Whether it’s the Extinction Rebellion protests or Greta Thunberg’s speech to the UN, there has been a renewed focus on climate change in recent months and what individuals can do about it.
This has led to high profile calls for governments and institutions to divest funds away from ‘harmful’ industries and sectors such as oil and gas, mining and airlines, which are some of the biggest producers of carbon and other damaging greenhouse gases.
But this doesn’t just apply to large organisations with millions of pounds at their disposal. Ordinary investors also have opportunities to ‘green’ their ISAs and pensions by reducing their exposure to carbon-heavy industries. You can choose instead to invest in companies that support and promote more sustainable strategies
Many people are changing their everyday habits as they become more environmentally aware, through reducing plastic, recycling or cutting down unnecessary car trips. If you want your investments to follow suit then there are several options — from ethical funds to ESG (environmental, social and governance)-based investments.
As the name suggests, these funds take a more principled stance on investment choice. Many screen out companies, or whole sectors, that do not meet their guidelines, which will vary from fund to fund. For example, some of the oldest ethical funds stem from the Quaker movement, so may not invest in companies that sell or manufacture alcohol, weapons, tobacco or pornography.
Today many ‘ethical’ funds have a more environmental remit. However, while some will automatically exclude whole sectors such as oil and gas, others take a ‘best of breed’ approach, investing in those companies with better track records on issues like pollution, water waste and recycling. Those who take this approach argue it encourages companies to improve environmental standards and engage with wider issues such as climate change.
Funds that adopt this approach take into account environmental, social and governance factors, alongside standard financial data, when deciding whether to buy or sell a stock. This extra information can help identify future risks.
For example, companies with poor environmental track records may face fines and tighter regulation in future, affecting their appeal as a long-term investment choice. This ESG analysis also tries to identify companies that are ahead of this curve and may profit in a world which is more environmentally aware, for example, electric car manufacturers.
Like any investment decisions, these judgments may not prove to be correct with hindsight.
Many funds combine these two approaches, excluding some sectors or companies, but using ESG screening as part of their investment process.
It is easy to think the relatively small amounts we save as individuals into ISAs and pensions won’t make much of a global difference. But it’s worth remembering that £28.2bn was contributed to personal pensions in 2017/18 and the UK pensions industry is worth over £2tn alone. While your retirement savings are managed on your behalf, it is your money, and you can choose where it is invested.
Please get in touch if you want to discuss your options.
The value of your investment can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance.
Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.