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An Investor's Look at Climate Change

By Alison Southwick - Mar 10, 2021 at 3:44PM

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How climate change can impact the business world and what to look for in a climate-friendly company.

If BlackRock CEO Larry Fink and Motley Fool CIO Andy Cross agree that climate change is the most important trend to watch in investing, then it must be worth talking about. In this episode of Motley Fool Answers, host Alison Southwick and Motley Fool personal finance expert Robert Brokamp are joined by Motley Fool analysts Alyce Lomax and John Rotonti to talk about environmentally friendly investing.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on March 2, 2021.

Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick, and I'm joined as always by Robert Brokamp, Personal Finance Expert here at The Motley Fool. Hey, Bro.

Robert Brokamp: Hello, Alison.

Southwick: In this week's episode, we're joined by Motley Fool Analysts Alyce Lomax and John Rotonti, they're here to help us understand how businesses are contending with climate change, and what that means for investors. All that and more, on this week's episode of Motley Fool Answers. So Bro, what's up?

Brokamp: Well, Alison, I got a couple of things for you.

Southwick: No, I want three things.

Brokamp: You're only getting two, but a lot of numbers. I'm trying to spread it out.

Southwick: Buckle up.

Brokamp: Nothing like numbers on a podcast. All right. No. 1, retirement accounts on the rise. We, humans, are social creatures, and part of being a social creature is that we compare ourselves to everyone else and hope that we're better than all the other creatures. We see this at The Motley Fool because anytime we publish an article, about things like the average 401(k) balance, man, it is sure to get a lot of clicks.

Southwick: Very popular.

Brokamp: Yes, well we're not above doing such things here on answers. Let's dig into the latest numbers from Fidelity, which recently published account balance information as of the end of last year and those balances are at all-time highs. According to all the accounts at Fidelity, the average IRA balance as of the end of 2020 was $128,000, average 401(K) balance, $122,000, and average 403B balance was $106,000. Of course, how much someone has in a 401(K) or retirement account depends on other factors like how long they've been at the same company and their age. Here are some numbers they provided just based on age. For people in their 30's, the average balance is $51,000, people in their 40's, $121,000, people in their 50's, $204,000, and people in their 60's, $229,000.

How are people doing in terms of their savings rate? Well, that's also at an all-time high. The average savings rate for 401(K) from the employee was 9.1%, adding the employer match and a total 13.5% was being contributed to 401(K) accounts at Fidelity. Despite all the difficulties, last year during the pandemic panic and the recession, and all that stuff, 33% of individuals with a 401(K) at Fidelity increased their savings rate at some point in 2020. Workers are also taking more advantage of IRAs. The number of IRAs accounts that received a contribution increased by a third last year, and the amount that was contributed was up by 5%. Roths are increasingly more popular. Last year, at Fidelity they took in 59% of all IRA contributions.

Speaking of IRAs, to start with, remind you that you do have until April 15th to contribute to an IRA for 2020. You still have a few more weeks to do that, but why not take care of it now? Of course, not everyone did so well last year, thanks to the CARES Act, people who suffered a coronavirus-related hardship were allowed to take money out of their retirement accounts penalty-free. Some people did take advantage of that, but perhaps not as many as some people feared would happen. So, of the folks who have an employer plan at Fidelity, 6.3% took a CARES Act distribution and the average amount was $9,400. Not so bad. As a reminder, for those who did take money out, you have up to three years to put that money back in if your financial situation turns around. That's the first item.

et's move on to the second item which is, uncle Sam loves retirees too. We just talked about IRAs and 401(K)s which workers used to save for retirement because of the tax advantages, and those advantages are in place because the government is basically trying to incentivize people to save for their golden years. But the tax breaks don't stop once you quit working. A recent study from the center for retirement research at Boston college estimated how much in taxes retirees will owe on their income and man, it's pretty dang low. One of the reasons it's low is because the average retirees' income is pretty low, at least compared to the median income of all households in America, which these days is around $70,000 per household. According to the study, for people who retired between the years 2010 and 2018, the households in the middle 20%, the middle quintile, received an annual household social security benefits of $34,400, and for those who received a pension, the annual benefit was $8,000. The total value of their wealth of the average retiree was a little under $200,000. It came in at $186,000, so let's just apply yield 4% rule to that amount, and that results in another $7,500 of annual income.

All told, the average retiree is getting by, and between $40,000 and $50,000 a year. But that income isn't taxed as much as if the same amount had been earned by a working staff. That's because not only security is taxed, citizens 65 and older get a higher standard deduction. Some of that income that retirees received is from qualified dividends and long term capital gains, which are taxed at lower rates. Many states offer tax breaks to retirees. All told, the study found that retired households in the aggregate will pay only about 6% of their income in federal and state income taxes. Most of that liability is being levied on the top quintile, the top 20%, the lower 80% in terms of income, the taxes are almost nothing. They range from 0%-1.9%. It's really the top 20%, and really the top 5% of retirees who are paying most of the taxes.

The bottom line here is, figuring out how much you need to save for retirement starts with getting an idea of how much you will need in retirement. Chances are, your tax bill will likely drop dramatically once you stop working. That, Alison, is what's up.

This episode of answers is brought to you by Motley Fool Stock Advisor, The Fool's flagship investment idea service. Led by co-founders Tom and David Gardner, the Stock Advisor team has outperformed the market 5-1 since the launch of the service in 2002. If you're a regular Answers listener, you've probably heard about Stock Advisor, and may have thought to yourself, "I should check it out." Well, today is your lucky day, because you can give Stock Advisor a try for 50% off the list price by visiting saoffer.fool.com. You'll gain unlimited access to all the past and current recommendations, as well as a virtual library of investment education. Plus, members will receive new stock picks each and every month. Is your interest picked? Then go on over to saoffer.fool.com

[...]

Southwick: In his January 2020 letter to CEOs, BlackRock CEO and Chairman Larry Fink wrote, "Climate risk is investment risk". His January 2021 letter doubled down on the impact of climate change, saying there is no company whose business model won't be profoundly affected by the transition to a net-zero economy. Andy Cross, our own Chief Investment Officer here at The Motley Fool echoed these sentiments in an earlier episode of Answers this year, saying that climate change was the most important theme he was paying attention to as an investor. When BlackRock, the world's largest asset manager, and Andy Cross agree on something, you should probably pay attention. Joining us today is Alyce Lomax and John Rotonti, they're analysts here at The Motley Fool. They're going to help us understand the risks of climate change for investors, and how you can assess companies for the steps that they are taking. John and Alyce, thank you so much for joining us.

Alyce Lomax: Thank you for having us, Alison.

John Rotonti: Yeah, Alison, glad to be here.

Southwick: Alyce, you've been on the show before, John, remind me, have you been on the show before?

Rotonti: No, I'm a newbie.

Southwick: All right. Well then, let's just reintroduce you all over again, or for the first time. Alyce, let's start with you, can you tell us a little bit about what you do at The Motley Fool?

Lomax: Yes. I've been at The Motley Fool for about 17 years and I, over the years, started to specialize in socially responsible investing, environmental, social, and governance investing, and I'm an analyst with our investing group.

Southwick: All right. John, how about you?

Rotonti: I've been at The Motley Fool for almost seven years. I'm a Senior Analyst, and I'm the Head of Investor Training and Development.

Southwick: I did not actually know that. This is a learning experience for all of us. Well, thank you so much for joining us and helping us dig into what climate change can mean for investors, and why is this becoming such a big deal and such a headline. First off, in that quote that I said at the top of the show, Larry Fink said that, "There is no company whose business model won't be profoundly affected by a transition to a net-zero economy climate change." For me, I'm like, I can get how energy companies are going to be profoundly affected, agricultural companies could be profoundly affected. But all companies, especially working at a tech company, like at The Motley Fool, how will this profoundly affect our business model? Let's talk a little bit about all of the different ways that climate change, this shift in net-zero economy could have broader implications in what seems glaringly obvious to people like me who don't know very much. Why should a company run itself, make decisions through the lens of climate change? Thinking about climate change, why is this so important?

Rotonti: I think one big reason is sustainability of the business, the industry, and the economy in which they operate in and the planet. Because the company can make all the money in the world, but if we're having these extreme weather events every year, massive floods, fires, hurricanes, whatever it is, that's going to disrupt their business, and so it's survival on a large level. Then also, related to that is morally, if companies are big polluters, then they should be aware of that, understand that their business has consequences and they should do something to reverse that. Some companies are so huge, Alison, they're such big polluters that they should do something about it, and then just survival and sustainability of the business.

Southwick: Alyce, how about you? What do you think?

Lomax: Yeah, there's also the aspect that investors and consumers are increasingly demanding this with companies. We do know that especially younger generations want to be supporting, whether it's with their consumer dollars or their investing dollars, they want to be supporting environmentally friendly, and sustainable companies. We do know that increasing numbers of institutional investors want these types of initiatives, I mean, the BlackRock letter right there, that tells us, they're a huge institutional investor. There's increasing activism at companies, like ExxonMobil recently has been targeted by activists to do a better job with climate change. So, there is a big sea change going on, and a lot of people really want companies to be doing better in these areas.

Southwick: Let's start by talking about the moral obligation. Like, on the part of the investors, some investors just want to invest with an eye toward climate change, or being socially responsible.

Rotonti: Large institutional investors, Alison, have in a lot of cases large voting power at the companies that they own, because they own large chunks of stock. From a moral perspective, they have the ability to influence decision making at the company through their voting power. Some of those institutions may decide that climate change is a moral issue, and protecting the planet from climate change is a moral issue, and they may decide to use the voting power to push that agenda. Also, some of the clients of those big institutional firms are asking for ESG related products. They're asking for green energy friendly products, whether it's a mutual fund or an index fund that they can invest in, in order to fund a greener planet.

Southwick: All right. How about managing risk?

Lomax: Looking at ESG issues, including climate change issues, is actually not only an area of opportunity in some ways, but it's also a way to try to assess the risk to companies, for example lawsuits, customers defecting due to climate change related issues. We recently saw the terrible impacts to PG&E. That was absolutely a climate change related disaster that happened, that ended with loss of life, loss of property. So, more and more, it bodes well for investors to care about these issues, not just for the opportunities, but also to try to reduce the risks to their investments, and to the outside world.

Southwick: I guess there's regulation to consider as well.

Lomax: That is definitely an increasing drive, is that we need to have policy solutions to these issues, and that will absolutely result in regulations that are going to impact all kinds of companies and how they do business.

Rotonti: For example, the new administration is trying to halt drilling on federal lands, so that's going to affect the exploration and production companies. The new administration has talked about proposing a major trillion-dollar infrastructure bill with an emphasis on green infrastructure, with an emphasis on EVs, on electric vehicles, with the idea that EV manufacturing will both save manufacturing jobs today, and create the jobs of the future. There are rumors and speculation that the new administration is going to renew a $7,500 credit for buying EVs, and so whether it's through policy or through regulation, industry will be affected.

Southwick: There is the idea of what are companies doing to survive in a time of climate change, de-risk, maybe there is a moral obligation, but there's also an opportunity to see this as an opportunity for growth, or an appeal to consumers, because I think a Washington Post-Kaiser poll found that eight out of 10 Americans think that climate change is a serious problem.

Rotonti: Yeah, for sure. I think that there are companies that are using green technology innovation to sell products customers want. Whether it's Nike using recyclable materials to make shoes and apparel, whether it's Trex, an alternative decking company that makes green decks, so families can enjoy the outdoors in their backyard with a deck that significantly decreases deforestation, because the decks are made out of recycled plastic bags and sawdust. There are lots of companies selling greener products that are appealing to consumers.

Southwick: If you are not a climate change expert, which I'm not, how do you even begin to navigate the impact that companies are really having?

Rotonti: I think the first thing that Alyce and I do, and that investors do, we read their sustainability report, sometimes it's called their corporate social responsibility report. We try to see what their goals are, if they're providing hard numbers specifics around those goals, and then how they track those goals and report on those goals over time. I think one of the first places we go to is their sustainability reports. Then there are third party organizations that track and score companies on climate change, whether it's the CDP, formerly known as the Carbon Disclosure Project, or various lists like, there's various sustainability lists, various green energy lists that different news organizations or media will put out. Then there's other organizations, like the RE100, and that's companies that sign on and commit to generating 100% of their electricity through renewable means. There's lots of different organizations or lists that track this kind of stuff, but the first place I think we go is to their sustainability report.

Lomax: I'd like to just chime in, I agree with everything that John said, and one of the things that people get tired of hearing me say is that we need better and more full disclosure with real metrics, real goals. Larry Fink's letter, he was talking a really good, big game about getting companies to actually disclose more. That gets us on the road to addressing these issues. If you can measure it, you can manage, it is the good way to look at that.

Southwick: Well, let's take our listeners on a journey into the mind of a Motley Fool Analysts, namely you two. We're going to look at some specific companies and talk about what they are doing, what they're reporting on how they are operating in a world of climate change, net-zero economy. John, I'll start with you. What company do you want to highlight for our listeners?

Rotonti: Alison, I'm going to start with Microsoft ( MSFT ), one of the largest companies in the world. In 2020, Microsoft set a goal to be carbon negative by 2030, which means they want to remove more carbon from the environment than they emit. But they also want to remove all of the carbon the company has emitted since its founding by 2050.

Southwick: Wow.

Rotonti: Two separate goals they set just last year in 2020. Be carbon negative by 2030, and then remove all of the carbon going back to the company's founding by 2050. As part of this journey, it plans to use 100% renewable energy by 2025, that's the first big milestone. I think this is a bold goal from a company that is self-aware, because it knows it consumes just huge amounts of energy to run its data centers, which power its global Cloud platform. Then, Microsoft set other aggressive goals, such as being water positive by 2030. What water positive means is replenishing more water than it uses through things like water treatment and reuse, and wetland restoration. They want to be water positive by 2030, and they want to be zero waste by 2030 as well. The way they will achieve zero-waste is by eliminating single-use plastics from its packaging, reusing tech gear, like servers and components, and then actually making their surface devices fully recyclable all by 2030.

To me, this seems like an aggressive specific numbers base goal that can be tracked and monitored over the next decade. Then Microsoft also set this software goal, which sounds cool, but I don't know how to measure it yet, and it's to build a planetary computer to monitor the world's ecosystems. Now, if anyone can do it, it's Microsoft, because they have the second largest hyper-scale Cloud out there, and they have a full stack of software. So, if anyone could build a planetary computer, it's probably Microsoft. It sounds really cool. I just don't know how to measure that yet, but I hope they achieve that goal. Then finally, Microsoft is on this Carbon Disclosure Project A-list, and it is the second largest green energy producer behind only Google [Alphabet] according to the EPA.

Southwick: Well, by talking about Microsoft, you bring up a really excellent point that just because you're not in the energy business, even a tech company still can have a pretty big footprint and can still have a pretty big impact on reversing what they're doing to the climate.

Rotonti: Totally. It's all about being self-aware, and understanding that corporate reactions and corporate decisions have consequences. Not only does Microsoft have a big footprint, but it has a huge footprint. I mean, because these data centers consume massive amounts of electricity, energy, and then they use massive amounts of water to cool the data centers down. They heat up because they're just running so hot with energy. At least Microsoft is aware of that, and so if they are going to be a huge emitter, then they should try to do something to rectify that.

Southwick: Even mining Bitcoin, there's climate concerns about mining Bitcoin, it's like something that leaves totally in a digital space actually has an impact in the real world. The real world, the digital world, whatever. Alyce, what company do you want to talk about?

Lomax: Actually, I think I've talked about them before, because they are one of my favorite companies, I actually own shares at this company. It's a major multinational corporation that probably everybody has their products in their home. I'd like to talk about Unilever (NYSE: UL). They own brands such as Ben & Jerry's and Dove soap and just a whole variety of different consumer goods. They've been actually very good and ahead of the curve about making really aggressive goals around these types of issues. For example, it plans to cut its emissions from its operations to net-zero by 2039, and have the environmental impact of its products. It has many plans like intending to make all 70,000 of its products biodegradable in the next decade, cut its use of virgin plastic in half by 2025. It's aiming for a deforestation-free supply chain by 2023, which is a very big deal for a company like this; and it will use some innovative ways to do so, such as satellite monitoring, geolocation tracking, and blockchain to get an idea of its commodity sourcing. It's going to give priority to suppliers that have made emissions targets that match its own view of things, which is important. Again, as we were just saying, sometimes it's hard to really get your arms around all the different impacts down the chain, so it's going to hold its suppliers to those. Another nice thing, it plans to publicize its carbon emissions involved in the manufacturing and transport of its products, which is helpful too, because as a more environmentally concerned consumer, it's hard to know what the products you are using, what their impacts are. So that drive to actually publicize that, I think is a very big deal too.

Southwick: All right. John, what's your second company you want to talk about?

Rotonti: Alison, I want to talk about Starbucks ( SBUX ). So Starbucks signed on to the RE100, the renewable energy 100. I mentioned earlier, that's a list of companies that are committed to using 100% renewable electricity. Starbucks already generates 100% of its company owned stores in the U.S., Canada, and the U.K., already run on renewable energy. Globally, as of 2019, 72% of its global operations were powered by renewable energy. It has issued sustainability bonds to help finance development of 10,000, what they're calling greener stores by 2025, and those greener stores supposedly go beyond lead certified. I haven't found a whole lot of information more on what beyond lead certified means, but apparently they are going to be greener, and so it's issuing green bonds to help finance the growth of these 10,000 greener stores.

It has a goal to develop a 100% compostable and recyclable cup for hot beverages by 2022. Then, Starbucks did set a goal to eliminate all single-use plastic straws from all of its stores across the world by 2020, and to replace them with an alternative material straw. But because of logistical challenges brought on by COVID, and then the subsequent global shelter-in-place orders, Starbucks has moved that goal back to sometime in 2021. But it's a good goal. Then lastly, I'll just say, it is the 11th largest purchaser of green power according to the EPA.

Southwick: All right. Alyce, what's your second company?

Lomax: My second company is another one that's a household name. I also own shares of this one, it's L'Oreal. John was mentioning the carbon disclosure project earlier, and L'Oreal actually has a triple-A on its A-list, which is actually very rare. I think sadly, there are only 10 companies that have gotten an A score in climate change, forest, and water security, and L'Oreal has done that I believe it's four years in a row. It has a L'Oreal for the Future initiative, where it is aiming to achieve carbon neutrality in all of its sites by 2025. It's going to reduce its greenhouse gas emissions connected to transportation of products by 50% on average, and per finished product by 2030. It's also holding its suppliers to reduce their emissions. Again, as we were talking about product labeling, they plan to reveal the environmental and social impact of products, and also make all packaging sourced from recycled or bio-based materials by the end of the decade. This is just really neat stuff that they're doing. At the end of 2019, it had 51 carbon neutral sites, including 14 factories. It's doing the work and reducing its emissions, and I encourage people to look into their sustainability information, because I think they're taking a really good lead.

Southwick: One of the concerns people have with companies talking up how they're being green or whatever, like greenwashing -- I think they call it greenwashing where a company is just talking about it, and not really doing anything, how do you look at a company and really think, OK, actually, they are walking the talk here, and they're not just trying to have a nice section of their report sound like they care.

Lomax: To my way of thinking, it really is about having those numbers and goals and being able to see over the years how they're progressing on these goals. Personally, I don't detract from a company that doesn't necessarily make the goals, but I want to know what it's doing and why. If I see a company, and you do still see this, where they will have what seems to be a really beautiful sustainability treatment. But the more you read it, you're like there are no numbers, there are no figures, there are no metrics, so that's when I start to worry about the greenwashing part.

Southwick: So, Larry Fink closed his thoughts on climate change in his 2021 letter with, "I have great optimism about the future of capitalism, and the future health of the economy, not in spite of the energy transition, but because of it". What are your closing thoughts here on climate change, and what companies are doing?

Rotonti: I'm optimistic. I think that big, huge companies with enormous amounts of capital are going to throw a lot of capital at an urgent crisis, whether it's a Microsoft which was mentioned, or the companies that Alyce mentioned, or other just big tech giants, whether it's Berkshire Hathaway which owns Berkshire Hathaway Energy, and they're throwing massive amounts of capital at wind and solar, just massive amounts of capital. They have a competitive advantage in that they just can't be replicated, because other public utilities, investor owned utilities, have to pay a dividend, not only dividend but a large dividend. So they're paying out a huge amount of their earnings back to investors rather than investing in green projects. Berkshire Hathaway's Energy doesn't pay a dividend to Berkshire Hathaway. That's a competitive advantage that cannot be replicated, and so Berkshire Hathaway's lead in green energy is just going to accelerate from there. But my point is that big companies with these big brands like Microsoft and Google, and Berkshire, I think they are going to really lead a massive pivot in how other corporations approach climate. They're going to be a leader, other companies are going to follow their lead. I think it's going to just really create a tailwind of support behind this, and so I'm optimistic.

Lomax: Unfortunately, I feel like we're a little bit late in the game. In terms of 10 or 12 or how many years ago, I feel like companies should have been leading then. But I absolutely agree with John, that we have some great big companies that have smart managements that spur a race to the top. I also really like to always emphasize that the companies that are coming up with solutions like Microsoft just coming up with these really neat initiatives, like, you're seeing innovation that is really exciting. So, even though I wish that everything had started sooner, I have great optimism that we're getting there now, and that these companies are going to lead into the future to work on this issue.

Southwick: John, Alyce, thank you so much for joining us and helping us understand this a bit better. It's still complicated. I think I need to have you guys back to talk more maybe later on in the year about this, and socially responsible investing, and more. Can you come back for more?

Lomax: I would love to, Alison, thank you so much.

Rotonti: Yeah, I'd love that. Thanks for having us.

Southwick: Awesome. Disclaimer time, because we talked about stocks, stocks. As always, The Motley Fool may have formal recommendations for or against the stocks we talked about in this episode, don't buy and sell stocks based solely on what you heard here, even though John and Alyce are pretty on it. Well, that's the show. It's edited cloud-ily by Rick Engdahl. Our email is answers@fool.com. For Robert Brokamp, I'm Alison Southwick, stay Foolish everybody.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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