According to NASA, 2020 was the warmest year we have experienced – despite the slowdown in economic activity due to Covid. Unfortunately, this builds on a worrying trend. The past seven years have been hotter than any previously recorded, and we are now heading for potentially devastating effects on the environment and society unless we can significantly slow the rate of global warming.
As well as increased flooding through rising sea levels, climate change could also increase the size of deserts and mean there are less habitable areas of the planet. Warmer seas and changing weather patterns may also increase the likelihood of destructive storms, floods, droughts and forest fires in many areas, as well as have a hugely detrimental effect on ecosystems.
Addressing this is the biggest societal challenge we face and will require huge efforts to restructure entire industries across the world. Investors might not realise it, but they are a key part of the process to solve the problem. In fact, the required changes cannot happen without them.
By allocating capital wisely, championing good practice and engaging with firms perceived as laggards, investors play a vital role. The more they do, the greater the impact. Ultimately, money talks and companies deemed unsustainable will find funding harder to come by. As well as being shunned by investors, those deemed to be at odds with the need to significantly reduce greenhouse emissions and protect the natural world could also face increasing regulatory scrutiny and fines.
Ways to invest
Like choosing individual products or suppliers, investing with environmental issues in mind is a way to make a difference. It doesn’t matter if you are a small investor, you are still empowered. Anyone can buy investments with strong ESG (environmental, social and governance) credentials, as well as good engagement and voting records on key issues.
While traditional ‘ethical’ funds simply excluded a range of companies – or whole industries – deemed unethical, many of today’s approaches are more holistic with increasing focus on more positive factors and an alignment of portfolios with targets, for instance in respect to climate change, recycling, or social improvement. Investors and funds adopting these will invest in companies they believe contribute meaningfully (and often measurably) to a more sustainable world. Others prioritise ‘engagement’, aiming to engender change across companies through dialogue and voting.
Avoiding risk and finding opportunities
An ESG approach is not just a ‘nice to have’, it’s a necessity to inform decision making both in terms of identifying risks a company faces as well as opportunities. It’s a way of investing that makes sense.
A management that focuses narrowly on the immediate interests of its shareholders and fails to address environmental and social concerns or pay attention to governance issues could do serious damage to its business. The company is more likely to suffer negative publicity, fall foul of regulation or face reputational damage and a consumer backlash. That’s why any diligent analysis incorporates ESG factors, and ultimately why backing companies with good or improving ESG credentials is sensible. Those behind the curve of accepted standards or caught out by change could struggle.
There are also significant investment opportunities in the seismic industrial and societal changes that will take place as we transition to a lower carbon and more sustainable economy. For instance, the share of electricity generated from renewables is expected to increase from 20% to almost 85% by 2050 in order to reduce carbon emissions, and increased efficiency is necessary to offset the growth in overall power consumption, which presents opportunities for businesses with intelligent or energy saving technology.
Below is a selection of investments we believe are well aligned with these trends, as well as offering responsible investors strong performance prospects.
They offer varying levels of risk and are provided for your information but are not a guide to how you should invest. Before investing in any fund please read the relevant Key Investor Information Document or Key Information Document, and Prospectus.
This specialist fund could be of interest to those who believe the transition to a greener and more inclusive world is inevitable. WHEB are a pioneer in ‘impact’ investing and aim to identify companies with long-term solutions to sustainability challenges, and in doing so harness excellent growth potential. The managers have nine investment themes that define the list of companies they can invest in: cleaner energy, environmental services, resource efficiency, water management, sustainable transport, education, well-being and health and safety.
WHEB is a ‘Certified B Corporation’, a for-profit company certified by the non-profit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency. Their website includes an impact calculator, which we consider to be a market-leading interaction tool. It shows the positive benefits associated with an investment in the strategy in terms of renewable energy generated, waste material recycled, carbon emissions avoided and five other environmental and social factors.
Investment in climate solutions has rapidly moved from the periphery into mainstream. To achieve climate goals, how we produce, distribute and consume energy will have to change significantly and will require huge investment – as much as $120 trillion has been estimated. From a purely economic perspective, renewable energy also makes sense – it is now the lowest cost form of generation in most markets.
It is clear companies have a key role to play in the battle against climate change and the evolution of a more sustainable energy system, and the investment required will likely create significant opportunities. Businesses delivering products or services that are part of the solution should be well placed to deliver growth to shareholders.
This fund is broader than many of its peers, investing across the entire sustainable energy industry from production to end-use. There has been a surge in interest in renewable energy stocks recently and consequently valuations have become more expensive, so we believe a selective, disciplined and active approach such as the one adopted by this fund is a sensible means of accessing an exciting theme. It is also worth noting that it excludes companies involved in fossil fuels and nuclear energy, as well as applying ESG screens, so it could be of interest for many responsible investors.
A more direct route to participating in the renewable energy story is through investing in dedicated renewable energy investment trusts. These own stakes in projects that generate renewable energy and receive revenue based on what they produce, which is used to pay dividends to investors. This part of the market has enjoyed huge growth in recent years, with income-hungry investors drawn to the high and steady yields on offer.
The Renewables Infrastructure Group is a well-diversified option in this niche area investing predominantly in onshore wind assets, with additional exposure to offshore wind, solar and (to a lesser extent) battery storage. As well as being well spread across technology and geography, it also has significant scale and could appeal to investors wanting exposure to a variety of renewable energy assets rather than a pure play on one element.
The key risks are fluctuations in the power price, which affects the portion of assets (about 25%) not receiving fixed prices for the energy provided, as well as operational risk - the danger that assets fail to generate the forecasted amount of electricity due to variable weather or technical issues, meaning less cash generated. Nonetheless, with a yield of a little over 5% presently, there is an attractive income on offer with the prospect for pay outs to keep pace with inflation. All yields are variable and not guaranteed.
There’s more about socially responsible investing on our dedicated webpage.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.