“You can't eat money” and “climate emergency” read some of the signs wielded by climate change protestors last week, as they glued themselves to the London Stock Exchange.
As our planet heats up, so does the debate around global warming.
Regardless of whether you agree with the tactics used by the protestors or not, there is no denying that we are on the cusp of a global crisis. According to David Attenborough, we could face irreversible damage to the natural world and the collapse of our societies unless we take dramatic action in the next decade.
But where does the investment world tie into this issue? Vast swathes of the financial industry still profit from commodities like oil, and with much of the world dependent on fossil fuels to provide a large proportion of our global energy, it’s still big business.
Admittedly, much of the investment industry has been slow to change, particularly considering that scientists have been warning about global warming since the 1800s.
Money going into “ethical” funds only accounts for 1.5 per cent of all UK investments, according to Darius McDermott from FundCalibre.
But change is happening nonetheless, and many asset management houses now embed environmental, social and governance (ESG) factors into their core processes.
For those investors who would rather not super-glue their body-parts to buildings, there are other ways of making a stand – either by avoiding those funds that invest in environmentally-damaging companies, or by buying funds that purely focus on sustainability (many of which are developing technology to lower carbon emissions).
Research house Morningstar rates all UK investment funds on “carbon risk” – the lower the score, the more environmentally-friendly the funds tend to be, and vice versa.
Of the 10 funds with the lowest carbon score, nine are in the healthcare sector, meaning that they have low exposure to fossil fuels, and emit small amounts of carbon monoxide. “It isn’t surprising that healthcare funds score low on carbon emissions as they have a very light manufacturing footprint – the companies they invest in are largely asset-light and hi-tech in nature,” says McDermott.
Unsurprisingly, funds in the energy sector have the highest risk score, and therefore pose the biggest threat to the environment. The Artemis Global Energy fund, which invests primarily in oil and gas, came out the worst with a carbon risk score of 44.43 (a score of zero is negligible, while a score above 30 is high).
That’s not to say that you should avoid all funds in the energy sector.
In fact, funds that are focused on alternative energy – which actually inject cash into companies that produce renewable energy or infrastructure – can have a positive impact on the planet. With a score of 10.33, BlackRock’s BGF Sustainable Energy fund has the lowest carbon risk rating in the sector.
Some “sustainable” funds have a much broader focus, such as investing in firms that are designing components for zero-emission vehicles.
Of more than 300 UK funds with an ethical or sustainable investment focus, 21 were granted a top FE rating (meaning that their performance had scored highly in terms of stockpicking, consistency and risk control).
|Fund||Annual charge (OCF)||Three-year performance|
|Liontrust Sustainable Future Absolute Growth||0.93%||59.25%|
|Liontrust Sustainable Future Managed||0.92%||49.70%|
|Thesis Climate Assets||1.22%||35.88%|
|Liontrust Sustainable Future Defensive Managed||0.93%||31.41%|
|Royal London Sustainable Diversified Trust||0.77%||36.30%|
|Royal London Sustainable Managed Growth Trust||0.69%||23.85%|
|Schroder ISF European Equity Yield||1.06%||38.81%|
|Baillie Gifford Global Stewardship||0.53%||85.78%|
|Guinness Sustainable Energy||1.24%||25.33%|
|Stewart Investors Worldwide Sustainability||0.90%||48.99%|
With three of Liontrust’s funds ranked in the top four, the investment house is a clear winner for anyone looking for green investments.
All three Liontrust funds are co-managed by Peter Michaelis and Simon Clements, and the top fund – the Liontrust Sustainable Future Absolute Growth – returned an impressive 59 per cent over the past three years, proving that returns and sustainability are not mutually exclusive.
In the past, investors may have shunned these sustainable funds on the basis of giving up some performance for their values, but this is no longer the case.
“The shift from cost centre to profit centre has been a watershed moment for many chief executives, who now see a return to the bottom line from adopting a more efficient carbon footprint,” says Ketan Patel, fund manager at EdenTree, the first investment house to focus purely on ethical investing in the UK.
Patel, who co-manages the EdenTree Amity UK fund, says that the investment industry is a great position to shape the debate on carbon, by supporting companies that are stewards of the environment.
“The interest shown by new generations of investors, who are asking difficult questions on climate, will be a catalyst and we are seeing a surge in new products to meet this growing demand.”
If you want to have a positive impact, look for funds that publish the "carbon footprint" of their investments – EdenTree does this for all its funds.
Soon, however, we will get to a point when funds have to be sustainable as a requirement. As McDermott says: “There will be a tipping point where behaving ‘ethically’ becomes essential for a firm to keep clients, and therefore essential to fund houses.”
Ben Yearsley, director of Shore Financial Planning, agrees. “I don’t think I’ve been to a fund manager presentation in the last two years where ESG doesn’t get mentioned. And in five years’ time, it will be a standard part of every investment process.”
In the meantime, investors who care about our planet should select funds that invest in environmentally conscious companies – the more demand, the more likely investment houses will change their ways. And that might have more impact on our world than glueing yourself to a building ever will.