In a time where climate change is a hot topic, and more and more people are looking to take action and make a difference, can ethical investments really help? The short answer is yes. But the long answer is far more interesting, and it starts by looking at how your money is contributing to climate change now.
How does my money damage the environment?
Being ethical is hard work and requires a lot of due diligence, even things that you don’t expect could lead you to inadvertently damaging the environment. For example, a report released by the Rainforest Action Network in 2019 found that 33 global banks have provided $1.9 trillion to fossil fuel companies since the Paris climate accord was struck in 2015.1 What this means, is that there’s a potential that by keeping money in your current account, taking out a mortgage or securing a loan, you could be funding climate change.
This highlights how important it is to be selective if you’re concerned with being ethical. If you already consider things like where your food comes from and if it’s organic, or whether your clothes have been made ethically with everyone being paid a fair price, then doing research on your banks and investments is certainly worth doing.
There are hundreds, if not thousands, of companies out there who have positioned themselves around the climate crisis, from Ikea’s flat-pack furniture to Google’s servers2. Companies are shaping their values and adjusting their business to lower their emissions and help their customers and employees do the same.
Doing nothing is worse than doing something
Taking a long-term approach, which is good practice for investing, not investing ethically now could be detrimental to your long-term gains. According to a detailed forecasting report by Mercer, basing predictions on scenarios where global temperatures rise between 2C and 4C, coal investments are expected to have an absolute loss of value as early as 2041, while gas and oil are predicted to see a cumulative 95% loss by 2050.3 On the other side of things, renewables could increase by 6.2% additional returns a year by 2030.
Based on this information, and general market trends, it’s likely that we’ll see a gradual – if not a substantial shift – away from fossil fuels eventually. But taking advantage now could give your investments much greater potential, than if you wait for this to become a mainstream course of action.
What are ethical investments?
In a nutshell, ethical investments are when you select investments based on your personal and ethical values. The issue here is that not everyone’s ethical values are the same, and there are a lot of different branches like Socially Responsible Investing (SRI), Environmental, Social and Governance (ESG), impact investing and sustainable investing. Each of these has a slightly different definition of what ethical investing is. So, while you may care solely about climate change, a fund manager – the person responsible for a fund’s investment strategy - of an SRI fund may be focused on equality.
How are ethical investments managed?
This is a whole new kettle of fish – how are these ethical investment funds being managed? And who is doing it? Broadly speaking, there are two types of management style: active and passive. A passive fund essentially replicates the return of the financial market it’s tracking, but to be ethical, it filters companies out based on their ESG score. This filter can be set independently and typically removes what are thought of as ‘sin stocks’. That means tobacco, firearms, deforestation etc. are immediately excluded – great news, right? But companies who are actively engaged in good environmental practice and sustainability are also included. And, perhaps surprisingly for some, this can include large oil companies, like Shell, who have been included in the FTSE4Good index since it launched in 2001.
Then you have actively managed funds, where investment professionals – called fund managers – purchase investments with the aim of beating the market. But more than that, it’s about picking individual assets based on how they are expected to perform, and with actively managed ethical funds, it goes further than filtering out sin stocks and picking companies based on good ESG scores. Fund managers get involved and leverage their shareholder status to ensure the organisation remains committed to maintaining and improving standards.
How can ethical investments combat climate change?
By speaking with your money and investing ethically, you’re showing companies where your values lie. As this investment space increases in popularity, more and more businesses will be changing their models to suit public demand. While this won’t happen overnight, in the long run, it could help to get the ball rolling on corporations acting on climate change.
If you’re using actively managed ethical funds, then you are giving your money the best chance at avoiding investments that are deemed unethical. But it also goes one step further and helps organisations like start-ups, innovations, and climate-change activist companies to get the financing they need to deliver a positive impact on the environment and society. This approach allows you to consider climate change as an investment opportunity – not only to support those reducing their emissions but to find companies who will benefit from a low-carbon economy.
Passive funds place a large amount of emphasis on ESG scores, which largely focus on sustainability and the environment. But, even then, some of the companies you may have included in your mix may not strike you as ethical, and certainly not a company fighting climate change. This is because ESG scores are delivered by a non-bias third party based on a number of different factors, with an environmental approach only making up a part of this.
Do ethical investments have a good rate of return?
Fighting climate change is important, but so is making a profit. If you could invest ethically and make good returns, you would, right? It’s a common misconception that by focusing on the ethical aspect of investments you’re ignoring the potential for growth and performance, but that simply isn’t true.
This can be clearly shown in Wealthify’s 2019 performance, where our Ethical Plans performed just as well, and in some cases better, than our Original Plans. And it’s not just us either! Take a look at the past performance of the FTSE All-Share, which includes more than 600 UK companies, and its ethical version FTSE4Good. From January 2009 to October 2019 the FTSE All-Share returned 75.6%, while the FTSE4Good delivered 75.0%, which isn’t much at all – it’s essentially a £30 difference on an investment of £5,000.4
It’s your money. It’s your choice
At Wealthify, we fully believe in giving you control over how and what you’re invested in. That’s why we launched our Ethical Plans in 2018 and why we’ve made changes to what we invest in based on customer feedback – i.e. taking a stronger approach towards fighting climate change.
Our Ethical Plans are actively managed using best-in-class ethical fund providers, helping our customers invest in organisations who are committed to delivering a positive impact on the environment. What’s more, you can invest ethically and tax-efficiently with our Stocks and Shares ISAs and start by investing as little or as much as you want. Our experts do the rest, making sure that your investments reflect your values and are doing what they can to prevent climate change.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
Please remember that past performance is not a reliable indicator of your future results.
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
- Data from Bloomberg