Why Climate Literacy is Critical to Green Investing

The International Maritime Organization, shipping's global regulator, has yet to produce a full plan for wide-scale decarbonization in line with the Paris Agreement. The Environmental Protection Agency (EPA) released a draft white paper last week that gives the public the first clues into the possible requirements the agency might include in a new rule that seeks to rein in climate warming emissions from natural gas power plants, the nation's leading source of electricity. Native American tribes that generate power from natural gas and power companies could be required to adopt these new rules if approved, to make their gas-fired plants more efficient and cleaner. Those options include building hybrid plants that run on both gas and renewable energy, implementing carbon capture technology to reduce overall emissions, as well as phasing in the use of hydrogen gas, which burns without emitting carbon dioxide.

Many of these technologies, however, have been criticized by climate activists who say they aren't as effective as proponents claim and distract from the more important task of transitioning away from fossil fuels altogether. Millions of more Americans are breathing unhealthy air compared to just a few years ago, in large part due to climate change, according to the American Lung Association. The association released its latest annual State of the Air report, which evaluates county level air quality data across the nation over three-year periods. This year's report, which looked at 2018, 2019 and 2020, found that 137 million Americans were exposed to unhealthy levels of air pollution.

More than 80% of homeowners who have flood insurance are set to see rates climb, according to a new report from the real estate firm Redfin. When the Federal Emergency Management Agency (FEMA) rolled out a major overhaul to its National Flood Insurance Program last April, it promised that the bigger, richer homes would bear the brunt of premium increases, while almost 90% of policyholders would see their cost stay stable or decrease. That does not seem to be playing out that way. The National Flood Insurance Program serves 3.4 million single-family homes, most of which are in high-risk flood areas. The program was created in 1968 to cover the homes that private insurers either didn't want to cover, or to only cover at a relatively high cost.

The government offered more modest premiums, but the result is that over time, the program has gone broke. It has more than $20 billion in debt, in part because of climate change-related phenomena, such as rising sea levels and more storms. Expect more showdowns on climate goals and sustainable investing inside shareholder meetings this spring as proxy advisors are joining the battle. Institutional Shareholder Services, one of the largest proxy firms that advises institutional investors on how to vote their shares at shareholder meetings, urged investors in Occidental Petroleum and the refiner Valero Energy to back proposals to align the company's targets for cutting greenhouse gas emissions, including those of their customers with the Paris Accord. According to Bloomberg, ISS is likely to issue the same recommendation for eight other oil companies, including ExxonMobil and Chevron.

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Meet Marika Christopher

Marika Christopher is Senior Director of Product Strategy & ESG at Janus Henderson Investors, a position she has held since 2018. Throughout her career, Ms. Christopher has held numerous consulting and leadership roles with several prestigious firms including Goldman Sachs, Treasury Strategies Inc., UBS, and Citibank. Ms. Christopher holds a BSBA in international business as well as an international MBA, both from the University of Denver. In addition, she holds FINRA Series 7 and 63 securities licenses. Her career spans 16 years of experience as a financial professional.

What's in This Episode?

Somebody cue the Prince playlist because the Corvette is about to go electric. General Motors, which makes the Corvette, told CNBC this week that an electrified Corvette will be on the market as soon as next year. An electrified Corvette will be available first with a fully electric Corvette to follow soon after. But the traditional Corvette, with a highly powered internal combustion engine, will remain available for sale. GM has said it plans to launch thirty electric vehicles globally by the end of 2025, and exclusively sell electric vehicles by the middle of next decade. What is your money manager doing about climate risk and sustainable investing? Most of us invest our money through a mutual fund company, an asset manager, or a financial advisor. And while so many of them claim to offer sustainable and green investing solutions, how do you know that they're really investing along with your beliefs? What's really inside their investment products and where does the company itself stand on those issues that might matter most to you? Janus Henderson Investors has had a global Sustainable Equities team for the past 30 years, with over $400 billion in assets under management. Marika Christopher is the senior director of Product Strategy and ESG for Janus Henderson. She joins us this week on The Green Investor to talk about their approach to ESG and sustainable investing. Welcome to the Green Investor. 

Marika: "Thanks so much, Caleb. I'm happy to be here."

Caleb: "Tell us about your job. What do you do as the Senior Director of Product Strategy and ESG?"

Marika: "It's a motley crew of things that I do on a daily basis. I like to split it into two pieces, one being that product strategy side, so really thinking about innovation, thinking about where the puck is going in the next 3 to 5 years, when it comes to ESG and sustainable solutions around the globe. And that's going to mean different things for different regions that we serve. You know, you look to the European market and there's a lot of focus on regulation there and the asset flows moving based on SFDR and other regulations that are coming down the pike. And then you look to more nascent markets like here in the US and Australia and Asia Pacific, and you're seeing a product landscape that is really waiting to be shaped by the regulator, and perhaps is going to be more driven by the investors, by the players themselves. So that's part of my job—it's really just dreaming up what's going to happen. And then the second piece is on the ESG side for our distribution force and on the corporate side. So, what that means is building out an ESG strategy, a focus area, how we can support our sales teams when it comes to ESG."

"It's not only the products that they're selling, but how they sell them. Are they well-trained enough to know the nomenclature region-by-region, channel by channel; do we have the right thought leadership pieces out there, the right content to draw the reader in? We're also constantly looking at the corporate element of it. I think something that's interesting about sustainable investing is that any other product trend that you had in the investment space, it was all about, well, who is the portfolio manager and what's the performance? And there weren't too many questions asked about who's the asset manager—who are they really behind the scenes? And with sustainable investing, that cloak has been opened and there are a million questions coming towards us around, well, what is Janus Henderson doing from an ESG perspective? How did they manage their own ESG risks? What do their DNI metrics and targets look like? And that matters to me just as much as the product that you're putting out. So it's been these parallel work streams that we've had going between product strategy, corporate strategy, sales strategy, to ensure those are all in line and meet the needs that our clients are looking for."

Caleb: "Right. It's not just what you're buying, but who you're buying from. That's so important. That's why that 30-year history is important. It probably goes deeper than that, when you think about the origins of the firm. So as a retail investor, how am I experiencing your products and am I experiencing it through ETFs? Am I experiencing it through index funds or mutual funds that you may build or offer through other other companies?"

Marika: "We like to look at this from a product agnostic, product wrapper, agnostic perspective. So we launched a suite of ESG ETFs last September 2021 that offer five different ETFs, a couple on the equity side and a couple on the fixed income side. Create that puzzle, if you will, where you can fit all those together and create your green portfolio if you are a retail investor. We also have a couple of mutual funds that are out there, including the one that's been around for about 30 years, global sustainable equity. And we have a few extensions off of that when it comes to international sustainable equity and US sustainable equity. So those are options from a product perspective today. I think it's important to note that there are a number of products out there that have been incorporating sustainable factors for a number of years that may not have ESG or sustainability in the name. And as we go down this path of global regulators taking different forks in the road on how they define what ESG means and what sustainability means, you know, I think there's going to be a lot of confusion, a cloud of confusion, until there's clarity. And so I'll note that for some, when you're looking for sustainable investments, you may have to go a little deeper than the name that's out there. You know, you look at the top ten, top 20 'ESG funds' that are offered out there, if you look at it like a Morningstar report, over half of them don't even have ESG or sustainability in the name."

Caleb: "Yeah, the nomenclature is getting murkier and then greenwashing is out. There are plenty in the industry. Yeah, you're absolutely right about that. Janus Henderson is an active investor. You don't just chase indexes, you build portfolios, you build ETFs. What's your criteria on building those for ESG, but more particularly sustainable investing-oriented investors like me and like our listeners?"

Marika: "You know, when you're you're thinking about active management, a lot of folks go immediately to, oh, you're going to engage with someone and immediately divest if they're doing something that isn't on your list of good or if they're on the list of bad things. And I think it's important for investors to understand that engagement from an active manager truly means engagement. That is a profound relationship where you've got portfolio managers meeting on a quarterly or biannual basis with these companies to truly understand, not only from an ESG perspective, but operationally, what does management look like? What is their strategy three, four, five years out look like? What plans do they have in place to make the changes needed to make it a long term valuable company? So I think what's so important for investors to understand is if you've got funds that have been out there for years at a time, and they have been engaged with these management companies for that long, and you might be saying, oh gosh, well, maybe they should disengage. We've got to divest from that area."

"There are some deeper conversations going on there, where they're searching for long term value and they see that, oh, it may not look quite right today, but we know two years out from now, there's an entire change in track and we feel comfortable with the area that the management of the company is taking this organization. Now, it's going to be different product-by-product, depending on what you're looking for as a sustainable investor. You may end up with a different kind of product, different kinds of exclusions, if you will, a different kind of engagement, areas of importance. I think it's important not to lose sight of the fact that ESG or sustainable investing isn't just about the 'E'. I think the S gets forgotten often, and I think it will come more to the forefront here over the coming years. It's just harder to measure right now, but you are going to see a lot of funds that focus there, and there's a lot deeper engagement that has to take place from an active management perspective to see those changes over likely 5-to-10 years."

Caleb: "I want to hear more on this active responsibility. You make it clear that Janus doesn't exclude companies that don't score well on ESG-related issues. You engage with them. How effective is that when companies kind of feel slow to change? And I'm looking at areas, you know, you mentioned the 'S'—that's the societal part of ESG, the 'G'—the governance part of it. But for the purposes of this conversation, the environmental, the climate risk part of it, which is becoming more severe every single day, how effective is that engagement when you know the company has just historically not been doing the right thing by the environment and may have a plan, a five, ten-year plan? How does that work?"

Marika: "I think that's a great question. There's there's two camps of thought there. Right. You can say we're in a classroom and we've got a bully and we can decide to just not speak to the bully and put them in the corner. Does that really change the dynamics of the classroom? The other train of thought, which is engagement, is all right, It's going to take a lot of time and effort, and planning and different strategies. But we're going to engage with this bully and we're going to figure out what makes them tick, help them to understand why our cause is important to them and to the longevity of their firm. Because I think we all forget we've all got our own goals, our own purposes, right? And what we're looking to achieve may not be the main focus of the management of another company. So we've got to flip that conversation to say we know you're trying to achieve X and to do so, we believe you need to deliver on X, Y, Z. If you start flipping that script and finding out the reasons they were the way they were, and the things that you'd like to change and how to get them there, I think that becomes a different conversation."

"I also read an article a few years back that I found fascinating, around the fact that if you start excluding some of the largest companies in the world because of their E-behavior in the past, not not being best in class, let's say, and they hold 70% of the world's GDP and you just exclude them. Are you really making a change in the world? You're making a change on the 30% that you're focusing on. But is that enough to actually impart change in this global environment that we cannot ignore the other 70%? I found that a very interesting way to think about it. You know, you don't necessarily want to say, oh, well, we'll talk to them because we have to. But, but we do. If you're simply ignoring all of this capital, trillions and trillions in capital, wouldn't it make a bigger change to change them, than to change the people that are already on board with your concern? That's a question that's always in my mind."

Caleb: "You make a good point and listeners of the podcast know we've had follow this on there. They actively buy shares of companies so that they can get involved. And we've had engine number one, a much more intense activist investor here. And then we've had the Divest Harvards of the world that, you know, that are trying to push institutions to get out of companies that are exacerbating climate change and climate risk. Like us, you at Janus Henderson believe climate risks are business risks, but they're still widely misunderstood. What are the most common misperceptions or gaps in knowledge that retail investors have about climate risks?"

Marika: "When you go through business school, you are taught about legal risks and operational risks and management risks, marketing risks, reputational risk. And you go through a whole slew of classes to understand identification of the risks and materiality of it. How important is it? How how big of an impact could it have on the firm? Now, I went to college years ago, so things may have changed a bit, but there was never a focus on climate risk, per se. There might be physical risk in certain industries. You know, if you're in the fossil fuel industry or oil and gas, or you're in real estate, there may be physical risks that you assess as part of your business risk assessment. But climate isn't necessarily part of that, and if you start to really get down to it, even industries like investments or retail can be affected by the climate. And, well, the Covid-19 pandemic certainly wasn't good for a number of reasons. I do think it helped highlight the fact that something that seems so 'out there' can actually affect your day-to-day."

"We saw that also with supply chains, which again aligns right with with climate risks. It doesn't matter what kind of industry you're in, climate can affect supply chain. And I think that's probably the biggest myth that's out there, is that it can't touch every industry, that it's only focused on, oh, fossil fuels and the energy sector. It can touch everything you think about food and agriculture, and someone building out their agricultural area in northern Mexico, and they think through all the business risks of, well, you know, from a legal perspective, how are we going to handle this being in another country? And could the government potentially take the land away from us? And from a reputational perspective, are Americans going to be upset that we are building this factory and all of this out in Mexico rather than the states? You go through all those risks in your head, but you don't think through, well, gosh, over the last six years has been the lowest amount of rainfall. And yet there's been huge storms that dumped 48 inches and the roads have been completely demolished and so our trucks can't get through to actually send the product up to the states. You know, all of those things that you don't think would affect your industry that—quite frankly—do."

Caleb: "Great point. And so you guys are really into climate literacy, something I know you care a lot about. We try to break a lot of these things down here at Investopedia and on the Green Investor, especially the acronyms. And there is an alphabet soup of acronyms in the sustainable investing industry. But when you say climate literacy, what are you really talking about?"

Marika: "I am talking about each organization ensuring that their entire employee base—and that's going to start at the management level—it's going to start at the top—understand what climate means for their organization, for their industry, for their supply chain. You have to be able to be literate enough in all of those other operational risks and opportunities, all of those other management risks and opportunities, the same way you have to be literate in climate. And this is talking about not only the risks, but the hazards that it could present to our business line, to our operations, but also to some of the opportunities there. We talked a bit about active management and engagement and changing course for some of the largest offenders out there. But, you know, you're going to see real change with perhaps a mix of both climate mitigation strategies and climate adaptation, right? You're going to have to employ both, most likely."

"And so, there are opportunities within climate literacy to change the way your company is doing business and actually save money, or improve productivity, or improve client and employee relationships. And when you think about getting that climate literacy down to every level of the organization and getting every function to think about it, from marketing, to product development, to operations, to legal, and really making them own that and say, from the top, climate literacy is important to us. And because it's important to us at the very highest levels, you need to figure out a way to incorporate that into your business strategy, your function. Marketing, I want you thinking about climate literacy; I want you making sure that everybody that's in your organization, your sub org, understands what climate change, what climate risks will mean for your business, and, could you list out the top five risks and the top five opportunities that we face from climate change? I think that's what it really means."

Caleb: "Yeah, that's so important. And the words we use, the way we understand things, and how widely that is understood across the investing community and across the business community is so important. As you said at the top, still a lot of uncertainty around the regulations, what things mean—all of that is so important. What's next for Janice Henderson and the sustainable investing initiatives that you're working on with your team?"

Marika: "You know, we're continuing to watch the regulatory landscape here in the U.S. shape out. We know that there's a comment period open right now with the SEC, with some of their disclosures, so we're continuing to watch that closely. We believe that the U.S. and the Asian market are still ripe for growth with sustainable solutions. And that, again, is not only going to be around the 'E', we've certainly got a few things in the pike around the environmental side, looking at low-carbon, neutral-carbon, or negative-carbon products, but also starting to focus a bit more on the 'S' and seeing where that will go more long-term. How can we better measure the 'S' within ESG at each of the companies. Is there a way to create some sort of fund that would offer focus on companies that are doing a great job on the social element of ESG, or are focused on creating a program that will get them to a better place? You know, if we look around at some of the industries, like the legal industry or investments in finance, you're going to see a lot of misses on the 'S' side of the equation, but there are a lot of industries in companies like on the tech side that are doing a great job today and are continuing to progress their agenda on the 'S', where they've got some excellent metrics out there on ensuring diversity, equity and inclusion. And so we're seeing, you know, where we can go with that, what we can learn from it, and where we can build out of that side of the product set."

Caleb: "Well, we'll be looking out for it, and folks, follow what Marika Christopher and her team are doing at Janice Henderson. We'll link to her blog and and their ESG zone on their website in the show notes, and it's really been nice to have you on The Green Investor. Marika Christopher, the senior director of Product and Strategy and ESG for Janus Henderson Investors. Thanks so much for being on the Green Investor."

Marika: "Thanks so much, Caleb. I appreciate it."