The idea of investing in companies that contribute to society, help the environment and behave ethically has been around for decades.
Indeed, April this year saw record inflows of almost £1billion into responsible investment funds.
What looked potentially like a knee-jerk reaction to the outbreak of coronavirus, proved more sustained, however.
Investment Association figures show that three months out of the past four with data available saw investors continue to pour more than £900million a month into responsible investments.
April this year saw record inflows of almost £1billion into responsible investment
But it’s a broad bucket that makes up so-called ‘ethical’ and ‘responsible’ investing.
What does it mean exactly? What’s the difference between a fund claiming to be ethical and one claiming to be green?
How do we know whether what we would consider green is the same as what they consider green?
The answer at the moment is, we don’t.
The Financial Conduct Authority is currently consulting on how to apply financial disclosure on climate change exposure rules to public companies, but there are no plans so far to subject funds to the same rules.
A similar consultation is going on at the Department of Work and Pensions, but won’t conclude until next year at the earliest.
Even if these disclosures do eventually apply across the board – and it’s likely they will – there is still a real lack of standard definition around what is meant by green, ethical and sustainable.
To help you navigate what’s on offer, This is Money has done the digging to find some options if you want to make your investments and pension greener.
When is green actually grey?
There are lots of ethical funds on offer, and several styles available ranging from ESG – environmental, social and good corporate governance – to SRI – socially responsible investing.
These styles of investment are an increasingly popular choice among younger retail investors, with green bank Triodos finding recently that 78 per cent of those aged 18 to 24 have been prompted to consider where their money is being invested in response to the climate emergency.
Working out whether a fund – or company for that matter – adheres to your particular understanding of action against climate change is not straightforward though.
A recent study carried out by Redington surveyed 104 fund managers from across the globe, representing over $10trillion in combined assets under management.
It found that 76 per cent of managers said they ‘consider climate related risks and opportunities’ but just 60 per cent could provide an example of when these factors have actually influenced buying or selling decisions.
Furthermore, 39 per cent were unable to provide an example of a climate change-related engagement effort, while less than 62 per cent have an ESG engagement policy in place.
Yet more and more, funds and companies are jumping on the caring about climate change bandwagon. It’s a grey area.
‘Expect financial brands big and small to start trying to win your business with claims that appeal to your values, whether that’s through their commitment to net zero emissions or to investing in local communities,’ says Becky O’Connor, founder of ethical personal finance blog Good With Money.
‘As the industry catches on to this values-based demand, more marketing budget will go behind the sustainability status of banks and insurers. This makes it harder to work out if a company is genuinely walking the walk, or just really good at the talk.’
There is no shortcut to finding out beyond doing your own research, unfortunately, but O’Connor adds: ‘Positive impact is the gold standard for investment funds for your Isa.
‘There’s some margin of interpretation with almost all other styles of sustainable fund. You are more likely to find investments within these themes that are unpalatable to you, particularly if you don’t agree with fossil fuels.’
Can energy companies be green?
BP produces 2.6 million barrels of oil a day but says it’s turning to renewable sources
The inclusion of big energy companies in green funds is contentious.
One side of the debate argues that staying invested in energy companies affords shareholders the opportunity to pressure them into changing their approach from oil and gas extraction to focus on investment in renewable generation.
The other favours backing smaller, newer and entirely sustainable energy focused companies and divesting from stocks exposed to fossil fuels altogether.
BP is a good example of why it’s so tricky to define ‘green’ when it comes to stock picking.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says: ‘As difficult steps go, BP’s pirouette from traditional oil company to green energy giant ranks among the more challenging.
‘The company still produces 2.6 million barrels of oil a day, and making an abrupt heel-turn away from its core business towards renewables could see investors used to steady returns, leaving their seats and heading for the exit.
‘The chief executive Bernard Looney has been trying to perfect the complex move of reassuring them he is not abandoning oil and gas, while demonstrating the huge potential of renewable energy.’
Where to invest for green
There are a number of fund managers in the UK that specialise in ethical, impact or green investing.
£1million invested with EQ over the past year
EQ Investors offers a range of positive impact portfolios if you want to align your investments with your values, though these extend beyond the environmental.
You can invest from £500, or £100 per month, through both an investment Isa or self-invested personal pension, and their fund performance has consistently beaten traditional investing benchmarks.
Triodos Impact Investment Funds are another green option.
They invest in companies driving positive change, and recently received Environmental Finance’s award for best ESG reporting by an asset or fund manager.
Triodos also allows you to invest directly into pioneering organisations delivering positive change via the Triodos crowdfunding platform. It currently offers access through its Innovative Finance Isa.
A new local government-backed green bond is now an option for investors seeking something a bit less risky. Local authority green bonds use savers’ cash to invest in local renewable energy infrastructure, with returns of 1.2 per cent on offer to those prepared to fix for five years.
They are the brain child of Bruce Davis, co-founder of Abundance Investment, an established platform that lets investors directly back renewable energy projects. You can read more about them here.
Impax Environmental Markets is an investment trust launched in 2002 and the UK’s largest environmental-targeted one. It invests in companies trying to meet environmental challenges, whether that’s a company that makes reverse vending machines – taking in plastic and giving out money to encourage recycling – or those making farming less carbon intensive.
Invest AND improve the world
Can you make a profit and get your money to do some good?
Most personal investors are just ordinary people trying to grow their wealth over the long term – and like the population at large many of them care about the environment, people being treated well and business being done properly.
On a This is Money investing special podcast, Simon Lambert and Rob Morgan, of Charles Stanley Direct, explore how to invest for profit and improve the world we live in.
If you want more diversification, investment platform Interactive Investor has put together an ethical investments long list of more than 140 socially responsible and environmental funds, investment trusts and ETFs.
The platform has also launched the ACE 30, the UK’s first rated list of ethical funds and an ethical growth portfolio for investors who want a ready-made, balanced, multi asset portfolio run within a socially responsible investing framework.
Teodor Dilov, of Interactive Investor, said: ‘Investors who want to make their finances greener face a few challenges. The major one is that currently there is no formal and generally accepted industry standard for classifying the approaches to ethical investing adopted by asset managers.’
To help investors navigate their way through all the confusing jargon and technicalities, II came up with a traffic light system of three broad ethical investment styles.
‘Avoids’ focuses on funds that exclude companies, sectors or specific business practices such as tobacco companies or weapons manufacturers.
‘Considers’ includes only managers who actively consider ESG issues as part of their investment strategy. Most avoid controversial business practices and focus on sectors, themes and activities that the managers believe to be both financially sound and ethically, socially and/or environmentally beneficial.
‘Embraces’ is the greenest category, focusing on funds investing in companies where delivering positive social and/or environmental outcomes is integral to their existence.
Three ways to approach funds
UBS ETF – MSCI World Socially Responsible ETF
This exchange traded fund that has closely tracked the performance of its reference stock market index. This is the MSCI World Socially Responsible index, which is designed to measure global equity market performance considering only companies with high environmental, social and governance ratings relative to their sector peers.
BMO Responsible Global Equity Fund
The investment objective is to provide long-term capital growth. The fund is ethically screened and will invest only in companies whose products and operations are not considered to be harming the world, its people or its wildlife and are considered to be making a positive contribution to society.
Impax Environmental Markets Investment Trust
The objective is to enable investors to benefit from growth in the markets for cleaner or more efficient delivery of basic services of energy, water and waste.
Investments are made predominantly in quoted companies that provide, utilise, implement or advise upon technology-based systems, products or services in environmental markets.
There is particular focus on alternative energy and energy efficiency, water treatment and pollution control, and waste technology and resource management, which includes sustainable food, agriculture and forestry.
Commentary provided by Interactive Investor
II’s approach mirrors that which has broadly been in use across the ethical investment world for many years, with funds actively avoiding ‘sin’ stocks such as arms and tobacco companies.
But as Darius McDermott, managing director of FundCalibre, points out: ‘Different people have different morals or beliefs, so this was always tricky as funds didn’t necessarily fit 100 per cent with what people believed to be right.’
As for funds that focus specifically on the green agenda, McDermott highlights Montanaro Better World, which invests in medium and small sized businesses whose products or services are making a positive impact on the world.
To identify these companies, the team has six impact themes: environmental protection, the green economy, healthcare, innovative technologies, nutrition and well-being.
And, in order to stay true to these themes, the team will also exclude companies that are causing harm, such as those involved in tobacco, weapons and fossil fuels extraction.
Montanaro Better World invests in medium and small sized businesses whose products or services are making a positive impact on the world
Ninety One Global Environment is a relatively new fund that only invests in companies that are contributing to the decarbonisation of the world economy.
In order to reach global temperature goals of a maximum 2°C rise – in line with the Paris Agreement – it’s estimated that $2.4trillion (£1.9trillion) per year will need to be spent or reallocated.
This fund looks to tap into the companies that will benefit from that spending. As well as avoiding creating carbon emissions, companies will also have to have at least 50 per cent of their revenues from three sectors: renewable energy; efficient use of resources, and electrification.
McDermott also likes Pictet Global Environment, an environmental fund which invests in global equities that address nine environmental challenges including but not limited to: climate change, ocean acidification, biodiversity and freshwater use.
All companies within the portfolio must operate ‘within a safe operating space’ for each of these nine areas and actively contribute to solving environmental challenges.
British film director and founding Comic Relief campaigner Richard Curtis
While not all of us have funds to invest more generally, thanks to auto-enrolment, nearly everyone employed in the UK should have a workplace pension.
That allows them to benefit from tax-free investing and top up contributions from their employer – and try to invest in a greener future.
Companies tend to offer a limited range of funds, usually from one provider when it comes to pension schemes that are still actively growing.
More than 95 per cent of those with company pensions remain in their scheme’s default fund, many of which will contain investments in the big energy firms, tobacco and arms.
But it doesn’t have to be that way.
Earlier this year British film director and founding Comic Relief campaigner Richard Curtis has set up Make My Money Matter, a national campaign urging everyone to put their pension into investments that address climate change.
He is backed by Mark Carney, who warned in December last year while still in post as the Bank of England governor that pension funds and businesses risk seeing their assets become worthless unless they wake up to the climate crisis.
Since then, Nest, the largest pension scheme in the UK with nine million members, has announced it will actively divest from carbon heavy investments.
A month later, in September, the pension schemes bill was approved in the House of Lords, which proposes that pension schemes adopt the recommendations of the Task Force on Climate-Related Financial Disclosures to act against climate change.
Among the activities required would be calculating the carbon footprint of pension schemes and assessing how the value of the schemes’ assets or liabilities would be affected by different temperature rise scenarios, including the ambitions on limiting the global average temperature rise set out in the Paris Agreement.
The disclosures would be required to be made publicly available, referenced from the schemes’ Annual reports and Accounts, and pension savers informed of the availability of the information via their annual benefit statement.
Amanda Latham, of Barnett Waddingham, says: ‘This is a pivotal moment. Employers and trustees will have to understand and assess how their pension scheme is contributing to climate change, and how exposed it is to climate risks, and make decisions based on these considerations.
‘There’ll be more transparency for policyholders too, who previously might have been in the dark about how their contributions were impacting the planet.’
While we’re still waiting for the outcome of this, it will provide the means for savers to understand how green their pension really is and then act on that information.
Green pension providers and plans
With over 40,000 separate pension schemes in the UK, it’s impossible to delve into the detail here, but Make My Money Matter told This is Money that there are some relatively straightforward steps you can take to make sure your money is somewhere you’re comfortable with.
- Find out what your company pension is invested in and what ethical or green alternatives are available.
- If there is nothing that fits the bill, you could band together with colleagues to ask HR to review their employee pension scheme provider and include a green or ethical option.
- The financial benefit you get by accruing company pension contributions is probably not worth forgoing on ethical grounds alone. Keep an eye on what’s available so you can switch when greener options become accessible.
- If you have old company pensions that you no longer contribute to because you’ve moved jobs for example, you could consider consolidating them into a Sipp.
Find a financial adviser you can trust with This is Money’s help
Whether you are investing to build your wealth, want your pension to fund the retirement you hope for, or are considering passing on an inheritance, it helps to have someone on your side with an in-depth knowledge of tax, investing and how to make financial plans.
The value in good independent financial advice is that it will continue to pay off for many years to come.
Many of our readers recognise this, but one of the things they regularly ask us for is help in finding an adviser that they can trust.
This is Money has partnered with Flying Colours Life to help people find an adviser. It specialises in financial lifestyle planning and helping people to find high quality trustworthy advice.
Flying Colours Life’s approved advisers offer a free no-obligation consultation, so you can work out if they can help you. If you don’t feel that they are right for you, there is no pressure to see them again.
Before you do that, make sure you’ve read the small print as some older schemes offer some valuable benefits that you might lose if you transfer your funds to a new plan.
If you have a Sipp, it’s relatively easy to go green with your pension investments – most platforms will offer a range of ethical funds and, depending on where your pension is held, you may also be able to invest directly into companies you believe are making a difference to the world.
One provider, Pensionbee, is planning to launch the UK’s first specifically green option for its customers next month.
The Fossil Fuel Free Plan will completely exclude fossil fuel producers, tobacco companies, manufacturers of controversial weapons and persistent violators of the UN Global Compact.
Romi Savova, Pensionbee founder and chief executive, says: ‘Everyone should have control over where their money is invested.
‘Our new fossil fuel free fund will finally offer consumers a practical way to exclude the major oil producers.
‘We hope this is just the start of all savers using their investments to transform the world they live in – for the better of the planet, society and their retirement.’
An independent financial adviser can help you to review how to achieve the right balance between financial and ethical or environmental priorities.