Investment Funds: Do they Impact Carbon Footprint?

How do investment funds impact carbon footprint? Is funding an investment good for the environment or carbon emissions?

Sustainable Finance 🏦

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6 min

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June 24, 2022

money

Table of contents

Americans are known for being in debt more than citizens of other countries, but they’re also known for something else financially that no other country is as invested in – investments. 💰 But how do investment funds impact carbon footprint?

How does an investment advisor, individual investors, investment products, or other investors assess investment risk while still keeping carbon footprint and the client in mind? Are our favorite ways of investing our money harming the environment? 🌍

🤔 What are Investment Funds?

Why choose investment companies over a typical savings account? 🏦

Opening a savings account is useful to have easy access to extra funds when necessary in the event of an exorbitant, unexpected charge – but many investors agree that as inflation continues to be on the rise, it means your fund's assets in your savings account are technically decreasing in value as time passes. 

In short, the costs and fees for clients who invest in a savings account are keeping potential income. For example, $10,000 in 2021 – just one year ago, is equivalent to $10,787.02 today in 2022. 

That’s an $800 difference – and while that $800 will continue to decrease in value over the following year as well, just think how that could’ve been used to pay for some essential expenses when you were in a tight financial spot. Better yet – think of the places you could have put that $800, that you didn’t even realize you were technically going to lose by keeping it in a savings account, so that it could have made you money instead.

This is why investment funds, such as mutual fund shares, fund assets, closed end funds, unit investment trusts, bonds, and other private investment funds have grown in interest. ⬆️

Investment funds are a wiser choice to achieve any long-term financial goals – as investment funds will allow your money to grow rather than lose value. 

💵 What is the difference between investment funds and stocks?

Investment funds are when multiple investors used to purchase their own shares of a property or asset, and where the shareholders can maintain freedom and jurisdiction over their individual share of the investment. 

Some examples of investment funds are mutual funds, exchange-traded funds, open end funds, bonds, and hedge funds.  

Stocks are a representation of a small percentage of ownership of a particular company. Apps like Acorn, Stash, and Public have all created a user-friendly experience for beginning investors. Stocks are ultimately less financially volatile than investment funds, as one who invests in the stock market can have that same share sold the next day with little fund damage done.

You make money from stocks by reaping the rewards of your small “ownership” of the company depending on market conditions, whereas with investment funds you are often making a larger contribution to obtain various financial assets. In other words, you have more financial control over an investment fund than a stock market investment

💥 What is currently happening in the U.S. with Investment Funds?

Why are Investment Funds and their impact on carbon footprint a topic of interest, right now?

A new SEC proposal for investment funds to disclose their portfolio companies’ greenhouse gas emissions is forcing them to think twice about pursuing environmentally friendly strategies.

What is the SEC? The SEC, short for the Securities and Exchange Commission, is the sector of the U.S. government that monitors and manages the regulation of security markets and to protect investors

The SEC recently released a plan on May 25th that would demand for any funds that pertain to environmental impact to recognize, record, and share the carbon footprint made in the companies that choose to invest in.

The only way to avoid this new environmental regulation as an effort to reduce carbon emissions and global warming, is if the investors or company can claim that carbon footprint is not directly impacting their current success in environmental, social, and governance investing. 

Investors have already expressed their dismay for the proposal made by the SEC, as many are concerned what it could mean for both the investors, and the company. 

Given that the proposal to prevent greenwashing in investment funds and other services would produce extra work and compliance measures to be met by the investors, companies, and investment funds – investing as a whole could become unappealing to all parties involved in the investment. 

Ultimately, this plan proposed by the SEC to monitor and employ the use of the ESG Disclosure rule would prevent companies that handle investment funds from greenwashing their consumers.

What is ESG Investing? ESG Investing, otherwise known as ESG deterrent, is when investors seek to monitor the potential environmental, social, and governance effects of an investment. ESG investing has grown in popularity in attempts to achieve corporate sustainability and corporate social responsibility – as well as to better assess the lucrative capability of their investment. 

What is the ESG disclosure rule? The ESG disclosure rule is the responsibility of the company to commit to better professional management and use ESG reporting as an effort to, “disclose” their environmental, social and governance data in order to improve transparency in regards to their investments. 

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There are three types of ESG Funds according to the ESG Disclosure Rule:

  • The first type of ESG funds are Integration Funds – where both ESG factors and the sole interests of financial gain are considered in the investment decision.
  • The second type of ESG funds are ESG-Focused Funds – where ESG factors of environmental, social, and corporate governance are prioritized over the financially lucrative appeal of the investment. 
  • The third type of ESG funds are Impact Funds – which are similar to ESG-Focused Funds, but strive for greater transparency through ESG reporting to measure the progress towards their financial goals.

Many agree that ESG disclosure is necessary in order to benefit the planet and reduce carbon footprint, but investors also argue that there will be new found financial distress due to the investment funding announcement. 

🎃 What is Greenwashing?

Greenwashing is when a company markets their support for carbon footprint reducing practices, but doesn’t take any effective action to do these environmentally friendly practices themselves. 🤦

Basically, greenwashing is a way to convey that a company cares about carbon footprint without the business themselves employing carbon-friendly practices that are not the responsibility of the consumer.

For instance – think of every time you go grocery shopping to Trader Joe’s. 🍅

We all love Trader Joe’s: the fun frozen meals, desserts, and unique spices – but many of them come in plastic packaging that could be avoided. Instead of Trader Joe’s altering their packaging to be more environmentally friendly – they persuade customers to be accountable for reducing their carbon footprint on the customer’s behalf instead of the company’s. 

A good example of greenwashing is how every time we forget to bring a reusable bag to the grocery store, we have to ask for a paper or plastic one. 🛍️

To be fair, Trader Joe’s only offers paper bags – which is better than most U.S. retailers that still sell or offer plastic bags. However, we still are contributing to carbon footprint, even if the company says they are making an effort to be greener. ♻️

Encouraging customers to bring their own reusable bags doesn’t require any effort on behalf of Trader Joe’s to change their own habits that impact carbon footprint. 

This is greenwashing, and it is the exact ideal that investment funds are attempting to avoid. ❌

🐱‍👤What was the political reaction to SEC’s statement on investment funds?

The reaction to the SEC’s statement on new guidelines for investment funds elicited various reactions depending on the political party. 

Democrats were supportive of the new regulations to reduce carbon footprint, but Republicans were critical of the new ESG disclosure requirements – as they weren’t personalized for each individual investment fund, and therefore can’t be tailored to personalized success while still ultimately reducing carbon footprint. 👣

🗡 Are Investment funds really fighting against climate change?

It seems logical to believe that if all companies followed the new regulations proposed by the Securities and Exchange Commission, that everyone would ultimately benefit from the effects of ESG investing.

ESG investing would appeal to new investors, create transparency for both consumers and companies alike, and reduce carbon footprint all at the same time

But are the even innovative tacts to combat the ill effects of investment funds really enough to reduce carbon footprint? 😐

The SEC has proposed strict regulations for companies to comply with the ESG Disclosure Rule in attempts to make serious progress in reducing carbon footprint and greenhouse gas emissions. Due to these firm rules, investment funds and those advising investment funding would have to meet all the protocols necessary in order to qualify as an ESG-friendly investment or project. 

However, given this is still only a proposed investment regulation by the SEC – it would still take a reasonable amount of time to see the positive environmental effects, and these environmental, social, and governance demands are subject to change as well. 

Lastly, it’s important to note that these new regulations would only pertain to investment funds instead of all imperative components of the SEC – for instance, the money sitting in your savings account could very well be investing into harmful fossil fuels without your knowledge. 😲

How do investment funds impact carbon footprint? 👣 Typical investment funds always look for the financial gain in an investment, even if it means leaving a carbon footprint behind

For example, there is a reason why the United States is leading in oil production – they have the finances to do so, and it continues to be a fiscally advantageous investment. 💸

However, it’s clear that continuing to invest in the industrialization of oil isn’t good for the environment – but a country like the United States isn’t going to drastically alter their production of a lucrative activity for the sake of reducing greenhouse gas emissions. 

Investors often try to offset their carbon footprint by creating a financial portfolio to reduce their environmental impact – such as investing in companies that strive to reduce pollution, invest less in companies that own fossil fuels, and use index strategies to reallocate funds to decrease a particular investment’s carbon emissions. 

While intelligent, these investment strategies aren’t enough to deter the already existing problem of investment funds. 

Unfortunately, ESG investments aren’t perfect either. Since ESG investing seeks to satisfy all sectors of a business rather than simply pursuing economic growth – money is often lost where money could have been made. In short, it is harder to grow financially when environmental, social, and governance are given attention. 

The problem with individuals and companies alike  is that money always seems to come before the environment, and therefore – it’s hard to create sustainable change that will satisfy both investors and reduce carbon footprint at the same time. 😕

❓ Should Americans still make investments given their carbon footprint?

So, should Americans still seek the help of an investment adviser contrary to their negative impact on carbon footprints?

The stereotypical relationship that Americans have with money in combination with the high cost of living in the U.S. nearly requires that Americans invest in some manner – even if it isn’t as predominant or commercial in our culture as it should be given the financial realities and circumstances. 💰

46% of millennials aged 18-24 have zero dollars in their savings account. Given the cost of higher education, higher education, healthcare, and retirement in the U.S. – it’s no wonder that existing debt continues to increase. Americans don’t have the money necessary for a financial emergency handy. 

American culture is based on capital culture and materialism, and while there should be no shame in portraying that if it’s what you truly value – the importance of financial security and the ability to combat carbon footprint shouldn’t be dismissed. 

After all, it would be impossible to help the environment or reduce carbon footprint if we don’t have the financial resources to help ourselves first. 

As concern for carbon footprint grows 👣, smaller banks 🏦are striving to sell themselves as environmentally friendly by advertising the transparency they will provide in how your money will be invested. Also, another financial institution like a credit union or a building society is less likely to use your money to fund fossil fuels or other harmful substances linked to carbon footprint. 

The best solution for Americans looking to better manage their finances while also protecting the environment is to seek an investment company, stock exchange, or bank that is committed to ESG disclosure in order to reduce carbon footprint, while also investing in the best future, both financially and environmentally – possible. 

🍀 What About Greenly?

If reading this article about Investment funds and their impact on carbon footprint has made you interested in reducing your carbon emission to further fight against global warming – Greenly can help you!

Greenly can help you make an environmental change for the better, starting with a carbon footprint assessment to know how much carbon emissions your company produces.

Click here to learn more about Greenly and how we can help you reduce your carbon footprint.

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