Investing to Save The Planet with Alice Ross
Date: Dec 3, 2020
Investing responsibly is one of the most powerful avenues towards addressing climate change. But how can the average investor on the street get involved in the fight against climate change?
The good news is that anyone with savings, a pension or investments has building blocks at their disposal. If we invest our money in the right way, we can help to combat climate change and feel a sense of control in an uncertain world. According to the newly launched Make My Money Matter Campaign, moving your pension to a more sustainable fund is 27 times more effective in reducing your carbon footprint than not taking planes and becoming a vegan combined.
In this episode, Alice Ross advocates making our money matter by changing the way we invest to save our planet. Alice has been a Financial Times journalist for more than a decade, covering topics ranging from personal investment to corporate activity to market movements. Previously, she has held positions as the deputy editor of the weekend ‘Money’ section, Editor of the Wealth magazine and editor of the FT newsletter, ‘Trade Secrets’, which examines issues affecting globalisation including climate change.
*Remember: the value of investments can go down as well as up so you may get back less than you invest. Always do your own research - and note that what we discussed in the podcast is not a personal recommendation for any particular investment.*
You can listen (47 min) and subscribe here:
What is sustainable investing and how does this relate to ESG principles?
Sustainable investing falls under the broad umbrella of ESG (environmental, social and governance) investing. ESG investors are those who seek positive returns and a beneficial long-term impact on society, the environment and financial performance of businesses. Such investors follow the principle that it is no longer sufficient for companies to pursue shareholder maximisation in isolation, but instead money should be allocated to the companies that actively consider the wider corporate, social and environmental effects of their operations.
The following are examples of ESG considerations:
Environmental – businesses’ operations can create environmental risks that cause actual or potential negative consequences on air, land, water, ecosystems and human health. Company environmental activities perceived as ESG factors might include managing resources and preventing pollution, reducing emissions and climate impact, and reporting environmental impact through disclosures.
Social – this refers to the impact the business has on its stakeholders and society at large. Company social activities perceived as ESG factors might include promoting health and safety, encouraging good labour-management relations and protecting human rights throughout the supply chain.
Governance – this refers to the way the company is run, focusing on areas such as corporate risk management, compensation and brand independence. Company governance activities perceived as ESG factors might include protecting shareholders and their rights, candid reporting and disclosing of financial information and developing fairer forms of employee compensation.
NB: people who want to invest to save the planet should do their homework before picking an ESG fund, as the fund might be invested in companies that score highly on social or governance factors, but not environmental. For example, it surprises many investors when they learn that a major polluter such as BP is included in their ESG fund since it scores well on the corporate governance factor.
When did sustainable investing move from a niche, specialist area to one of the biggest topics on today’s investing agenda?
Although ethical investing is by no means a new concept, in recent years there has been a surge of people wanting to make a difference through ESG investment considerations. According to data from Morningstar, annual European sustainable fund flows increased from €50bn in 2018 to a colossal €120bn in 2019. This dramatic increase was mirrored in the number of environmentally sustainable funds, which increased by 360 in 2019 to 2,405. For example, top fund companies Vanguard and Fidelity now have sustainable funds available at their clients’ disposal.
The interest in sustainable investing has only increased since the start of the Covid-19 crisis as more people have begun to notice and appreciate the lower levels of pollution resulting from the economic slowdown, while companies that scored badly on the ESG front were punished by consumers and retail investors. Further, our global shared experience during the pandemic has drawn comparisons with climate change, highlighting that a collective approach is the best way to move forward in times of crisis.
Awareness of the urgency surrounding the climate crisis has been the key driver for moving sustainable investing from a more niche, specialist area to one of the biggest topics on today’s investing agenda. Developments since 2015 have hastened the interest in climate change solutions. In particular, Alice points to two pivotal moments in recent history: the 2015 Paris Agreement and the publication of the UN’s Sustainable Development Goals.
Why is sustainable investing important?
As the world wakes up to the terrifying reality of climate change, there have been major changes in the way that mainstream investors think about the environment. The power of even the smallest retail investor can be huge when we group together to inspire action in large corporations through joining environmental action-based groups, such as ShareAction, and remain open in our communications with our fund managers.
Individuals who invest sustainably choose to invest in companies and funds with the purpose of generating measurable environmental impact alongside a financial return. This impact is spread across various sectors, from renewable energy to electric vehicles to environmental solutions for agricultural practices. As a greater proportion of investor capital is allocated to companies focused on delivering environmental solutions and ‘best-in-class’ companies that make the biggest steps in improving their environmental impact in their sector, there will be a great demand for sustainable investing products that will accelerate the demand – and hence supply - for sustainable solutions.
This upwards trend seen surrounding sustainable investment is likely to continue as millennials, a group of investors with a heightened sense of global responsibility, accumulate wealth. Indeed, according to a 2018 publication from EY, millennial investors are nearly twice as likely to invest in companies or funds that target specific environmental outcomes, while nearly one third of millennial investors seek a financial advisor that provides values-based investing. The long-term structural shift in global investor preferences towards sustainability is one reason as to why major investment firms, such as BlackRock, see sustainable investing as the future and why top fund companies, such as Vanguard and Fidelity, are now launching ESG fund options at a record pace.
Contrary to the common investor misconceptions at the beginning of the century, financial performance has become a top reason to invest sustainably. In the volatile first half of this year, all 26 ESG index funds outperformed their conventional index-fund counterparts and 72% of sustainable equity funds ranked in the top halves of their performance categories, according to Morningstar. This supports the research from Oxford University and the United Nations which have consistently shown, year on year, that sustainable investing platforms perform at least as well, if not better, than conventional investing platforms. Further, sustainable investing is being used to help manage investment risk in uncertain times, which has proven to be crucial in the backdrop of Covid-19.
Ultimately, why wouldn’t you invest in companies and funds that do well for the planet, as well as doing well for your bank balance?
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In this episode, Alice Ross shares her expert insights and tips on how we, as average retail investors, can get started with sustainability investing. She provides us with detailed, action-oriented guidance on the sustainability solutions we can invest in and who we can go to for help as we embark upon our sustainable investment journey.
You can listen (47 min) and subscribe here:
Resources:
Alice’s book, Investing To Save The Planet, is available now!
Investing To Save The Planet: How Your Money Can Make a Difference: https://www.bookdepository.com/Investing-Save-Planet-Alice-Ross/9780241457238
You can follow and connect with Alice at:
Twitter: https://twitter.com/aliceemross
Financial Times: https://www.ft.com/stream/89bc219c-f119-4b45-bdbe-aacb7e897eed
Alice shared some great resources in this episode. All the links are below:
ShareAction: https://shareaction.org/
London Stock Exchange, Navigating the green finance landscape report (2019)
IMF, Chapter 6 Sustainable Finance (2019)
European Commission, Factsheet: Financing sustainable growth - A new European regime on sustainability-related disclosures that will come into force from March 2021