One of the guiding principles here at Laurel Wealth Planning is to support our clients in achieving their financial goals in a way that feels right to them. From helping clients maximize their charitable donations to ensuring their children and grandchildren have a secure financial future, we always strive to honor clients’ values.
For a good portion of our clients, that means supporting their efforts to invest in companies that align with their specific values. In the industry, this falls under the umbrella of ESG investing.
ESG investing has been popular for a number of years, and it is becoming increasingly important to people. So now seems like a good time to talk about where this kind of investing is today and where it’s going in the future.
What Is ESG Investing?
Put simply, ESG (Environmental, Social, and Governance) investing is investing in companies that meet certain behavioral standards important to the investor. Environmental considerations can include how company policies tackle issues such as climate change; social considerations include how a company manages relationships within its community, with vendors, or other stakeholders; and governance considerations include things like demographics of leadership, levels of executive pay, and more.
For many of our clients, it is important that they invest in companies that align with their ethics. While the social and governance aspects are important, for most of our clients, climate change is a driving factor in ESG investing. They want to make sure they are investing in companies that are doing what they can to mitigate the effects of their business on climate change, whether that’s alternative energy sources, carbon-neutral investing, or an emphasis on recycling.
Current State of ESG Investing
ESG investing isn’t just important to our clients, it’s gaining in popularity overall. According to a report by PwC, ESG-related assets under management are expected to almost double from 2021 to 2026 (from $18.4 trillion to $33.9 trillion worldwide).
With climate change being a driving factor for many of our clients interested in ESG investing, I see two big energy trends that are shaping the current investing climate.
One of the main areas where I see ESG investing increasing is transportation. Electric vehicles are exploding in popularity, both in the United States and around the world. Globally, electric vehicles are projected to account for 18% of car sales in 2023, up from 4% in 2020–almost quintupling sales in just three years. It’s projected that sales of electric vehicles will save up to 5 million barrels of oil per day by 2030.
In the United States, EVs accounted for 7.9% of total vehicle sales in Q3 2023. EV sales in the U.S. have increased for 13 straight quarters and are showing no signs of slowing. When hybrid vehicles are added to the mix, the numbers increase even more, making up 16% of total U.S. light vehicle sales.
One of the factors in this increase in sales is increased investment by the major auto manufacturers. While Tesla has the most name recognition for EVs, its share of electric vehicle sales in the US has fallen to 50%, as major manufacturers like Ford, BMW, and Mercedes ramp up their own EVs. This increased supply has led to lower prices, which is, in turn, increasing demand — a virtuous cycle if I’ve ever seen one!
As the growth in electric vehicles demonstrates, reliance on fossil fuels is starting to lessen. In the first six months of 2023, renewable energy sources (solar, wind, biomass, geothermal, and hydropower) accounted for 25.11% of electric energy generation in the U.S.
The Russia/Ukraine conflict has accelerated renewable energy production in much of Europe. Reducing dependence on Russian-controlled oil pipelines became less of a nice-to-have and more of a national security issue once the war in Ukraine began, and renewable energy production in Europe is expected to increase by up to 40% in 2023 and 2024.
The Future of ESG
My prediction for ESG investing is that it will eventually go away. I don’t mean people won’t care about these issues anymore! Rather I think that ESG concerns (especially environmental) will become so mainstream that they will no longer need their own category.
When I recently traveled to France and Germany, I noticed solar panels on home after home, old ones and new ones, ones with flat roofs and steep roofs. If trends continue, in 10 years as I look out of my office window, I may see solar panels on roof after roof. I certainly have noted a change in the vehicles clients are buying. Over the last 18 months, there has been strong movement to buying hybrid or fully electric vehicles.
Part of this mainstreaming of environmental considerations is due to government incentives. The Infrastructure Act and the Inflation Reduction Act, both bipartisan bills, incentivize the purchase of electric vehicles and allocate significant amounts of money to invest in renewable energy. Energy tax credits and incentives make it attractive for homeowners to look to alternative energy sources for their homes.
While government incentives help companies prioritize ESG initiatives, consumer expectations are even more important. Millennials and Gen Z care the most about climate change (71% and 67%, respectively, compared with 57% of Boomers) and also are the most supportive of phasing out fossil fuels and gas-powered cars.
These consumers are not afraid to vote with their dollars, and I predict many companies will adjust their policies accordingly. My daughter Rachel, at age 31, is an example of this. Within months of buying a home in St. Paul, she and her husband started the process of adding solar panels. They also recently bought a new car — a hybrid.
As I look at the performance of our clients who invest with an ESG model vs. standard investing, the results over ten+ years are similar on average. I do think that ESG investing still sends a message to companies that they must focus on their environmental footprint and social equity. But I really think that in 10 years, we will be talking about ESG investing much less because it will simply be a part of how companies do business.
Laura, the founder of LWP, is a Senior Wealth Manager, Chief Investment Officer and Shareholder. She has a master’s degree in tax and is an excellent listener. While she is a sophisticated financial planner with experience in complex issues, her priority is ensuring a financial plan works for people.