There’s no denying it; many people are actively considering and requiring “greener” investment solutions.
Recent media coverage of our planet’s problems surrounding climate change and the massive plastic mountains which are ruining our natural world seem never ending. Indeed, this week it was reported on the news that an explorer who broke the record for the deepest-ever dive found a plastic bag and sweet wrappers on the seabed; so even the furthest corners of our planet are already sullied. Coupled with this, is the inexorable data about our loss of species and natural habitat which can make the whole matter overwhelming and depressing to say the least.
Those who are green minded want to take more responsibility in the way they lead their lives by minimising waste and looking to keep personal levels of pollution as low as possible. These can be wide ranging actions, from avoiding air travel to simply walking to the shops instead of taking the car, from making sure that everything is recycled to buying green energy. This way of thinking is translating into how some individuals want to invest their money. Put in a nutshell prospective investors sometimes simply state that they want to avoid environmental harm.
Over recent years, demand has grown from a distinctly fringe offering to a much more mainstream movement, much along the lines of the demonstrations and media coverage on the subject. The green investment movement has grown recently to the extent that the Investment Association is discussing* the possibility of a new sector for these types of investment along the lines of an Environmental, Social and Governance sector. For some time, Richmond Independent has asked clients about how important this might be to them and new regulation** would appear to make this a new imperative. In the past, there was little choice in this area*** and the distinct probability of smaller returns (mainly due to screening out companies).
Most of the problem with this investment sector is that there is, unfortunately, a very wide range of issues to consider and different approaches to these within funds. Some funds simply screen out harmful or maybe unethical or polluting businesses. Others might invest in those which are looking to actively promote greener solutions, e.g. developing alternative energy supplies, alternatives to plastics. Some may look at companies which trade as greenly as possible and actively be looking to reduce waste and pollution. In the past, ethical investments has largely meant screening out tobacco, alcohol and armaments and these are still important considerations for some managers and investors. But there has been a progression. Historically there have been green funds e.g. reducing greenhouse gases and ethical funds e.g. excluding armaments manufacture but there is emerging a more rounded approach.
Environmental Social and Governance (known as ESG) might be described as follows:-
- Environmental – taking into account climate change, greenhouse emissions, renewable energy, resource depletion, waste and pollution and deforestation
- Social – working conditions, local communities, conflict, health and safety, employee relations and diversity
- Governance – executive pay, bribery and corruption, political lobbying and broad diversity.
Firstly, the Governance aspect of these funds appears to be a positive to companies, because having robust governance means businesses are less likely to get into severe problems and managers tend to be better custodians of shareholder capital. Also as public awareness and opinion are heightened there is an increased demand from the public for greener more socially aware practices. Doing business with these principles in mind means businesses may be able to differentiate themselves from competitors; forward thinking businesses will start to think this way and could become more profitable. This type of thinking may also start to lead to using more technology and therefore reducing unnecessary waste and for companies to be generally more forward thinking in their decision-making. Also dirty and polluting situations may lead to taxation issues which could weigh down on some businesses.
However, for the time being there is room for confusion even among ESG funds as they seem to be doing a range of different things; but for investors this does at least offer alternatives and will answer some of their needs. This is a sector at a reasonably early stage (although it`s been around since the 80s but not taken off until recently) so there is plenty to discuss with prospective investors and time for the sector to develop and mature.
This article is purely for information purposes and does not constitute advice, for advice based on your individual needs and circumstances please contact an independent financial adviser.
* According to FT Adviser 04/04/2019
** European Commission’s Delegated Regulation (EU) 2017/565)
*** There have been numerous fund launches recently to meet increased customer demand – FT Adviser 2019.