Climate change, population growth, water quality, and finding alternative energy sources have all become important topics in recent years. Investors are increasingly aware of the effect businesses can have on such issues and are demanding profits are generated without causing any harm.
In fact, two-thirds of investors would like their investments to support companies that contribute to making a more positive society and environment, according to a study by Triodos Bank UK.
Bevis Watts, the bank’s chief executive officer, insists there is no such thing as a neutral investment because they all have an impact: “UK investors are looking for opportunities that allow them to support pioneering and innovative companies making a positive difference in the climate emergency, while receiving good long-term returns,” he said. “They recognise the power of money to be a powerful tool for change.”
Shareholder concerns have led to so-called Environmental, Social and Governance factors (ESG) being used to evaluate the impact companies have on the world around them. This umbrella term includes everything from the level of a firm’s greenhouse gas emissions, to how it manages its supply chain and looks after employees.
Environmental factors will include pollution, climate change, waste management, energy efficiency and the use of natural resources. Social factors, meanwhile, cover human rights, relationships with stakeholders and employees, engagement with the community, and health and safety.
Finally, governance looks at codes of conduct, board structures, conflicts of interest, systems and procedures, and executive pay. Essentially, any factors that could impact the future viability of a business or sector, as well as any broader risks to the environment, will be considered as part of ESG.
Individual companies are ‘scored’ on each of these factors and the results are considered by fund managers when they’re putting together their portfolios. This process may highlight regulatory changes in the pipeline that could adversely affect a company’s key market – and, therefore, its ability to generate future profits.
For example, many cities and countries are putting in place zero-carbon policies that will require significant changes to take place on the ground. This may lead to older, established businesses disappearing and being replaced by new companies that are better equipped to turn these regulatory demands into reality.
While ESG factors are considered for most funds nowadays, billions of pounds have been invested into specialist funds that focus on issues such as climate change.
An estimated £23.5 billion is currently held in UK green and ethical funds, according to annual figures published by the EIRIS Foundation in 2019. This represents an increase of around £4 billion on the previous year and reflects a growth in demand for products that take environmental and social factors into account.
The good news for investors is that many of these specialist portfolios are capable of delivering bumper double-digit returns.
The Pictet Global Environmental Opportunities fund, for example, invests in areas such as clean energy and water, agriculture, and forestry. It normally includes around 50 to 60 of the most promising stocks from an investment universe of 400 environmental-related companies.
The Liontrust UK Ethical fund, meanwhile, identifies key structural growth trends that will shape the global economy of the future. Its investment process is based on the belief that particular types of company are likely to survive and thrive in a fast-changing world.
These include those that improve people’s quality of life through medical, technological or educational advances, as well as those helping to build more stable, resilient economies. Businesses that drive efficiencies in the way we use our increasingly scarce resources will also be looked on in a positive light.
The BNP Paribas Climate Impact fund, meanwhile, invests in companies around the world that contribute to the fight against global warming. World leaders have promised to limit the rise in world temperatures to no more than 1.5 degrees Celsius – and BNP Paribas has pledged to help the world achieve this ambition.
While these kinds of funds tend to have slightly higher fees than a typical investment fund, an investor conscious of their impact on the world may not have a problem with this. And while the past performance of these funds is not a crystal ball for the future, it is clear that those who tackle the greatest issues facing the globe are also best placed to enjoy the dividends of that change.