understand the issues: Money
Arguably the quickest way to accelerate the momentum on sustainability globally is to change the flow of money – away from polluters and unethical behaviour and towards innovative businesses embedding ethics and sustainability in every process and department.
This is just as applicable to individuals and companies choosing their pension fund as to banks changing their investment and lending policies.
Given the United Nations has estimated that $2500bn will be needed annually to reach the 17 sustainable development goals by 2030, the need to transform private money markets is urgent. There has been real progress – many central banks and pension funds have now accepted that climate risks are also financial risks and are demanding greater clarity from companies on declaring these. Investors are also beginning to realise the opportunities of investing in companies which are able to solve some of the greatest problems facing the planet.
Many large banks, including HSBC and Barclays, have enormous investments in some of the dirtiest fossil fuels. The Banking on Climate Change 2019 report found that 33 of the world’s most powerful financial institutions invested a total of $1.9 trillion in the fossil fuel sector between 2016 and 2019. In contrast, global banks have invested $130 billion in green projects, less than 7% of what was invested in oil, gas and coal.
Mark Carney, outgoing head of the Bank of England, has said if the policies of all the companies that have pension fund investment were added up they are consistent with global warming of 3.7-3.8C – well above the 1.5C target scientists have said is needed to avert irreversible climate change.
End investments in fossil fuels
Investment banks and pension funds should be viewing fossil fuels as high risk rather than the low risk investments they have always been considered. If all the countries in the world met their stated carbon targets then assets such as coal mines and oil wells will become ‘stranded’ assets (assets that rapidly decrease in value and may need to be sold at a loss). Investors are now beginning to demand the disclosure of investments in fossil fuels from banks and asset managers and increasing shareholder action is forcing some companies to reassess their strategies.
Investment bank Goldman Sachs recently ruled out future finance for oil drilling or exploration in the Arctic and said it would not invest in new thermal coal mines anywhere in the world or any mountaintop removal mining. It has changed its strategy to become the leading financier in the US for clean energy companies and one of the largest investors in alternative energy. It’s financial performance over the next two years will be critical in whether others follow suit.
Investors have numerous ways to invest in renewable energy. For private investors after stocks with the potential for higher returns with more risk, a portfolio of companies that build or install renewable energy components or make renewable fuels could be the solution. A more secure, slower growth option would be to focus on companies that operate renewable energy producing assets (i.e. wind farms or solar panels). Such companies have a more reliable cash flow, making investment steadier. However, financial advice should always be sought when compiling an investment strategy.
If your business has a finance department, send them a copy of the top 200 coal, oil and gas companies and ask them to calculate the proportion of your holdings represented on the list. If you don’t, it might be worth hiring a specialist financial adviser to do this. A common figure to expect would be around 10%. If you can pull out of these investments individually, do so as soon as possible. If not, move your holdings to a green investment fund or create a unique product that avoids fossil fuel companies. Due to the ambiguity around what constitutes ecological in the finance world, it’s worth researching exactly where your money will be invested.
companies without clear sustainability strategies
Climate change presents a clear risk to the long term economic and financial stability of large, global companies and governments alike. Whether it be insurers grappling with more claims caused by extreme weather conditions to office buildings being shut down during regular heatwaves. These incidents have a direct impact on return on investment. However, large scale investment decision making has traditionally been based on historic trends and the sector has been slow to judge the scale of future opportunities and risks associated with climate change. However, this is one area that is starting to see more wholesale shifts in thinking. A Harvard Business Review study with 70 senior executives at 43 institutional investing firms found ESG (meeting environmental, social and corporate governance investment criteria) was top of mind for all these executives. Evidence is also now coming through that those companies that prioritised ESG in their strategies and processes in the early 1990s outperformed a carefully matched control group over the next 18 years. These findings have been reinforced by others international studies.
FINANCIAL REPORTING TEMPLATES
A key problem for investors is trying to assess the risk facing any company by climate change and therefore how secure their investment is. Government action to incorporate an agreed methodology into all company financial reporting is necessary to ensure investors are not swayed by ‘greenwashing’ claims and therefore underestimate the risks facing certain companies.
Taskforce on Climate Related Financial Disclosures
The TCFD is an industry led collaboration to develop voluntary, consistent climate-related financial risk disclosure templates that companies can use to provide information to investors, lenders, insurers, and other stakeholders. It tries to improve the quality of data to enhance how climate-related risks are assessed, priced and managed and also helps companies measure and evaluate their own risks and those of suppliers and competitors. It now has 1,000 supporters globally that represent a market capitalization of nearly $12 trillion.
For most individuals your investment portfolio is your pension. Pensions tend to be invested conservatively and traditionally fossil fuels have made up a large part of portfolios based on historic performance and returns. Find out where your pension is currently invested and consider switching to a more ambitious green pension. While this might be higher risk, if the companies invested in have been researched carefully this could actually increase the value of your pension in the long-run.
Workplace pensions are much harder to get control over as it is the employer who decides on the pension provider, not the employee. Most employer-based schemes will allow you to switch to an ‘ethical’ fund which avoids tobacco, arms and gambling stocks but only a tiny number also screen out oil, gas and coal companies. Your only option is to try and lobby your employer to switch to more ethical funds. Share Action have some resources to help with this.
Which bank you use is also important as banks have investment arms that could be helping finance companies and technologies that could make a real difference to climate change. Ethical banks such as Triodos are a good option. Triodos currently supports £2.25 bn of investments in renewable energy, its largest portfolio, and has never invested in nuclear.
Businesses should be investing into ethical pension firms and the number available are increasing. It is worth spending some time researching the options and Good with Money has an easy to understand guide to pensions and research on how ethical pension funds have performed. Make sure you ask questions about the funds’ screening of the stocks and shares it invests it to check it covers mining and nuclear as well as tobacco, arms and gambling stocks. Even better consider those that focus on companies actively contributing to solving environmental challenges.