Why sustainable investment isn't just for "do-gooders"

The Financial Times journalist Alice Ross explains that where individuals put their money is as important as what they buy.

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Many of us are taking concrete steps to mitigate climate change – eating less meat, flying less (even in non-Covid times) or cycling our children to school. But for a variety of reasons – a fear of lower returns, a lack of time, ignorance or laziness – few of us take much notice of where our money is invested. It can seem, for many, to be one more part of a complex situation in which we have very little agency.

The journalist Alice Ross, who has spent 14 years reporting on finance for the Financial Times, says she too was feeling “quite stressed” by climate change before she began to write about the power of finance to effect change. However, once she started to investigate: “There were lots of positive developments to report,” she told me.

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Record numbers of people in the UK now want their investments to be sustainable. A report by the UK Department for International Development found that 68 per cent of UK savers want their investments to consider their impact on people and the planet alongside financial performance. In the US, investors ploughed $20.6 billion into sustainable investments funds in 2019, nearly four times as much as the previous year.

Ross says this change of tack is more than just a passing phase. “When I started writing about personal finance, the green element in investment was very niche, and not taken very seriously,” she says. “People working in this part of the industry were seen as do-gooders, who were not interested in maximising revenues. But ESG and green financing is becoming much more pervasive – and climate change is not going away.”

As Ross explains in her new book, Investing to Save the Planet, this movement is not simply altruistic. Investors are ditching funds invested in fossil fuels or other environmentally damaging products in favour of those supporting wind or solar power projects because it makes financial sense to do so.

Sustainable funds are often outperforming traditional funds: a report from the London Stock Exchange in 2019 showed a 41.1 per cent rise in the FTSE Environmental Opportunities All Share index over the last five years, versus a 33.4 per cent rise in the FTSE Global All Cap index. “It seems increasingly clear that in the long term it makes financial sense for investors to avoid fossil fuel companies,” says Ross.

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The book’s aims, Ross says, are similarly practical – “to demystify the financial industry” by untangling its “alphabet soup of terminology” – as well as environmental. She wants, she explains, “to inspire people [that] they can actually do something”.

One good example of the “alphabet soup” around socially responsible investment is its most popular acronym: ESG, which refers to standards in environmental impact, social impact, and governance. But these standards are subject to interpretation. “It can be confusing that BP, for example, is included in some ESG funds because although it is an oil and gas stock,” says Ross, “the company often has good governance”.

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Institutional investors – such as pension funds and insurance companies – are already aware that sustainable finance is becoming the standard rather than the exception. PwC says that by 2025, ESG funds will overtake conventional funds in Europe. In a survey of more than 300 investors, including pension funds and insurance companies, three-quarters of respondents told the consultancy they would stop buying conventional funds in favour of ESG products by 2022.

“The financial industry is opportunistic,” says Ross. “If financial companies can sell something by sticking a label on it, they will. It is their business to sell products. ESG is one of these labels and it is difficult to analyse exactly how green or clean investments are.”

At the same time, however, she warns that dismissing such investments is both a financial and environmental risk. “We could be cynical and say companies are just saying what people want to hear, but I am an optimist. Regulation is pushing for more sustainable investments, and I think companies are looking increasingly at doing more than simply maximising profit for shareholders.”

Philippa Nuttall Jones is editor-in-chief of Energy Monitor.

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