How the Climate Crisis Is Shaping the Future of Investing

How can investors engage with climate and social issues dramatically affecting the finance sector?

Springwise recently attended edie’s virtual conference, Sustainable investment: Shaping the future of finance, as part of its Sustainability Leaders Forum 2021. The panel comprised a diverse range of green finance experts who offered valuable insights into the rapidly changing landscape of investment portfolios and the growing momentum of the net-zero transition. 

Emerging from this debate was the collective belief that climate’s role in the future of finance, whatever its shape or form, will impact each and every one of us. From students opening their first bank accounts to the CEO of the London Stock Exchange, we all have a responsibility to engage with climate and social issues dramatically affecting this sector. Here’s how:

1. Change is upon us, whether you like it or not.

The conference kicked off with a rousing speech from BNP Paribas Asset Management’s chief sustainability strategist, Mark Lewis, who declared that “there’s never been a more exciting time to be in sustainability and that should give us hope that we can accelerate and further the cause of net-zero”. Indeed, the finance sector is undergoing a radical transformation with the issuance of Environmental, Social, and Governance (ESG) bonds increasing by 272 per cent year-on-year and the global demand for fossil fuels set to decline by 9 per cent by 2020.

This is colossal when we consider that investors, like bees to honey, have historically gravitated towards fossil fuels which have typically produced higher returns than those of other industries. However, the fact is that fossil fuels are a finite resource and thus are inherently inflationary, while the geology of renewable energy is intrinsically deflationary.

As Lewis succinctly puts it, one of the greatest advantages of the low-carbon markets is that “you don’t have to dig for wind”. The entire cost of renewable energy is in the infrastructure, so the more we invest in clean technology, the less it will cost us and, more importantly, the less it will cost the planet. The London-based think tank, Carbon Tracker, echoes this sentiment, warning oil and gas producers against reverting to “business as usual” as they will be risking in excess of €8.3 trillion in potential profits. 

“We’re seeing policymakers set net-zero targets,” Lewis continues, “which will force companies to align one way or another, whether they like it or not. Excluding companies from portfolios becomes less necessary if policymakers are putting in place net-zero frameworks. Then it is a decision for the company of whether they want to align with that and if they don’t, they’re going to go out of business.”

There is no doubt that the global economy has suffered a devastating blow as a result of the coronavirus pandemic, with the UN recently projecting a decline of 5 to 15 per cent in foreign direct investment flows. However, as we emerge from a third national lockdown, it is becoming clear that a green recovery is rapidly underway and that companies that do not align with a low-carbon trajectory will suffer financially as a result. 

That said, we must resist the urge to become complacent. David Harris, the group head of sustainable business for London Stock Exchange Group, rightly pointed out the while the rate of change in financial markets and investments is incredible, there is still a “real lack of understanding”  as to how the investment landscape is changing. “The companies don’t really have an idea of how their sustainability data is being collected and fed into different methodologies and how it is leading to investment allocation shifts. It is really important that we start to engage, and there is a need for the industry to better engage with corporates to help them understand how priorities are shifting and better engagement with investors.”

2. Harness the power of pensions

Traditionally, the pensions sector has been slow on the uptake when it comes to sustainability. However, the last two years have witnessed an unprecedented rate of change, with ESG and sustainability investments taking the pensions industry by storm. According to Maria Nazarova-Doyle, head of pension investments at Scottish Widows, this is in part due to fast developing regulations being implemented within this sector, and partly as a result of institutional investors beginning to see climate change as both an investment risk and opportunity.

There has also been a sharp rise in interest from individual pension savers who are increasingly concerned about the climate crisis and subsequently want greater transparency about how their money is being handled, and as to whether it is being invested responsibly. 

Scottish Widows certainly seems to be jumping on the sustainability bandwagon, having pledged, in 2020, to divest at least £440m from companies that have failed to meet its ESG standards, in what it purports to be the most extensive exclusions process in the sector. According to the pensions provider, it will only continue investing in companies with historically poor performance on ESG if it believes it can “influence positive change to their business models”. Nazarova-Doyle drove the point home when she implored companies at the conference to “help us to keep you in our portfolio”. 

While daily initiatives such as recycling, carpools and short showers are environmentally valuable habits to adopt, Nazarova-Doyle makes the point that “all of these everyday activities we can do to have less impact on the environment are not as valuable as moving our money and pensions into sustainable funds. The difference is 27 times greater in terms of positive impact. It’s important that everybody has this in mind when making everyday changes.” 

When we consider this startling statistic alongside the fact that the UK alone constitutes over £2.5 trillion in investment savings, there is every opportunity for pension funds to play an integral role in making 2021 a superb year for climate action. 

3. Put your money where your mouth is…but do it wisely

Knowing where and how to invest your money can be a daunting process, especially if you don’t know how to cut through the spin. Edward Vaughan Dixon, head of ESG at Aviva Investors Real Assets helped elucidate the facts by providing some fantastic insights about how best to invest your money while ensuring that you are not just being misled by some grand greenwashing marketing scheme. Whether you are newly graduated embarking upon your earning career or a seasoned pro, these pearls of wisdom are worth sharing.

1. For individual pension holders, the simplest way of ensuring that you are investing responsibly is by way of an index fund (an investment that tracks a market index, typically made up of a collection of diversified and varied stocks or bonds) with an ESG overlay. According to these criteria, you can measure the sustainability and societal impact of your investment. There are also credible third parties that assess investment funds and products to ensure sustainability. These include companies like 3D Investing which conducts independent research and publishes its findings on the company website, or alternatively The Big Exchange, which gives you the option of a pre-selected bundle of funds with a dedicated impact and details on the investment itself. 

2. Make your voice heard. If you work in a company with a pension scheme and are unsure where and how your pension is being invested, track down the colleague who is responsible for handling the pensions and speak to them! Tell them what you hope and expect to see. Generally speaking, companies will provide a range of funds from which you can choose where to direct your money. By opening up a dialogue, you have the power to make influential decisions about where to move your money and how to align your own values with those of your employer.

3. Greenwashing is a problem and at present, there is not a great deal to prevent it. However, within the finance sector, important steps are being put in place to tackle this issue. The new Sustainable Finance Disclosure Regulation (SFDR) is an EU-led initiative and its sole purpose is to prevent greenwashing by providing greater transparency on sustainability within the financial market, in a regulated and standardised way. This regulation will likely be adopted by the UK in the coming months and aims to facilitate greater comparability.

Our Better Business series aims to provide actionable takeaways for entrepreneurs looking to bring more purpose to their work and create positive change within and beyond their sectors.