has been able to harness its favorable climate to increase its electricity generation from renewable sources while Spain has moved toward greater reliance on wind power. Because environmental, including risks related to climate change, social, and governance issues can affect a country and its economy, we fully integrate ESG factors into our macroeconomic research, as well as country and valuation analysis.”

2. Commercial Real Estate

“When looking at commercial real estate, it’s important for investors to look at the carbon footprint and how green energy is leveraged in the projects,” said Craig Tagen, Head of Asset Management at Clarion Partners. “We installed our first solar photovoltaic system in 2012, starting with 1.5 megawatts. By 2015, Clarion rooftops hosted more than four megawatts of solar generation capacity and now they host almost 14 megawatts of solar power generation, a more than 300% increase in megawatts of power generated annually across our portfolio.”
Tagen continued, “This is also a differentiator when we are working with our tenants. We worked alongside Amazon on the installation of solar systems on three fulfillment facilities in Nevada and California. We are proud to serve as an active partner to support Amazon in its ambitious effort to deploy solar on 50 fulfillment centers by 2020. Overall, our solar installations are spread across retail, industrial, and residential properties on both U.S. coasts and in Texas.”

3. US Equities

“For long-term investors, making an impact through active equity ownership should be at the forefront of every investment decision. Business can be a force for good in society. Investors have the ability to examine and amplify that impact,” said Mary Jane McQuillen, Head of ESG and Portfolio Manager at ClearBridge. “By investing in a portfolio which is actively managed and includes high-conviction stocks with a fully integrated ESG approach, investors have the opportunity to benefit from companies which are making a true difference when it comes to sustainable factors such as carbon emissions and water consumption.”
McQuillen continued, “For example, we engaged with a hardware company, for which we’ve been a shareholder for the past nine years. An initial discussion on sustainability reporting led to the company measuring and reporting carbon emissions data and setting five-year targets to reduce emissions by 30%. The company also recognized the need to address water consumption and eventually achieved 100% water recycling in its Shanghai manufacturing plant, the first facility of its kind to reach such a milestone. In addition to the environmental impact, this decision resulted in over $2 million in water utility cost savings, a direct impact to the bottom line.”

4. International Equities

“The days of treating ESG and sustainability matters as ‘extra-curricular’ are clearly numbered. The question for investors now is not why, but what and how. At least this is where we will continue to focus our energy,” noted David Sheasby, Head of Stewardship and ESG at Martin Currie. “To help illustrate this point, we are a shareholder of a U.S. oil and gas company. A shareholder proposal was put to the board, that the company distribute a report outlining the firm’s climate change policies. We were in full support of this initiative, meeting directly with company leadership to explain why this is a critical issue for shareholders. We voted in favor of the proposal – along with a majority of the company’s investors. Since the voting, the company has outlined specific initiatives to prevent climate change and distribute a climate risk report. That level of shareholder transparency is critical in this day-and-age.”

5. Green Bonds

“Investors can also play the ‘green aspect of investing’ when it comes to fixed income. ESG factors affect the creditworthiness of fixed-income issuers’ securities and therefore impact the performance of fixed-income investment portfolios. We have found that there is great appetite to engage issuers and policy makers on issues of relevance, particularly as it relates to environmental conservatism,” said Bonnie Wongtrakool, Global Head of ESG Investments for Western Asset. “Climate-related initiatives were a focal point in a number of our discussions with policymakers during a recent trip to Africa, which included stops in Côte d’Ivoire, Ghana, Nigeria and Egypt. In Côte d’Ivoire, specifically, we had a long discussion about the challenges in developing the country’s energy sector, and the potential for off-grid solar systems to facilitate rural electrification without overwhelming public finances.”
Wongtrakool added, “Additionally, we believe the issuance of green bonds in emerging markets can help to make the connection between environmental factors and a country’s cost of capital more direct.  While still in its nascent stages, the growth of this market will help shape incentives for sovereigns to develop their energy infrastructure, agricultural systems, and water resources in sustainable ways.  Western Asset played an early role in this market by participating in Banco Nacional de Costa Rica’s $500-million green bond offering in 2016, one of the first benchmark-eligible green bond issuances in emerging markets.”