Nurturing the green shoots of sustainable investing

DURING the course of the last six months we’ve all been forced to change our behaviour in one way or another and there are aspects of life that have altered forever.

While everyone’s health remains a priority, the virus will have a lasting effect on the way we live our lives, consume goods and services and this will have a knock-on effect on financial markets going forward. Given that the vast majority of us rely on these financial markets for our investments and pensions, it is therefore important for us to understand where we should look for growth in the future.

Changing habits

Of course, the way we consume goods and services has been evolving for some time, whether it’s ordering your groceries online or your weekend takeaway via an app. However, as with most crisis situations, the rate of change has accelerated dramatically during the pandemic.

As a result, in terms of investing, this has led to strong performance in sectors such as technology and communications, driven by, amongst other things, online shopping and working or educating from home.

This has been in direct contradiction to some of the traditional investments such as energy and travel, which have struggled with changing demand for their services as we have filled up the car less and been unable to travel.

The sectors that have shone in the last six months generally have one thing in common: sustainability.

While it is likely that ratio of sustainable assets in all investment portfolios will increase, the easiest way to access these assets is still via an ethical or ‘ESG’ (environmental, social, governance) fund or portfolio.

What are ethical & ESG investments and how do they differ?

Ethical investing is based upon principles and morals.

An ethical investment will automatically filter out so called ‘sin stocks’ such as tobacco, weapons and gambling, so there is no chance of exposure to companies that operate in these areas, despite other positive areas of their operation and potential profitability.

ESG investing takes more of a pragmatic approach to ‘green’ investing and allows companies to demonstrate positive elements of their business to investors. Each of the three pillars (environmental, social and governance) provide a screening test by which potential investors can measure a company’s green credentials. For example, to pass the test on environmental, a company would have to demonstrate that its activities do not damage the natural environment.

For the social factor they might need to demonstrate a strong position on diversity and human rights and for governance that the company is run with good stewardship and that employees and executives are remunerated fairly.

So if an investor is happy with the way a company measures up to these tests it could be included in an investment portfolio.

Sustainable themes for the future

So as our habits change, it is likely that companies that offer sustainability are going to be a key part of the recovery from the global pandemic. Those investments that have been successful during the pandemic have not been successful just because the underlying companies are in demand now. Investors recognise that they are likely to be more in demand over the long-term as economies come out of lockdown. So the question for the investor is how best to harness this potential.

Clean energy

Awareness of pollution and climate change has been with us for many years, but has gained momentum through Greta Thunberg-inspired rallies and increased regularity, and media coverage of climate events, such as bush fires and tropical storms. All of this taps into our collective consciences and drives demand for products and services than do less damage to the environment. As a result, demand for clean energy such as solar power will grow and demand for fossil fuels will fall.

Stakeholder consideration

The pursuit of profit nature of big business has changed somewhat over recent years. Companies have realised that doing what is best for all stakeholders is the way to win the hearts and minds of customers, rather than providing a return for shareholders at the expense of everything else. Being a considerate organisation drives reputation, in turn improving the prospects for profit.

Avoiding ‘greenwashing’

‘Greenwashing’ refers to the practice of making misleading marketing claims that a product or service is sustainable. It is important that investors look for meaningful and measurable claims rather than general statistics in order to avoid this. Exclusions on investments allowed into a portfolio should be explicit and clear.

Time to check your investments

It is important that investing in sustainable investments doesn’t become a case of virtue signalling. As ever, the investor must remain focussed on finding good value, but be cognisant of the fact that the rate of change has accelerated in 2020 and returns will be found from different sources, driven by consumer behaviour.

• For more information on sustainable investing or to review your existing portfolio, please contact me at paul.mccormick@gowerfinancial.com or telephone 700155.