The recent announcement at the G20 summit in Japan that both China and the United States will ratify the Paris climate change (COP21) agreement is an indication that perhaps, finally, the world’s superpowers are taking this issue seriously.
Closer to home, many of us are also taking steps to reduce our personal impact on the environment. According to estimates from the International Energy Agency, the use of fuel-efficient vehicles, energy-saving appliances and lighting will save the equivalent of more than 700 million tonnes of oil by 2040 – approximately the combined annual oil consumption of Germany, France and the UK today.
Socially Responsible Investing – No Longer a niche
Increasing numbers of our clients are looking to ensure that their investments will also have a more positive effect on the environment. Socially responsible investment (SRI) funds are no longer a niche interest.
Avoiding investments in climate-unfriendly sectors of the economy is one obvious approach. The Church of England’s decision last year to divest entirely from companies with significant activities in the most polluting fossil fuel sectors is one high-profile example.
But this isn’t the only green investment strategy, or necessarily the most effective. The largest polluters have the greatest capacity for improvement and so a number of leading institutional investors prefer instead to engage with these firms’ management teams, as major shareholders, in order to effect positive change.
Many SRI funds adopt a policy of ‘positive screening’. This method does not fully exclude companies in any specific sectors of the economy, but instead concentrates investment in businesses of all types that are doing the most to reduce their carbon emissions.
Is There a Financial Rationale?
Aside from the ethical aspects of investing in environmentally-friendly areas, is there also a financial rationale for a greener approach to your investments? After all, just as the internet has radically changed the media industry, advancing battery and other technologies may have similarly transformational effects on the generation and supply of power.
More targeted ‘impact investing’ in renewable technologies aims to support – and equally benefit from – the shift away from fossil fuels, but investors may need to be patient before they reap financial rewards and the risks of this very focussed approach are not insignificant.
Another practical issue is the availability of a suitably diverse range of SRI investments. Although there is a growing range of investment funds, there are still some notable gaps in more specialist areas, such as emerging markets. This inevitably makes any environmental investment portfolio less diverse than one with an ‘open’ mandate, which in turn may entail some compromises in terms of both the risk of losses and the rate of return over time.
A further dilemma for many investors is that a more environmentally aware approach to investing is only one of a number of factors that contribute to a more socially responsible wealth management policy. A number of green funds have no specific policy on other areas of interest to many investors with a social conscience. These might include companies involved in weapons, gambling, tobacco and so on. Other factors such as responsible employment practices and sensitivity towards the communities in which a business operates are also often important considerations.
It’s Not Always An Easy Decision
In certain areas, there’s not even a consensus on what the right socially responsible investment policy should be. Take genetically engineered crops, for example. Whereas many funds eschew this area entirely, others take a view that the prospect of reducing hunger in poorer regions of the world, together with the opportunity to reduce the use of chemical pesticides, outweighs the perceived risks.
Overall, however, it’s my firm belief that it should be perfectly possible for investors to do well, financially, at the same time as having a positive social impact.