At One Day In July, we focus sustainable investing on the environment, recognizing the urgency of climate change and the tangible nature of the metrics available. We work to cut through the frenzied noise surrounding this growing field, while sticking to our basic principles: simplicity, low fees and personalized attention.
June 22, 2020
In basketball, the concept of “airspace” is important to shooters. It refers to the amount of room a player has to elevate and cleanly release the shot with a clear sight line to the basket. The further away the defender is, the more airspace the shooter has. The more airspace, the less distraction exists and all else equal, the greater the probability that the shot will go in.
As investors, we attempt to create the equivalent of airspace by focusing on long-term outcomes instead of short-term market fluctuations. The probability of the stock market generating a positive return on any given day, week, or month is relatively close to a coin flip1. On the other hand, the probability of a positive return over a given 5 or 10-year period, while not 100%, is much higher. Time is the investing equivalent of airspace, allowing one to ignore short-term distractions and substantially increase the probability of success.
Our approach to building environmental portfolios also relies on the concept of airspace.
First, we reduce noise by focusing on a small number of criteria we think are most important. The two criteria we seek to minimize when building portfolios are carbon intensity (i.e. the level of emissions generated by a company relative to its revenue) and exposure to fossil fuel reserves.
We understand that it is difficult to predict the short-term direction of oil prices or how the stocks of companies in carbon-intensive sectors will perform in the next few months. However, we can ask ourselves some basic longer-term questions that help to create the airspace we desire.
For example, given current societal trends, are companies that produce or distribute fossil fuels more or less likely to outperform other types of companies in the next decade? In light of the aggressive emissions targets set in the Paris Accord and other global climate agreements, are the regulatory and economic pressures on heavy carbon emitters likely to increase or decrease over time? How likely is it that today’s stock prices for these companies accurately and fully reflect the future risks associated with climate change? Is the trend toward divestment of fossil fuel companies likely to slow down or speed up going forward?
When framed this way, the odds of ultimately being on the right side of this from an economic standpoint seem favorable. Climate change is a long-term issue that we think aligns well with our long-term investment approach, a view supported in a recent study by MSCI.2 One element of the study evaluated the impact of 11 key environmental, social and governance factors on stock price performance. While corporate governance factors were the most influential on year-over-year price changes, carbon emissions was the most influential factor over a full 7-year measurement period.
One of the concerns people often have about sustainable investing is whether it entails any sacrifice in investment performance. Short-term results may vary, but with the appropriate environmental criteria and the benefit of airspace, we think the probability of long-term success is high.
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