Ask our experts: how can you invest without compounding climate change?

How can you invest without compounding climate change?

Ilena Ilardo
Published: 28 Feb 2020 Updated: 13 Jun 2022

I’m concerned about climate change and want to make sure that my investments don’t compound the problem but instead can help bring about positive change. What can I do?

Louie French, Senior Research Analyst

With the focus on climate change really gathering pace over the past year, many people now want to make sure that their investments don’t have a negative impact on the environment or society.

Closer to home we have also witnessed historic commitments from businesses and governments alike, largely focusing on environmental issues such as carbon emissions, climate change and single-use plastic. Consumer behaviours have also notably changed, which adds to the clear tailwinds behind sustainably focused companies.

Our approach: active ownership

In spite of positive momentum, it’s not always easy to choose investments in the ESG (environmental, social and governance) sector. At Tilney we have an established process and a long track record of researching these investments.

When you’re getting into ‘ethical’, ‘green’ and all the various labels, it’s important to know how this ESG data is used and what investment policies and processes are in place.

ESG data are good indicators of underlying company health, but if used in isolation, this approach often fails to truly understand the DNA of a company and the intentions of its directors. That’s why we don’t believe in a best-in-class approach, where the best mining or oil and gas company (based on ESG data) can be included in a portfolio, limiting the possibility of achieving a real sustainable impact, and prefer active ownership and using voting power in this sector.

It’s not all about fossil fuel

We target funds that include companies meeting primary environmental and social criteria and that will thrive by improving people’s quality of life and economic development.

When looking at climate change in particular, a common approach is to try and avoid various forms of mining, oil extraction, coal, and other industries that have a negative impact on the environment. As the world is transitioning away from fossil fuels, there are plenty of investment opportunities around renewables, especially wind and solar farms, and we see these as a smart choice.

There are also other opportunities for investors to use their money responsibly, because there is a lot more to climate change and ESG investing than just fossil fuels. Tilney, for example, seeks exposure to biodiversity, resource efficiency and sustainable transport. An example is companies that will benefit from growth in the market for cleaner or more efficient delivery of basic services such as energy, water and waste.

Do ethical investments make money?

The good news is that ESG is now mainstream, so investors don’t have to compromise their returns for their values. There was certainly a belief in the past that investing ethically meant compromising returns, but in recent years there have been good examples of funds in this sector performing in line with non-ethical or ESG investments and, in some cases, doing better – although do remember that past performance isn’t a guide to the future and that some ethical funds may, by definition, have a limited investment universe which could affect performance.

Marcel Porcheron, Investment Director

I regularly discuss responsible investments with my clients at Tilney, which include charities and private investors across the demographic spectrum. Investors of all ages and backgrounds are telling me that they want their portfolios to deliver great results, but also to reflect their values.

I start out with understanding what my clients would like to achieve: even when investors are clear about their objectives, the next step isn’t always obvious.

There is a broad understanding that climate change is a risk and also an opportunity, both from an investment standpoint and on principle. Sustainable investing brings together ideas around avoiding investments in areas which do harm to the climate, promoting instead those with a more positive and proactive approach.

Portfolios that reflect investor values

As a start, we focus on long-term growth and the preservation of our investors’ capital. Because of that, portfolios are often already positioned in a way that reflects investors’ values. Some investors want to go a step further: maybe they have very strong views about the sustainability of investments in an area of economic activity, or they are trustees who are concerned with discharging their responsibilities. With them I usually discuss the best way to avoid compounding climate change and the implications of implementing their values in different ways through the portfolio.

Our investment philosophy favours long-term sustainable investments, meaning that my clients typically are less invested in areas with the worst environmental impact. Going a step further could mean looking for opportunities to make market returns by investing around environment themes like clean water, renewable energy or impact investments.

Different fund manager approaches

We aim to invest through fund managers who we think will deliver the best risk-adjusted returns. They each will have their own approaches to sustainable investing, so it’s important to ask our clients if they are comfortable with this additional filter, which they cannot control. Some approaches are just about excluding certain areas of unethical activity, which can be broader than climate change. For example, if our investor feels strongly that no companies with any business activity in fossil fuels should be included, we could invest directly in equities and bonds, if appropriate for them.

An evolving process

Where do we go from here? We’re developing our proposition further to ensure that responsible investment is core through our approach. We also continue to look for ways to build out what we can do. For example, our analysts are finding more financial products that pass their due diligence; this means that my colleagues and I will have more tools in our toolkit to satisfy our clients’ ethical needs.

Speak to Tilney

If you want an investment portfolio that aims to deliver great results while also reflecting your values, why not speak to one of Tilney’s investment experts? There is no charge for an initial consultation and no obligation to take up any of our services.

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This article was previously published on Tilney prior to the launch of Evelyn Partners.