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The climate summit in Glasgow (COP 26) has drawn a lot of attention, with some lauding the pledges coming from attending nations whilst others – such as Greta Thunberg – arguing that it has been a failure. Undeniably, however, the event has increased attention in “environmental” investing (or ESG), which has gained growing popularity over the last 20 years. In this article, our team at Elmfield Financial Planning in Padiham, Burnley, Lancashire examines how COP26 and other environmental commitments might affect your financial plan, and how you could invest in a more “ESG-friendly” way – if you so choose. We hope you find this content useful. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 01282 772938
Financial planning: COP 26 and the direction of travel
There is growing scientific and international consensus that human beings are contributing to global warming, and action is needed to limit the damage this would cause to the natural world. UK politicians have largely accepted this (in their speeches, at least) and a string of policies has emerged in recent years to address the problem. Buy-to-Let landlords, for instance, face huge potential costs if the Government pushes through with plans to raise Energy Performance Certificate requirements by 2025. Gas boilers may be banned by 2035, which could mean that heat pumps will need to be installed, instead.
The Government has also announced that the sale of new diesel and petrol cars will be banned by 2030, in an attempt to hit its “net zero” target. In 2021, Chancellor Rishi Sunak also stated that the UK would soon release its first “green bonds” for investors to buy, and in October the Government announced plans to make the UK the “world’s first net zero financial centre” by requiring UK-listed companies to publish net zero transition plans. 450 companies from around the world – covering $130 trillion of financial assets – have signed up via the Glasgow Financial Alliance for Net Zero (GFANZ). Taken together, pledges like these suggest that households may soon need to adapt their monthly budgets – and investment portfolios – accordingly.
A carbon crash?
Some analysts have voiced concern that COP 26 and other green initiatives could contribute to stock market turmoil – potentially eroding the value of investors’ portfolios, in the short term. As UK-listed firms become required to show how they reduce their carbon footprint, companies like miners and oil giants (which make up a large portion of the British stock market) may find their valuations depressed in the years ahead – leading to poor returns. Whilst British shares still hold a lot of potential for investors, this provides another reason to ensure that your portfolio is not concentrated at home – but globally diversified. There is also a strong case to start considering how your portfolio can start incorporating more “ESG-friendly” elements (covered below).
ESG investing
Investing to help the environment, society or governance (ESG) has moved steadily from the fringe to the mainstream over the last 20 years. By 2025, one study suggests that as much as 33% of global assets under managements (AUM) could be classed as “ESG” – i.e. $53tn. ESG funds also doubled their net money from the previous year, in 2020, to $51.1bn. The range of choice for investors is also growing. Whilst 20 years ago it was difficult to find ESG funds to put your money into, today the options number in the 100s. This could grow even further under US President Joe Biden, who has voiced support for making it easier for employers to offer workers “sustainable funds” via their workplace pensions.
There are different ways to approach ESG investing, which may/may not be suitable depending on your financial situation, goals and investment horizon. One option, of course, is to adopt the most “radical” strategy of screening for exclusivity. Here, the investor simply excludes any firms, sectors or countries which are deemed harmful for the environment (e.g. oil and mining). This is likely to produce a portfolio most aligned to the investor’s values, yet can also lead to tracking errors and limited performance. Another option, therefore, could be positive screening – which lets the investor commit capital to companies which are deemed to be “outperforming” peers in regard to ESG measures. For instance, if an oil company can demonstrate that it is leading the way in its industry to reduce carbon emissions and promote diversity, then this could be a good investment opportunity.
Other options include ESG integration – whereby ESG funds and shares are gradually brought into the investor’s portfolio – and proactive ownership, whereby you use your influence as a major company shareholder to promote an ESG agenda to the board. The former option can be a good option for those looking to take a more balanced approach to ESG investing, whilst the latter requires a significant stake in a business to work.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
