Your guide to sustainable investing

Your guide to sustainable investing

What is ethical investing?

Thirty years ago, if you had invested into one of the few ethical funds available, you might have been considered a pioneer - or an eccentric. In 1990, according to data analyst Morningstar, there were just 26 ‘ethical’ funds available to UK retail investors. By the end of 2020, there were 862, with nearly £400bn invested across them.

There are many reasons why ethical investing has proliferated: climate change and social responsibility are high on the agenda, while the internet has made it easier to see what listed companies are doing to the environment, to their employees and to their communities.

But what does ‘ethical’ mean?

Simply put, ‘it depends’. If you are environmentally conscious, then ethical investment might mean not only avoiding known polluters, such as fossil fuel or mining companies, but also investing in companies seeking solutions to waste management or alternative energy.

Maybe you have strong views against alcohol, drugs, gambling or pornography; in which case, you would want to avoid firms profiting from tobacco sales or gaming sites.

Perhaps reflecting the breadth of people’s values, there are many ways of describing ‘ethical’ investing, including: environmental; green/ deep green; impact; responsible; socially responsible investing; socially conscious; and sustainability.

These terms often sit alongside particular investment strategies.

For example, if you are a ‘deep green’ investor, you might invest in a fund that specifically excludes any stock that is detrimental to the planet. This means you might not be invested in any oil & gas, mining, aerospace, agriculture, timber or manufacturing business where there is a known and quantifiable negative effect on the environment.

Or, if you are an impact investor, you might be investing in a more specialist investment, such as a bond, that aims to target recidivism,

for example, while aiming to generate a target rate of interest over a set time frame - such as 4.5 per cent over seven years.

But the term that has come into prominence over the past decade is ESG: Environmental, Social and Governance.

ESG investing is a way of measuring various elements related to sustainability and the societal impact of a business. Managers of ESG funds aim to quantify how well a company is scoring on corporate governance or carbon emissions targets, for example, and then build a portfolio of businesses scoring highly on these metrics.

Fund managers and analysts will provide reports on why certain companies rank highly for ESG credentials, and why other companies have failed to make the grade.

That said, each fund is different: some funds are managed along strict ‘ESG’ lines, while other funds have an ESG overlay - which might mean the manager invests in an oil and gas major, for example, that is setting a good environmental standard in its sector. So it is worth choosing carefully when it comes to matching your values and your investments.

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What is ethical investing? (Continued) For most people, their biggest investment will be their pension, whether this is through the workplace or in a personal pension arrangement.

So for those wanting to invest in alignment with their principles, it is worth exploring how your pension can meet environmental, social and governance (ESG) metrics.

For personal pension investment, you have a wide choice of funds available, and it is important to get professional financial advice to help make the right choices.

If you have a workplace pension, you may be able to choose how your workplace pension money is being invested, as most corporatesponsored pension plans offer an ESG option to staff. Speak with your firm’s HR department to find out the scheme details.

But regardless of the type of pension you have, this is money you are saving for the long-term, which could mean an accumulation period of 50 years for a 20-yearold starting out on their pension journey today.

‘Sustainability’ must therefore be the key word for long-term investors. While companies may

talk about how their operations are sustainable in terms of their environmental and social impact, you also want to be sure they are sustainable businesses that will still be around in the years to come.

After all, your pension fund needs to last the course so you have enough to live on in retirement.

In recent years, many ‘old-school’ businesses that operated in traditionally non-ESG areas have realised their current operations are not sustainable over the longterm. For example, Marlboro maker Philip Morris International (PMI) has announced it will withdraw from tobacco sales in the UK by 2030. In 2010, this was one of the biggest listed tobacco companies, with a strong revenue stream and good dividend payouts. Now, it has to change to survive.

Another example is oil and gas.

Can drilling continue to be a ‘sustainable’ long-term investment, given the international will to cut our reliance on fossil fuels?

Industries which cannot, or refuse

to, change their business models to meet ESG criteria cannot be sustainable: we’ve already witnessed the power of social media to expose shoddy practices, drive customers away and hurt a company’s bottom line. Companies failing to change are unlikely to provide the sort of sustainable, long-term performance that pension investors need.

As the UK moves inexorably towards renewable energy sources, electric cars, lower-emission aircraft, home working and lower-impact living, then those companies whose businesses are all about bolstering these industries have emerged as sustainable, long-term investments.

These trends are especially important for pension investors to consider, as the funds in which you invest now need to be sustainable over the longer term - perhaps over 20, 30 or even 40 years.

Back in 1990, some people questioned ethical investing because of the lack of a track record: was it viable? The answer, now we have more than 30 years’ worth of data to analyse, is ‘yes’.

Investing in companies that seek to operate sustainable, future-proof business models can actually mean a sustainable performance for longterm pension funds.

What on earth is greenwashing?

Greenwashing is used to describe the way some companies claim ‘green’ credentials to improve their environmental, social and governance (ESG) scores, but are actually misleading investors.

For example, Company A issues a press release about cutting carbon emissions, improving its ‘environmental’ scores. Likewise, Company B creates a huge advertising campaign about how it has installed solar panels on all of its warehouses. Their new-found ‘green’ credentials encourage dozens of fund managers to select these companies for their ESG funds, and investors put their money into these environmental champions.

reforestation projects, building schools, creating clean water projects globally and investing in research and development into renewable energy?

In reality, Company A’s supply chain uses child labour, while Company B generates millions of tonnes of plastic waste each year, all of which ends up in landfill. In other words, these businesses have ‘greenwashed’ their operations and hoodwinked investors, who believe they are investing in ethical companies.

Falling for greenwashing can result in excluding solid businesses trying to do the right thing in terms of the environment, society and governance.

And, by failing to interrogate the ESG metrics for Company A and B properly, fund managers and investors risk the financial fallout from the public scandal when these poor practices become plastered all over social media.

Conversely, take Company C, which is an oil and gas major. Hardly a ‘green’ business, right? But what about the billions it has spent on

An ESG-badged fund that avoids Company C because the manager does not invest in any oil or gas, but invests in Company A or B because their environmental credentials look good, is therefore a victim of ‘greenwashing’.

It is not that the ESG metrics are wrong, but there is just so much information ‘out there’ that it is not

easy to do due diligence on every company. This is why it’s useful to use an investment fund, run by a specialist manager.

Even so, fund management groups often measure ESG differently.

Every analyst or data research organisation has varying metrics by which they judge a business’s ESG credentials, and some will tend to favour one element over the other - whether it’s the E, the S or the G. No wonder there are more than 860 ESG funds to choose from - a choice which in itself can be confusing.

To avoid investing in companies whose practices do not align with your values, the internet is a useful

starting place for doing research.

But don’t just read a company’s latest press release or market statement; also read news stories from around the world about its global operations. Examine what its long-term goals are for carbon targets or community projects.

Moreover, analysts and fund management groups often publish ESG reports on companies, which can be useful in your quest to invest.

That said, when it comes to real due diligence and knowing what’s best for you, a good adviser will do the work for you to prevent you from becoming a victim of greenwashing.

Why sustainability works for long-term investing We are used to seeing the word ‘sustainable’. We are familiar with terms such as sustainable forestry, sustainable agriculture or sustainable fishing. When a big-name company states it is seeking to operate more sustainability, we can make a decent guess as to what this might mean: lower use of virgin plastics, a shift to renewable energy sources and less waste, for example.

Those of us who want to invest in companies that will help us live more sustainable lives may think we are doing a ‘good thing’ for the world.

After all, we are putting our money where our morals are, aren’t we?

In fact, during 2020, when markets tanked thanks to the collision of two black swans - the Saudi-Russian oil price standoff and Covid-19 ESG funds proved their mettle by outperforming their non-ESG peers.

But there’s more to sustainable investing than just helping Planet Earth. Back in 1990, when ‘ethical’ or ‘Socially Responsible Investing’ as it was called then was in its nascency, many detractors labelled it a ‘fad’, claiming people were sacrificing financial returns in exchange for salving their consciences.

According to Morningstar research, 75 per cent of sustainable equity funds beat their Morningstar Category average in 2020, while 25 of 26 ESG equity index funds, which exclude certain sectors, beat index funds tracking the most common traditional benchmarks in their categories.

Yet 30 years’ worth of performance data later, it is clear investors putting money aside into funds managed along environmental, social and governance (ESG) lines have not seen a significant deterioration in financial performance.

So ‘sustainable’ companies and funds do not mean ‘unsustainable’ investment returns; quite the opposite.

There is another aspect of sustainability that needs to be

considered, beyond environmental and financial impact: business sustainability. Companies that are not operating fully along ESG lines, or which are not doing enough to improve their ESG credentials, may find themselves becoming obsolete. Remaining invested in such companies or in funds with heavy weightings towards such stocks is simply unsustainable in the long-term.

For example, consider the 2010 Deepwater Horizon disaster, which wiped millions off the prices of not just BP, which owned the oil rig, but all those in its sector. But by avoiding oil and gas, ESG funds were barely affected by sell-off and protected investors against the stock market drop. Simultaneously, by investing in wind and solar technology, ESG funds proved they were investing in companies that

have sustainable, long-term business models - companies unlikely to suffer from an environmental disaster that will move markets and hurt their bottom line.

‘Big now’ is not always ‘sustainable later’; as consumers become more conscious and social media less forgiving, companies failing on ESG risk their reputations and their revenues, posing a risk to long-term business sustainability. Therefore, those funds managed along ESG lines will protect investors against such shocks in the long-term.

True, no fund manager always gets it right, but thinking sustainably can help avoid getting it badly wrong.

And, for long-term pension investors, investing along ESG principles can help to create a sustainable longterm investment plan and a more sustainable world.

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Saving for your retirement whilst saving the planet – now that’s impact.

Chances are you have a pension but do you know where your money is being invested into? What if you knew it was funding unsustainable and harmful industries like fossil fuels, tobacco or weaponry?

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The market value of pension funds reached £2.6 trillion at the end of 2020*.

It’s widely believed that the Governance part of the ESG approach should lead to better returns in the long run, given that by it’s very nature, you are investing into companies that are deemed to have better management and corporate structures than their counterparts.

Investing in sustainable pensions is 21x more powerful† than becoming vegetarian, giving up flying or switching to renewable energy. Research has shown that greening your pension is the most powerful step you can take to reduce your carbon footprint.

The effect of investing £100,000 into a green pension is the equivalent to removing up to six cars from the road a year.‡

*www.ons.gov.uk/economy/investmentspensionsandtrusts www.theguardian.com/green-your-pension/2021/jul/08/pensions-with-intentions-a-simple-guide-to-sustainable-investing ‡ www.ft.com/greenpensions

How it works Becoming a pension hero has never been easier.

Follow these four steps and green your pensions today:

Step 1: Book in a complimentary phone consultation with one of our sustainability planners.

Step 3: Take a simple risk assessment questionnaire to see how much risk you’re comfortable taking with your pension funds.

Step 2: We’ll conduct a pension assessment on where your pensions are invested, how they’ve performed and let you know how we can help.

Step 4: Leave it to our experts to find the most appropriate sustainable portfolio for you.

Our portfolios and how we measure impact The area of sustainable and ESG investing is very wide and can encompass many different areas. The United Nations Sustainable Development Goals provide a useful framework with which fund managers can demonstrate which areas their investment portfolios focus on.

Another way we can determine how investing in these firms can help do good is by way of active engagement where shareholders can influence the management of the company. A fund manager is uniquely placed to make their own impact upon the company given they can often have a sizeable stake in the company.

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A bit about us TSPC has been born at a time of great positive ESG momentum: we are all too aware of the harsh realities of climate change. TSPC has also been inspired by the Make My Money Matter campaign which calls on people to ‘green their pensions’.

We are a small team but with support from our sister company, Aspirations Financial Planning, we’re big enough to give you the attention you need.

From each of our carefully selected funds to the way we’ve built our green website, sustainability is at the heart of everything we do. Our aim is to provide people with a pension they can be proud of. We do this by finding, vetting and creating sustainable portfolios with an impact tilt and conducting ongoing due diligence checks on each fund.

because money can grow on trees

Telephone: 0330 175 8456 hello@sustainablepensions.co.uk www.sustainablepensions.co.uk The Sustainable Pension Company is a trading style of Aspirations Financial Advice Ltd. Registered in England and Wales 8252963. Registered in England and Wales 06974708.

Registered office 1st Floor, West Offices, Willow Brook Centre, Bradley Stoke, Bristol BS32 8BS. Aspirations Financial Advice Ltd is authorised and regulated by the Financial Conduct Authority.