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UN climate warning: eight things investors can do

Many ethical investors are likely to have been pushed to the point where they think “it’s not enough to avoid oil and coal and buy renewables, I want to do more”

UN climate warning: eight more things investors can do

Reading about the UN’s climate change report and looking at some of photos of newly homeless families from wildfires and flooding in Greece, Turkey, Albania, Germany and California in recent days could be enough to lead many people to think that our planet is beyond hope.

But as much as the report from the UN Intergovernmental Panel on Climate Change is bleak and depressing, there is also a call to arms, for if urgent and large-scale changes are made then some of the most severe impacts can be avoided and many will be reversible.

When climate change Greta Thunberg said two years ago “I don’t want you to be hopeful. I want you to panic”, maybe now the time has come.

Investors certainly have seemed more hopeful that they can do their bit in the past year and a half, with a surge in interest in sustainability-focused and environmental, social and governance funds.

Inflows into ethical funds surged to a record £10bn in 2020 from £3bn the year before, according to Investment Association data – while this week data from Calastone showed ESG funds accounted for 90% of inflows in the past month.

But even among investors who were already giving over a large part of their savings and investments to ESG there must have been a sizeable number for whom the report came as a depressingly crushing reminder that not enough is being done, and governments are not moving fast enough.

For those people who aren’t ready to go and join Extinction Rebellion quite yet, is there more they as private investors can do?

In short, yes, plenty.

    1. If you were to do just one thing

Probably the single biggest impact any investors could make is switching their pension savings to more green investments.

What’s more, thanks to the proliferation of green funds in recent years, in 2021 it is quite possible to have most or all of your portfolio in sustainable and positive impact funds, with enough variety to provide tilts towards growth and income, as well as portfolio diversification.

“It’s easy to forget that your workplace pension is invested in the market, mainly because a default fund is selected for you and often people forget to revisit this selection,” says Laura Suter, head of personal finance at AJ Bell.

“Most pensions will have at least one ethical option and if that’s not up to scratch you can always consider transferring your pension somewhere else when you move jobs.”

Myron Jobson, personal finance campaigner at Interactive Investor, agrees, adding that while the challenge of climate change may be daunting, how you invest is one of the easier steps you can take to contribute to the fight.

Several fund managers offer a range of sustainable ‘quick start’ funds for beginner investors.

For example, Rathbone Greenbank offers a range of multi-asset sustainable portfolios ranked by four levels of risk; the BMO Sustainable Universal MAP range offers three for different risk appetites; while others doing similar include Royal London Asset Management.

But for those that are already past this point, there is still more you can do.

    2. Rethink how you invest

If step one was to move your savings to more sustainability-focused funds, the UN climate report might have also triggered many people to fundamentally rethink what it is they want across their savings and investments.

For example, is growth still your priority or are other issues more important to you now?

Thanks to the deepening and widening of ESG funds in the past few years, investing in green funds no longer means you are necessarily accepting second best in terms of fund performance or returns.

If anything, the market is still underappreciating the long-term risks and opportunities of climate change, says Ben McEwan, climate active analyst at Sarasin & Partners.

“The market is really only starting to price this stuff and it will be forced to price it further. And therefore you will generate, in our view, better returns if you think about these dimensions now.”

With a green-tinged fund available across most asset classes, the ardent ethical investor could turn their whole portfolio green, but Suter cautions about ending up with too much of your portfolio overlapping or focused on a handful of themes, such as green energy or wind power.

This may require more research than an investor might normally be used to, but it becomes more important when not only do you want your fund manager to make you money but also that they are trying to “do the right thing” as you see it.

Your broker or investment platform is likely to provide a long list of ethical funds, some of them break these down into sections to help match ethical investors with solutions that align to their morals.

READ: How to spot greenwashing

Part of the challenge here is the subjective concept of what constitutes ‘green’ – and you may have higher priorities for the different elements, be they E, S or G.

While avoiding traditional ‘sin stocks’ like oil, tobacco and arms firms has been enough for the ethical investor in the past couple of decades, for many people that is no longer enough.

But, as Jobson warns, research is important and investors should not take all investments labelled ‘green’ or ‘sustainable’.

“For investors looking to green their portfolio, there is no substitute for doing the legwork themselves. This means looking under the bonnet of every product purporting green credentials to ensure compatibility.”

To make sure they’re not ‘greenwashing’ and are walking the walk, all ESG-related funds will have factsheets explaining their investment policies, the breakdown of the portfolio between different subsectors.

You can also check a fund’s voting record – and if they’ve not been made public you can ask for them.

Asset managers should be proud of their records, with some becoming increasingly energetic and vocal critics of slovenly sustainability practices, such is Legal & General, which in the latest AGM season voted against 130 companies over their climate change policies.

But an example of why research is necessary is because you may feel that a company with a terrible 10-year record for polluting rivers (like Pennon) should not be in the portfolio of a supposedly environmental fund (like those run by Impax Asset Management (AIM:IPX, FRA:LW4)) – or you might think, as the firm says, that pollution events are “one of the factors considered in the assessment of their environmental performance”. 

    3. Vote green

This brings us to another relatively easy step but one that most investors sadly have let slide.

Especially for those who feel driven to do more, voting at AGMs is a must for every company where you invest.

“Voting is probably the most powerful tool in an investor's armoury to catalyse change,” says McEwen.

One investor on their own may not feel powerful but there are plenty more people out there like you.

Putting your money in the right investment fund also creates a strong collective vote.

“There's definitely a benefit in sort of the collectivism of investing with an asset manager that has a voice,” adds McEwen. “But you have to be wary that that manager is serious about using its voice, not only unilaterally engaging with the company, but also bilaterally engaging with other investor groups, and voting on an annual general meeting on the investor's behalf.

“Asset managers that are serious about expediting the transition to net zero have to do all three.”

    4. Get active

Voting is just the first step towards becoming a more active investor.

“As an investor, it is possible to have a powerful impact,” says Katarina Hammar, head of active ownership at Nordea Asset Management.

“As the urgency of the climate issue is mounting, it is vital for all investors to take action to ensure future generations will not see their prospects for a good life ruined by the actions of today.”

One way of doing this is through corporate engagement, which she says is “an incredibly powerful tool to bring about a real-world impact. Investors can either do this individually, or work with other asset managers to potentially have more of an influence”.

Huw Davies, a finance adviser at the Make My Money Matter campaign, says: “We encourage people who care about the impact of their pension to contact their scheme and ask what their pension invests in, and ask for them to commit to robust net zero targets.”

If you think your pension fund or investment funds are not doing enough, then let them know too.

And if you want to step it up a level, you might take inspiration from the recent court victory for seven activist groups to challenge Royal Dutch Shell (NYSE:RDS.A)’s climate strategy.

    5. Investing for impact

Over and above avoiding the ‘bad guys’ and backing the ‘good guys’, investors wanting to make a positive difference with their money might consider what’s called an impact fund, which aim to have a positive, measurable impact on society and the environment.

As James Penny, UK chief investment officer at TAM Asset Management, notes, funds focusing on impact investing have been blazing a trail into measuring and delivering the real impact on the investors they invest into.

“Right down to specific numbers of school books being delivered, trees being planted, green infrastructure installed, even the tonnage of carbon being taken out of the atmosphere. Clients can receive detailed reports about exactly how their investments are making a difference to industries and livelihoods.

“The Green revolution continues to deepen and with it investors are given more and more tools to empower them to deliver real change with each pound they invest,” Penny says.

One such impact specialist is UK-based WHEB Asset Management, which focused on sustainability via their one and only fund, the WHEB Sustainability Fund.

The team invest based on nine sustainable investment themes, ranging from resource efficiency and sustainable transport to education and wellbeing.

“Every investment into the fund makes a positive difference,” says Dominic Rowles, investment analyst at Hargreaves Lansdown, with £10,000 invested into the fund in 2020 helping generate 2 MWh of renewable energy, avoid 3 tons of carbon dioxide emissions, treat 27,000 litres of waste water for reuse, recycle or recover a ton of waste material, plus other investments in tertiary education and healthcare treatment.

“This is the only fund managed by the WHEB team, meaning they're totally dedicated to it and focused on its success. However, the portfolio looks very different to the broader global stock market, so we expect it to perform differently too,” adds Rowles.

Other funds take great pains to ensure their portfolio companies ‘walk the walk’, including the Rathbone Greenbank Global Sustainability Fund, where a dedicated research team filters out those that are not as green as they might wish to seem, before a meeting with the company to drill down further into their sustainability credentials.

M&G Investments has also launched a range of impact funds in the past year, where the target is for “a measurable, positive impact for people and the planet”, as well as long-term financial returns. The range includes the M&G Climate Solutions Fund that invests entirely in green technology, clean energy and the circular economy, though it’s not been going for a year yet.

Investment trusts also offer asset specialisation and income from the Greencoat UK Wind PLC (LSE:UKW, FRA:3GC) and its wind-powered peers, to the sun-charged subsector where NextEnergy Solar Fund (LSE:NESF) Ltd and Bluefield Solar Income Fund (LSE:BSIF) Ltd ply their trade; and in the last couple of years trusts have been launched to focus on other technologies, such as Gresham House Energy Storage Fund plc (LSE:GRID), as well as more diverse environment-focused investment trusts such as Impax Environmental Markets (LSE:IEM). 

    6. Passive aggressive

While many investors see ESG investing as something just for the active portion of their portfolio, this means that could be passively backing companies that are climate-negative.

With the market for ethical trackers and exchange-traded funds (ETFs) having ballooned in recent years, there’s many ethical options now available.

“More specialised tracker funds can provide purer exposure to specific themes investors may want to get behind,” says Suter.

She highlights the iShares Global Clean Energy ETF, while

“Clearly the more specialised the theme, the less diversified the portfolio, and the more risk investors must be willing to accept,” she adds.

The passive sector also has impact funds, including the iClima Global Decarbonisation Enablers UCITS ETF, which claims to be the world’s first exchange-traded fund (ETF) to focus specifically on companies that enable CO2 avoidance.

It tracks the iClima Global Decarbonisation Enablers Index, which at the latest rebalancing had over 160 companies.

Gabriela Herculano, CEO of iClima Earth, which developed the index, says the best way to reduce CO2e in the atmosphere “is to find lower-emission alternatives to products and services, thereby ‘avoiding’ emission” and in order for the world to reach net-zero by 2050 and have a chance of limiting global warming, the ETF provides exposure to companies across subsectors including green energy, green transportation, water and waste improvements, decarbonisation-enabling solutions and sustainable products “that will reduce and avoid carbon emissions”.

    7. Passive activist?

As mentioned above, one effect of investing in the right fund is that you can get other people to do your activism for you.

And in a confluence of the various ESG angles, there is also a theme that might almost be called passive activist impact investing.

Environmental activist fund Engine No.1 has only been going a short while but has already achieved big things, including getting three directors appointed to the board of Exxon Mobil, leading to the largest US oil company to focus more of its future investment on alternative energy sources than fossil fuel exploration.

READ: Exxon, Chevron and Shell forced to rethink as sophisticated activism gets a foothold

Engine No1’s founders believes ESG engagement on a corporate level benefits a company’s bottom line as well as impacting positively on its environment.

The hedge fund also launched an ETF, Engine No 1 Transform 500 ETF (BATS:VOTE) in June, “create value by driving positive impact” at the largest 500 companies in the US.

Activist investment platform Tulipshare also launched last month, with a mission to “unify individuals’ investing power with other investors’ shares to make their voices heard” from as little as £1.

Founder Antoine Argouges says the platform’s goal is “to give a voice to the everyday individual, to encourage retail investors to rethink their investment strategies”.

Based in the UK, the platform’s initial causes are focused on big US names, including fighting for workers’ rights at Amazon, plastic pollution at Coca-Cola and right-to-repair issues at Apple, but the plan is to broaden the approach over time.

    8. Even cash?

All investors have a portion of their portfolio in cash to varying degrees.

There will soon be a new way for UK investors to use that cash for positive environmental impact with the government’s proposed launch of green bonds later this year.

With a product launched via the National Savings & Investments brand, savers’ money will be used to fund green government projects.

What’s for green funds has soared in recent years, as demand from investors has increased. This means that you could feasibly ensure all of your portfolio has a green tilt, rather than just a portion of it.

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