In 2019, global CO2 emissions reached a record high of 36.44 billion tonnes (Statista, 15 January 2021). The Paris Agreement dictates that we must reach net zero CO2 emissions by 2050-70 in order to avoid a 2°C rise in global temperature; a rise which would have devastating impacts on the world in which we live. Achieving this target requires sweeping changes and attitudes to the way we operate.
As individuals, there are a multitude of things that we can do to reduce our carbon footprint. We could shorten our showers, take fewer flights, take the train instead of the car, or reduce our meat consumption. In their Sustainable Finance report (25January 2018), Nordea Group estimated that if you did all these things combined over your working life, you would reduce your CO2 emissions by 82.4 tonnes. However if the only thing you did was move your money, be it a pension or an ISA, to a sustainable fund then this would reduce your CO2 emissions by 2,222.67 tonnes.
That research tells us that moving your money to sustainable funds can be 27 times more impactful at reducing your carbon footprint than making these lifestyle changes.
As an individual, you can have a serious impact on what that future looks like by making your money a force for good. When your investments are aggregated up along with those of others, it can be used to influence the largest fund managers in the world.
So what is sustainable investing? It’s a general term, but essentially refers to contributing positively to society and solving the world’s biggest challenges, whilst also achieving long-term financial returns. You may have heard of ESG (Environment, Social, and Governance), which is essentially a decision-making framework for making investment decisions across a number of criteria, which at the high level are:
- Environmental factors (such as pollution and climate change)
- Social factors (such as worker conditions and human rights)
- Governance (such as the quality of the company’s policies and management)
Traditionally, sustainable funds would run on a negative screening basis, i.e. negatively screening out certain industries or companies based upon fixed criteria, such as what they produce. Some sustainable investment managers use a more progressive approach however: positive inclusion. Managers operating on this basis analyse if the company is providing long-term solutions to problems that exist today. They consider this to be a common-sense approach to making investment decisions; and many agree with them.
A preconception that some have is that sustainable funds mean sacrificing performance, however these funds have actually performed extremely well in recent times. This recent strong performance is partly due to sector positioning (often light in Energy and Materials businesses, and heavy in Technology businesses). In addition, we also need to remind ourselves of the “positive inclusion” lens that some sustainable fund managers use, i.e. where fund managers choose to invest in companies who they feel are providing long-term solutions to today’s problems.
An impact in recent years is industry movement towards associations such as the United Nations supported Principles for Responsible Investing (PRI). The PRI is the world’s leading proponent of responsible investment, with aims to understand the investment implications of ESG factors and support its network of investor signatories in integrating these factors into their investment and ownership decisions. This is a base level standard that more and more investors look for.
An increase in social pressure has led to an increasing number of fund managers becoming signatories of the PRI. This means that those who don’t pledge to incorporate these responsible investing principles may no longer be considered for selection by wealth managers. Sustainable funds in fact had a record 2020 in terms of attracting interest from investors. According to Morningstar (28January 2021), by the end of 2020 the total assets in sustainable funds had surged to a record of almost $1.7 trillion, up 29% in the fourth quarter. This indicates that sustainable investing is more than just a fad. In addition, the election of Joe Biden, who has promised green reforms, is expected to further drive interest and investment into sustainable funds.
By now you’ve got an idea of how sustainable investments can positively shape the world around us. You might be wondering how you can reduce your own carbon footprint by making more sustainable choices with your money. Speak to your financial adviser or whoever runs your funds, and see the options available to you. Ask them if they are PRI signatories. This will be a good indicator of how important sustainable and responsible investing is to them. By making sustainable choices with your money, you as an individual have the power to impact the future.