Could it be time to check in on how ‘good’ your investments are?
Protecting the future of our planet has never felt as big a deal as it does right now.
We’ve all seen the headlines over the last couple of years: more wildfires, floods, droughts, and extreme weather – all caused by climate change.
Now with COP26 (the UN Climate Change Conference) taking place on our doorstep, we’ve heard the message loud and clear from world leaders, activists (and legend of nature documentaries) David Attenborough. If we want to save our home from irreversible harm, now’s the time to act.
COP26 is also a huge talking point in the investment world. To meet ‘net zero’ emissions targets (not pumping out more harmful gases into the atmosphere than we can remove) every financial decision has to take climate change into account. That’s everything from what the government spends on the economy, to where you as an investor choose to put your money.
What difference does this make to your investments?
Even before COP26 began, there’s already been a real groundswell of interest in sustainability from the big institutional investors. In particular, they’re thinking about what impact environmental, social and governance factors (ESG) have on their investment portfolios.
Signatories to the UN-based Principles for Responsible Investment (the world’s leading proponent of responsible investment) have mushroomed from less than 100 in 2006, to nearly 4,000 – that’s combined assets under management of US$122 trillion.
Outside the industry echo chamber though, how much are individuals thinking about these issues?
Some of our clients insist on sustainability, removing particular stocks (such as tobacco companies) from their portfolios or including notably ‘green’ industries. But many others don’t see it as a priority. Their focus is still on the financial side, interest rates, inflation, protecting their pensions over the long term.
Could this balance of priorities be about to change? COP26 could speed up the momentum behind sustainable investing.
The UK Treasury has already put forward plans to make many UK firms and financial institutions set out how they’re helping the country move to ‘net zero’ by 2050. Increased legislation and regulation mean companies face potential financial or reputational risks if they don’t take their sustainability commitments seriously.
Our approach to sustainability and ESG
So how do we approach sustainability for our clients? We offer ESG investment options alongside our regular portfolios.
One challenge is finding a reliable way to measure a company’s record on ESG. In particular, you want to avoid firms that are ‘greenwashing’ (making their businesses look more sustainable than they are.)
We’ve found an excellent measure is using the UN’s Sustainable Development Goals (SDGs) as a guide. The 17 SDGs – ‘a blueprint for a better and more sustainable future for all’ – go well beyond environmental issues. They include targets to provide affordable and clean energy for all, create sustainable cities and communities, eradicate poverty, and reach gender equality.
One company where we can draw a straight line between its business model and the SDGs is online payment platform PayPal. Online and digital payments are an important part of the transition towards a more sustainable world, and PayPal’s revenues 100% align with SDG Goal 8 –‘ decent work and economic growth’.
Another key part of sustainable investing is engaging with companies. This helps fund managers understand more about a company’s ESG credentials. It’s also an avenue for them to give guidance on ways the company can improve. Common engagement themes include encouraging companies to take action in areas including how it tackles modern slavery or child labour in its supply chain and health and safety in the workplace and, of course, its environmental impact. It can reduce the likelihood they will suffer financial or reputational damage in the future, making them more resilient in the long term.
Building momentum
ESG investing is well on its way to becoming mainstream and part of everyday investment choices. Even non-ESG providers are now more proactive, making more demands of the companies they invest in.
In fact, the line between traditional financial metrics and ESG are blurring. Judging whether something is a sound long-term investment now also needs to look at factors including whether a company risks being on the wrong side of regulations or faces additional costs as they green their business. At the same time, sustainability can also open up new potential investment avenues.
Fortunately, ESG is now less likely to come at a cost to the investor. As more funds come on the market, so the products available are coming down in price when compared with the default options (in the case of one of our providers, it’s as little as an additional 0.01%.)
COP26 has already seen pledges to cut greenhouse gas emissions, phase out using coal for energy and end deforestation. It could be a catalyst for changing investing as well. So, even if ESG isn’t your primary concern, maybe it’s worth asking how ‘good’ your investments are? It’s not even a matter of principle, but one of good housekeeping.