It’s clear the planet is suffering, and industry is largely to blame. We’ve recently witnessed environmental destruction all around us. Recent news headlines include ‘Bush fires, hailstorms, dust clouds and flooding in Australia’, and ‘Extreme blizzards and storms in Canada’. With this knowledge, investors worry that they’re helping enable the companies implicit in damaging the earth.
Ethical investing, sustainable investing, socially responsible investing, or impact investing. Each of these describes the same thing; a way to invest your money in assets that make the world a better place.
Environmental, Social, and Governance (ESG) sum up the factors used to measure the sustainability of a company. ESG also tests the societal impact of your investment in a company or business.
Investments in ESG funds rose 233% in 2019, from £3bn to £10bn, so it’s clear ethical investing is in demand.
Pledging to reduce carbon emissions
The World Economic Forum in Davos this week is urging delegates to set net-zero emissions goals by 2050 at the latest.
Companies are already getting on board with pledges to reduce carbon emissions.
Last week Microsoft announced an ambitious goal to become carbon negative by 2030. This coincides with its pledge to remove historical carbon emissions by 2050. This refers to every ton of carbon it has ever emitted into the atmosphere over the past 45 years. It’s also launched a $1bn climate innovation fund.
This sets a new benchmark for companies assessing their climate goals and it’s a tough act to follow.
Profit from your principles
Main UK brokers such as Hargreaves Lansdown and Interactive Investor are now providing information and routes to investing ethically. Actively managed ESG funds can cost investors more in fees but can help clarify motivations for building an ESG portfolio.
The Task Force on Climate-related Financial Disclosure (TCFD) sets guidelines for companies to follow. However, there’s not a universal standard for ESG metrics, so it makes choosing companies more difficult. BP is involved in renewables and proactive in promoting diversity, but it can’t escape the fact it’s an oil company damaging the environment.
UK pension schemes are under immense pressure to divest from fossil fuel investments.
Local Government Pension Scheme (LGPS) Central covers nine local authority pension funds in the UK. Last year it launched the All World Equity Climate Multi-Factor Fund. This fund tracks the FTSE All-World Climate Balanced Comprehensive Factor Index. It attracted pension assets of £2.1bn and considers carbon emissions, green revenues, and fossil fuel reserves.
As positive as the move is, it’s not a simple solution for all UK pension monies. Some British pension funds warned they would have lost more than £600m if they’d divested from fossil fuels last year. However, that’s from funds worth billions of pounds, so is this really a cost worth quibbling about?
Climate change is real
Last year was the earth’s second hottest since records began and the U.N. World Meteorological Organization expects more extreme weather events to come.
There is a growing global demand from investors for ESG integration, portfolio decarbonization, social impact funds, and low carbon strategies.
The pressure is mounting on companies to take a responsible stance towards the planet. This should increase the investing options available to ESG funds. I think it’s a good time to get on board as the acceleration in demand for ESG investing will only intensify.
