What is sustainable investing?
Thomas Dickson reveals all on ESG investing and why you should consider it with your investments.
Sustainable investing has been attracting a lot of attention in recent months. At the COP 26 Conference last October, the pressing issue of climate change was brought into even sharper focus. Celebrities including Stephen Fry, Richard Curtis and Kelly Macdonald used the conference platform to publicise the campaign ‘Make my money matter’. This calls for people to ‘have a pension they can be proud of’.
Earlier in 2021 the government released a new policy paper called Greening finance: a roadmap to sustainable investing. A global investment summit occurred in October. It aimed to position the UK as the best place in the world for green investment. Many in finance are conscious that the transition to a fair, responsible and sustainable economy is one of the most pressing challenges of our time.
The issue of sustainable investing is extremely relevant for UK dentists. Most earn more than they spend, and have disposable income they want to save – for example in pensions or ISAs. These investments are typically invested in equities or stocks and shares. The feedback we’ve had from our clients is that a significant number are interested in green investments. They want to use their savings to create change.
What is sustainable investing?
Sustainable investing, increasingly known as environmental, social, and governance (ESG) investing is an umbrella term for investments that seek to deliver positive investment returns while making a long-term impact on society, the environment, and the performance of companies.
- Environmental issues: biodiversity loss, greenhouse gas emissions and climate change, energy efficiency, renewable energy, resource depletion (including fresh water), ocean acidification, ozone depletion
- Social issues: mass migration, wealth distribution, access to healthcare, workplace health and safety, diversity, employment rights, child labour, slavery, controversial weapons such as cluster bombs
- Governance issues: executive compensation, bribery and corruption, independent directors, ethics in business, transparent disclosure of ESG criteria, whistle-blowing policies, stakeholder relations and the implications of business strategy on social and sustainability issues.
A growing trend
In response to climate change, many of us are making lifestyle changes. Investing in ESG funds seems like a logical step for people who want to be part of the climate solution.
Statistics suggest that investing in this way is growing rapidly. Funds that specifically invest according to ESG principles attracted net inflows (so this is after any money being withdrawn) of $71.1bn globally between April and June 2020, according to research firm Morningstar. This takes the total for assets under management in ESG funds to a new high of just over $1trn globally.
Does it really make a difference?
Last summer, the ‘Make my money matter’ campaign published their research. It suggests that making your pension green is 21 times more effective at cutting your carbon footprint than stopping flying, going vegetarian and switching to a green energy provider combined.
I’ve seen other statistics that suggest investing in a certain ESG fund reduces carbon emissions by up to 60% more than an investment in the FTSE100. For a £100,000 investment this would, apparently, be equivalent to over 15 thousand gallons of gasoline burned.
Despite being an advocate of ESG investments, I encourage people to question these statistics and be realistic. The reason for my caution is that if someone sells their existing shares in a company they feel doesn’t reflect their values, and transfers their investments to an ESG fund, someone else will inevitably buy those previous shares. So, if an investor sells their shares in an oil company on ethical grounds, what does this actually achieve?
In the short term there’s been no real impact. It’s just the ownership of the shares that’s changed.
I would argue we should still consider ESG investments. Longer term we can send a message to companies about how important these issues are, and drive change.
We clearly need realistic expectations. However, I firmly believe that it’s important to take steps in the right direction with our investments too.
Our approach to ESG investing
We have created a range of sustainable portfolios. Firstly because we believe it’s the right thing to do, but also because of the demand from dentists.
Our investment philosophy is to provide a low-cost, broadly diversified portfolio, focused on long-term investment returns. We have simply added additional sustainability criteria to select the most appropriate funds.
The fund managers we’ve selected can screen out companies that don’t meet their ESG standards. For example, weapons manufacturers or those which profit from the gambling and tobacco industry. The fund managers assess companies on a number of factors. This includes the diversity of their workforce, their transparency and their carbon footprint.
We have deliberately chosen an ‘active ownership’ approach. We can therefore use the rights as an owner in a company through engagement and voting to try to make a difference to how that company operates.
When we ask clients if they want their children and grandchildren to live in a better world which has tackled climate change, helped to abolish child labour and produced a more equitable society, the answer is almost always ‘yes’.
Using their investment portfolios to make a small, yet meaningful difference, is certainly a choice worth considering.
For more information, visit www.wealthwide.co.uk.