President Joe Biden’s infrastructure initiative — and the measures it contains to curb climate change — may be a tailwind for investors in so-called sustainable or ESG funds, according to financial advisors.
If signed into law, the $2 trillion infrastructure proposal would rank as one of the largest federal efforts ever to curb the country’s greenhouse gas emissions.
Many of the clean-energy measures, such as funding for electric vehicles, millions of additional charging ports for them, and retrofitting buildings and residences, would help the president achieve a goal of net-zero emissions by 2050, according to the White House.
Investing according to environmental, social and governance — or so-called ESG — factors had been gaining steam before Biden’s plan.
ESG funds captured $51.1 billion of net new money from investors in 2020 — their fifth consecutive annual record, according to Morningstar data. Their returns have also been strong relative to traditional funds — 3 in 4 sustainable funds ranked in the top half of their investment category over the past three years, Morningstar data shows.
Financial advisors expect the president’s proposal to lend more support.
“Biden’s influence here is going to be helpful,” Mark Mathers, a certified financial planner and partner at Beacon Pointe Advisors in Boston, said.
ESG funds can allocate money in many ways to promote social good. They may invest in energy firms that aren’t reliant on fossil fuels or in companies that promote things like racial and gender diversity, for example.
Do-it-yourself investors looking to grab a stake in climate- or environmentally focused funds should do some research to ensure a specific fund’s focus.
And all asset managers aren’t created equal when it comes to ESG, Mathers said. Some are seizing on the funds’ recent popularity to debut investments, he said.
Investors should look for funds that have been around for a while (advisors typically look for a track record of at least three years) and are run by managers authentically focused on sustainable investing.
“Everybody has a sustainable fund,” Mathers said. “You’ve got to find people of substance.”
Authenticity is generally something investors can easily identify from firms’ respective websites, based on how prominently they feature values-based investing, he added.
Impax Asset Management, Pernassus Investments, and Boston Common Asset Management are good starting points for retail investors new to the space, he said. (They are active managers, meaning investors may pay more for access to the funds relative to their index counterparts.)
It’s also important to remember diversification and asset allocation — investors shouldn’t put all their money in solar energy, for example, advisors said.
“If someone’s in a 60-40 portfolio, I’m not going to take 60% [of my stocks] and buy those sectors,” said Ivory Johnson, a CFP and founder of Delancey Wealth Management in Washington, D.C. “I might nibble around the ends.”
Biden’s infrastructure proposal contains many elements beyond just climate change. Taken as a whole, such a proposal, if it becomes law, would likely be a boon to different sectors of the economy.
Sectors that could pop
Those sectors include basic materials, utilities and industrials, said Rusty Vanneman, chief investment strategist at Orion Advisor Solutions in Omaha, Nebraska.
(Building and upgrading roads and bridges, for example, would require construction equipment and materials like cement, advisors said of the thinking.)
And, somewhat conveniently, those sectors are among ones poised to jump when there’s higher inflation.
Some economists and advisors believe inflation is likely to ramp up due to additional federal spending from the $1.9 trillion Covid relief package passed in March. That came on top of two other large pandemic aid bills totaling more than $3 trillion.
“I’m not creating a whole new investment strategy based on what Biden’s doing,” Johnson said.
“Biden’s plan reinforces what’s already happening, which is inflation,” he added. “And when you have inflation, you buy these sectors.
“If Biden makes you rich off of it, fine.”
However, federal officials like Federal Reserve Chair Jerome Powell have brushed off projections of rampant inflation, saying the job market has a ways to recover before that’s a concern.
Chat Reynders, CEO and chairman of Reynders, McVeigh Capital Management in Boston, said some of the larger opportunities may be outside of the classic companies people associate with infrastructure, including those in materials and earth-moving equipment.
Instead, they may be investments in “new technologies to prepare the country for a more sustainable, climate friendly and energy-efficient future.”
Reynders believes the bill will make it promising to invest in new electric-grid technologies, alternative energy solutions, electric transportation, 5G technologies, automation and robotics, machine learning and AI applications.
However, not all financial advisors are necessarily bullish.
The Biden administration has telegraphed his green-energy push for a while, and much of the envisioned investment gains may already be priced into the market, said Michael McClary, chief investment officer at Valmark Financial Group in Akron, Ohio.
Beyond the headlines
While Biden’s historic investment in infrastructure poses opportunities for investors, advisors caution people to keep their own timeline and risk tolerance into account in any decisions they make with their money.
“Keep in mind several times in history presidents have introduced new legislation that were aimed to make ‘sweeping improvements,’” said Kristian Finfrock, the founder of Retirement Income Strategies in Evansville, Wisconsin. “Stick to your plan and keep a long-term perspective in sight.”
Vanneman warned that while thematic investing can enhance returns, you can also expect more volatility in your portfolio by using the approach.
Infrastructure strategies tend to be less volatile than climate change ones, he said.
“Climate change stocks tend to be newer, smaller companies with low [or] zero dividends and high growth expectations,” he wrote in an email. “All of those factors, in general, tend to be reasons why some stock[s] are more volatile than others.”
On the other hand, he said, “infrastructure stocks tend to be more established and have higher dividends and lower valuations.”
