Activists like Greta Thunberg have put climate change at the top of the agenda
As Greta Thunberg puts the environment at the top of the agenda and even bakery chain Greggs sees the financial benefits of a vegan sausage roll, the investment industry is responding to changing customer demand.
Imagine if we all used our Isa and pension savings to collectively send a financial message to businesses and governments. Because money talks.
Here’s how your Isa could be a more effective way to create change than joining a protest or waving a placard.
And even if you are a climate change sceptic, or the mention of diversity makes you scowl, it is hard to ignore changing consumer trends and the wall of money – and investment opportunity – that this brings.
ESG are three letters increasingly heard in investment circles.
This year, Environmental, Social and Governance concerns have moved into the mainstream for investors who are working out which companies to back.
The basic premise is that companies and institutions which do not destroy the environment, which treat their staff well, and which have strong governance in place, will do financially better in the long-term than those which are driven by short-term greed and amoral fat cat executives.
Making the connection between strong governance, having a sustainable business model and a company’s share price is not a great leap.
The Volkswagen emissions scandal, the Enron collapse and the BP oil spill are some better-known examples of how ESG mismanagement can drive down a company’s share price or even result in the collapse of household names.
As well as avoiding the disasters, backing businesses which actively set out to capitalise on money set aside by governments to respond to environmental concerns makes financial sense, whatever your personal views.
If we consider climate change, for example, in order to meet the goals set out in the 2015 Paris climate agreement, investors need to allocate an additional $1.5trillion (£1.1trillion) per year to renewable energy and other low carbon projects – and to do so very soon, within a decade or so.
This of course presents opportunities for businesses which can ride this well-funded wave.
Appetite for ESG investments is growing rapidly.
‘Even if you are a climate change sceptic, or the mention of diversity makes you scowl, it is hard to ignore changing consumer trends and the wall of money that this brings
Although only one in five investors knows what ESG stands for, once it was explained 76 per cent in a recent Boring Money survey said they would like their fund managers to actively consider these factors.
When we drill into the various ‘flavours’ of ESG investing, opinion differs notably by gender.
Some 22 per cent of men said that the best possible returns were their priority, followed by good governance and then funds which actively invested to help the environment and arrest climate change.
Women put good governance top (22 per cent), followed by environmental concerns (13 per cent) and then pure returns (13 per cent).
Environmental worries are also more likely to be cited among a younger age group. The over-55s are not so interested in this focus.
Some of the hesitation over ESG investing can be put down to assumptions that this involves some financial trade-off. But this is not true.
Many academic studies have debunked this myth and a quick search of best-selling ethical, sustainable and impact investment funds reinforces the fact that this style of investing need not go hand in hand with lower returns.
Rathbone Ethical Bond, Axa Global Factors Sustainable Equity, Liontrust Sustainable Future Global Growth and Royal London Sustainable Leaders are all examples of popular ESG friendly investment funds that have performed well and often better than mainstream alternatives.
What investment options are out there?
So what are the options? If you are interested in using your money to back ESG initiatives which matter to you, we have more choices than ever.
First, work out your priorities. If you want to avoid certain ‘sin’ sectors such as tobacco, arms and pornography, then look at what are labelled ‘ethical’ funds.
These are all about blacklisting and simply removing these ‘sin stocks’ from your investments.
If you prefer a more positive stance and want to back sustainable future-facing companies, you need a ‘sustainable’ fund.
The most extreme version of this is called an ‘impact’ fund – similar to sustainable funds but with a much higher burden of proof to demonstrate what positive impact the investments are having.
Second, once you have worked out your priorities, have a look at Isa providers that offer routes to ESG investing.
A good starting point for filtering the market is fund platform Interactive Investor.
It has put together a shortlist of 30 funds, all signposted and described to help investors match their preferences to investments.
And if it’s all a bit too much, it has blended an ethical growth portfolio that comprises a mixed bag of ten funds, chosen and assembled for you.
The charge for this portfolio is an annual 1.14 per cent as well as an Isa administration charge of £9.99 a month, and a £8 fee for buying or selling.
Another option is The Share Centre – just acquired by Interactive Investor – which has grouped investment funds into themes.
You can search for climate change, water and waste or sin stock exclusions and find investment funds which map to these themes.
The annual charges on the funds typically range from about 0.85 per cent to 1.1 per cent depending on what you pick. The Share Centre charges £156 a year for an Isa and a £7.50 fee for buying and selling.
Ready made portfolios
For many, the burden of choice is too much. If you are looking for a simple way to back ESG funds, online investment manager Nutmeg offers ‘socially responsible’ portfolios.
These are blends of investments which have been screened to ensure they both filter out ‘baddies’ and actively back more socially responsible firms.
The reporting is detailed for those who want it and it is easy compared to others and it is easy to compare the socially responsible ones to the traditional options. All-in charges for this Isa are 1.13 per cent a year.
Finally, Wealthify is another internet investment option for those seeking a ready-made ‘ethical’ portfolio.
DIY investment platform The Share Centre has grouped investment funds into themes. You can search for climate change, water and waste or sin stock exclusions
With total costs ranging from 1.08 per cent to 1.52 per cent, depending on your decisions about risk, this is a nicely crafted option which looks good and always tests well with less confident investors.
As ESG is gaining strength, investment managers realise that adding the word ‘sustainable’ or ‘green’ to a fund’s name can increase its marketing appeal.
Trying to prove what impact a ‘socially responsible’ or ‘sustainable’ fund has had is hard. Thirdparty research firms such as Morningstar can help offer an independent view with its sustainability ratings.
There’s a long way to go in judging the success of ESG investing.
But for those willing to make a start, there are more options than ever before to make your Isa work for you – and work for the greater good.
You can even have a carbon-free Isa!
By Rosie Murray-West
Supermodels may have a target of being size zero – now, increasingly a big ambition of corporate chiefs is to see their company become net zero.
This is a position where your carbon dioxide emissions and the amount of greenhouse gas you are taking out balance out to nothing.
With big businesses such as BP, Unilever and Nestle committing to being net zero by 2050, it is worth examining whether, as an investor, you can benefit from making similar commitments with your own Isa portfolio.
Oil company BP has committed to being net zero by 2050
Lisa Stanley, co-founder of sustainable money website Good With Money, says decarbonising your Isa portfolio is no longer a strategy for the few.
She says: ‘With growing evidence showing returns from investing sustainably are as good if not better than more carbon-heavy counterparts, there’s little reason not to go down this route.’
Those with conventional investment portfolios may struggle to work out how to decarbonise an Isa portfolio. As well as the difficulty of finding precise data on the carbon impact of individual businesses, investors face the problem of sorting the truly ‘green’ options from the merely cosmetic.
Jason Hollands of Tilney
Jason Hollands, a director of wealth manager Tilney, says some funds that claim to consider environmental, social and governance (ESG) factors in their choice of investments, conduct no more than ‘tick box exercises based on disclosures in glossy company reports’.
Others say there are investment funds with a genuinely sustainable focus. Hollands suggests Wheb Sustainability, saying: ‘Wheb Asset Management is a small boutique group focused on sustainable investing and so this fund isn’t just one of many funds run by a large business. It’s what they live and breathe.’
Darius McDermott, managing director of Chelsea Financial Services, recommends Investec Global Environmental – a fund ‘that specifically invests in companies that are helping to decarbonise the global economy’.
He also likes Janus Henderson UK Property. He says: ‘It has just committed to be carbon neutral by 2030. The managers and team are working with properties to reduce water waste, make lighting and heating more efficient and use more renewable energies.’
For those who prefer not to choose their own funds, Good With Money’s Stanley suggests using investment platforms that can help you put together an ESG-friendly portfolio. They include Interactive Investor, Nutmeg and The Share Centre (see above) as well as EQ Investors and Ethex.
Even after picking more sustainable funds, you may not have entirely decarbonised your investments. ‘We all have a carbon footprint, so it’s a big ask of any Isa to be completely carbon neutral,’ says Rebecca O’Keefe, head of investment at Interactive Investor.
‘Even watching telly has a carbon footprint – due to the power consumption of the equipment.’ Decarbonising is a balancing act, so try adding in some positive environmental investments to bring your score down.
Offsetting options for the brave include Innovative Finance Isas with a specific environmental focus. Stanley likes Thrive Renewables which operates energy projects across the UK, and Energise Africa which invests in solar energy projects. These focused Isas are risky though, as you are putting all of your money into one business.
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.