From “more blah, blah, blah” to “keeping 1.5 degrees on life support”, there has been a mixture of views about the achievements of COP26.  

    Although the initial outcome may have disappointed, there are signs that the conference has had an impact beyond the banks of the River Clyde.  

    A recent IPSOS-Mori poll revealed that climate change and environmental issues were the leading concern for the British public in November, beating worries about Covid-19, Brexit and the NHS. 40% of voters named it as a significant worry.

    Head, heart and hands-on

    Advisers tell me that clients are expressing interest in greener investments post COP.  Conference activity has made it clearer that:

    1. Climate change is today’s problem, not tomorrow’s.
    2. Everyone has a question to ask – what can they do to be part of the solution?

    The FCA are actively working on a new fund labelling system to make it easier to identify and compare various types of environmentally friendly investment (the green taxonomy). Until this system is in place, you could consider presenting the options to clients in the following way:

     

    THE HEAD APPROACH 

    A good case can be made that these strategies manage risk and/or offer growth potential. 

    ESG integration – considering whether companies face risks or opportunities as a result of climate change and the net zero transition. Building this into buy/sell and weightings decisions. 

    Sustainable/ Thematic investing – positively selecting companies whose goods and services are aligned with a low carbon world, such as renewable energy and clean transport. 

        

    THE HEART APPROACH 

    Stronger principles, passion, ambition. 

    Ethical investment specifically excluding types of company that don’t sit well with the client, perhaps polluters or fossil fuel companies. 

    Impact investment focusing on companies that offer a measurable positive environmental or social impact. 

        

    THE HANDS-ON APPROACH 

    For those wanting to drive change.

    Active ownership or engagement the investment manager uses shareholder status to influence a company’s decisions, perhaps seeking a faster journey to net zero.

    These approaches are not mutually exclusive, and many portfolios will incorporate a blend of them. 

    Categorising in this way does not suggest that ESG investors are heartless or that ethical and impact investors have no sense! It simply aims to highlight that the different approaches appeal to people in various ways. 

    By making your client aware of the choices and providing opportunity to express interest or indifference, you are ticking important compliance boxes.  

    Getting your head around ESG

    It may be helpful to go back to basics. If necessary, confirm that your client owns shares and debt in (mainly) large companies, each of which primarily exists to make a profit. 

    How the business goes about this profit making can have a negative impact on the environment. Some companies seek to limit harm and others generate benefits and solutions. 

    Explain that social issues (workers, customers and community) and governance (quality of management) are assessed, as well as environmental matters. Some companies may score highly on one element of the E, S and G and do less well in another area. Some examples drive the point home – Tesla perhaps!  

    Be clear that ESG integration was never intended to solve the climate crisis. ESG data provider Refinitiv gave the highest ESG score to the following four FTSE100 companies in March 2021:

    1. AstraZeneca
    2. GlaxoSmithKline
    3. British American Tobacco  
    4. Glencore

    Not all ESG funds will hold these famous four, but it’s an indication that an ESG bundle might contain a few surprises. Integrating ESG into stock selection makes good business sense and is a good option for clients without strong convictions about aligning their finances with their personal values.  

    Positive thinking

    Turning to sustainable and thematic investing, this is easy to talk about in relation to global mega trends and the solutions we need to build a brighter future. Positively selecting companies in this space could be portrayed as a win-win situation – with both clear drivers for growth and clear benefits to the environment and society. Head and heart combined. 

    The COP26 theme days covered several the sectors that these funds favour, and the $130 trillion that big financial institutions offered for investment in a low carbon economy makes this investment approach seem less avant-garde. Being a net-zero investor is becoming part of a pretty big club!

    It’s not what you hold, it’s why you hold it?

    If clients are averse to ‘dirty oil’ stocks, you should explain the divestment (sell the company) versus engagement (hold and influence the company) argument. You don’t have to know which is right or wrong, but cover both sides of the coin and let them express their views. 

    Managing expectations is also important. Not everyone will manage 100% alignment with their green conscience. Investing in large companies may feel remote from the community or environmental impact sought. 

    Here, we need to explain that these investments provide the long-term growth/income potential, risk management and liquidity that is crucial to their financial planning. If there is capacity to sacrifice returns or raise the risk bar with some of their capital however, this introduces a different type of investment vehicle and a further conversation. 

    Caring about the climate needs to be inclusive and all approaches play a role in keeping 1.5 alive.  

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