There is a growing consensus that the world needs to go greener. Joe Biden was sworn in as President of the United States with campaign pledges that included a commitment to take the US back into the Paris Climate Agreement.
Closer to home, many of us are recycling and watching our carbon footprint and even considering switching to electric cars.
But what about our investments? We might want to invest in those businesses that are green, but we can’t afford to ignore the best returns.
At Continuum we are looking at ways to how we can combine excellent returns with concern for the environment.
Ethical is now mainstream
Ethical investment is also referred to as socially responsible investment, environmental social and governance investing or ESG, or in line with current thinking, simply as Green. Friends Provident launched the UK’s first ethical fund in 1984.
Many studies now find that companies which adopt ethical principles may actually enhance financial performance. It may be that companies that embrace ESG are more responsive to changing demands of investors and society in general, and their ethical status reflects a better management approach which increases profitability.
Early funds simply avoided investments in companies associated with the ‘Sin Stocks’; tobacco, gambling, and the arms industry, and polluters, such as the petrochemical sector. They delivered mixed performance in their early days and were often seen as the preserve of idealists.
However, the world has moved on.
Corporate responsibility has become a major preoccupation, some of the old ‘sin stock’ industries are fading, and green initiatives are taking off. The UK Government is committed to going green with a ban on the sale of new petrol and diesel cars and vans from 2030 and supporting initiatives like a £2.7bn battery factory set to open at Blyth. Wind turbines are replacing factory chimneys across the country.
The Coronavirius crisis may have accelerated the trend, and the direction is clear. The UK economy is going green.
This new focus means that investing in green industries and in businesses which take social responsibility seriously has become a shrewd investment initiative. Despite the last year being difficult for world stock markets, ESG funds have more than held their own, with some comfortably outperforming the main indices.
There is evidence from the recruitment industry that the Millennial generation want to work for companies that share their values: as this generation become investors, they will want their investment funds to do the same.
Getting started with Green investment
Green investment and socially responsible and ecologically sound investments are grouped as ‘ethical’. Ethical investing can involve evaluating a company’s environmental, social and governance stance and as well as looking at a company’s track record on pollution from its factories and its green credentials, it could take into account how socially responsible it is in the communities where it operates.
There are many different interpretations of exactly what green, ethical and responsible investments actually are. These range from funds that screen out specific sectors such as tobacco, or major polluters such as oil, to funds that target positive sectors such as renewable energy technology or healthcare.
To examine every stock in a portfolio requires a great deal of research and an understanding of the business practices and commitment of companies. The need to ensure that companies are as green and socially responsible as they seem means that most ethical investment is done through specialist mutual funds or unit trusts. This allows expert managers to thoroughly vet the ethical credentials of companies before investing.
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The range of funds available mean that it may be possible to build a stable, well diversified portfolio around green investment and to enjoy returns that equal if not exceed a less idealistic and selective approach.
As a result, green investment is starting to take a bigger share of many portfolios. To discuss whether they might have a part to play in yours, you should seek expert advice.
Naturally, at Continuum we will be pleased to provide it.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.