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Investors vote with their money ahead of Cop26

·5-min read

Anyone who still believes that climate change is anything but fundamental to our financial lives should probably look away now.

From commodities values to current account choices and everything in between, the build-up to Cop26 and Good Money Week has arrived with one clear message – that to pretend a strong environmental, social and governance position is somehow still just a nice thing to have is not just worryingly out of date, it is actively damaging.

And the nation’s investors know it.

These days more than 80 per cent of adults have a pension of some sort, either an automatically enrolled workplace scheme or a private arrangement. That’s more than 42 million people commanding an average of just under £43,000 each, according to comparison site Finder.

Collectively, that’s big money – £2.6 trillion worth of big money. And 90 per cent of this group want their money to be invested in companies with strong environmental, social and governance records, according to a new study by another comparison site, Nerdwallet.

Crucially, eight in 10 also said that they would take issue with their pension being invested in a fund or company that isn’t ethical, even if it is delivering a good return.

Meanwhile, providers like Hargreaves Lansdown report cash inflows into the responsible funds on its platform are up by 6,000 in the last five years.

“2020 was a record-breaking year for [cash] flows into sustainable, ethical, ESG and impact funds,” says Emma Wall, head of investment analysis at Hargreaves Lansdown.

“Strong relative and absolute performance helped push funds in front of previously sceptical investors’ eyes, while both the pandemic and associated lockdown brought environmental and social issues to the top of the news agenda.

“The naysayers are calling it a bubble, but many companies held in responsible investment funds – both active and passive – are the beneficiaries of long-term structural trends. Yes, the past 18 months has accelerated certain social and economic movements, but the new norm of e-commerce, low-carbon, flexi-working, reuse and repair households are here to stay – as is investors holding businesses accountable for their actions and impact.”

But the enormous gap between intention and reality looms large. Only 11 per cent of pension investors have specifically chosen ethical funds and 85 per cent don’t know where theirs is invested at all, the Nerdwallet study found.

A huge part of the gap is distrust.

While consumers are keenly interested in the potential power of their investments to drive positive change, many are cautious about a lack of clarity from banks and financial institutions about how their money is being used, ethical bank Triodos warns.

Seven in 10 investors want more knowledge and transparency about where their money is invested, up from 65 per cent in 2020, while eight in 10 think all banks and financial providers should be more transparent about where people’s money goes.

Most consumers now believe providers aren’t helpful when it comes to revealing what their money is invested in.

“[W]ith many different investments labelled as ‘ethical’ or ‘sustainable’, it can be difficult to sift through the greenwash to find funds that actually deliver the impact investors are hoping for,” says Gareth Griffiths, head of retail banking at Triodos Bank UK.

“Looking at independent websites and digging into which companies a fund invests in can really help you to understand how sustainable the product actually is and what aligns with your values.

“To overcome consumer scepticism fund managers also need to draw clear lines and boundaries on what is sustainable and what is not – for example on fossil fuels, arms or food and farming. In the absence of clear product labelling or guidelines, they must be transparent on their approach and align investment choices to the UN Sustainable Development Goals. Active engagement as part of fund management is also critical to actually show positive impact of the investment.”

Investors, as well as savers and consumers, can begin to avoid greenwashing by looking for businesses, funds and products with strong histories in ESG, a large proportion of ESG-oriented products and services, and high levels of investment in sustainable research and development.

Melissa Scaramellini, ESG fund research lead for investment manager Quilter Cheviot, likes the BMO Global Responsible Equity fund, Regnan Global Equity Impact Solutions fund and Legal and General Future World strategy.

“The [BMO] fund seeks to avoid companies that have damaging or unsustainable business practices, and instead favours companies that make a positive contribution to society and the environment. The team also encourages the take-up of best practice management of ESG issues through engagement and voting.

“BMO has a large, well-resourced Responsible Investment team who work alongside the Global Equity team as well as engaging on behalf of BMO’s Responsible Engagement Overlay service. We think there is a rigorous approach to ESG integration within the investment analysis and valuation, as well as to engagement with companies.”

She likes the Regnan fund for its investment in “mission-driven companies that have a positive impact on people and the planet”. The team look to identify emerging growth opportunities and take advantage of market inefficiencies in pricing in long-term system change.

“The portfolio is concentrated in 20 to 50 global companies that contribute a solution to one of the Sustainable Development Goals (SDGs). We like the considered approach taken to assessing both positive and negative impacts and the fund’s focus on social as well as environmental issues.”

Meanwhile, though some have criticised Legal and General Investment Management’s Future World strategy for including companies that other sustainable funds screen out, she points to the policy of naming and shaming companies it engages with to highlight both those that are taking action and those that are failing to do so. The laggards can be excluded from their Future World strategy and voted against on behalf of LGIM’s full assets under management.

“We take the view that this enables LGIM to engage with more companies to improve their ESG practices, with the potential to be excluded from the Future World strategy used as an extra incentive for those that do not want to change,” she adds, arguing that “you can’t engage with companies if you don’t own them.”

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