The threat of climate change is becoming more and more clear. Extreme weather events and species extinctions are starting to happen regularly. With this in mind, you might want to make your finances more environmentally friendly. One way to do this is to invest sustainably.
The finance industry is often criticised for being solely focused on growth and returns and not caring about the impact this has on the planet. This appears to be changing. It is definitely possible to make money while helping fight climate change.
In this post I’ll cover:
- Find sustainable funds
- Look for sustainable companies
- Do your research
- Move your pension
- Lobby for change
Disclaimer: This post is not – nor is it intended to be – financial advice. The Twenty Percent is a journalistic website and aims to provide tips, tools and techniques, but can’t guarantee to be perfect, so please be aware you use the information at your own risk and we can’t accept liability if things go wrong.
Find sustainable funds
There are some very simple ways to invest sustainably.
If you invest in funds, an easy switch you can make is to move to sustainable funds. Most companies will offer at least one sustainable fund, many will have a range. Vanguard, for example, has about six ESG funs customers can choose from.
FYI – ESG stands for environmental, social, governance. This is the term generally used to describe sustainable investments.
There are funds focused on all elements of ESG investing, so it’s likely you’ll be able to find one that suits your preference. For example, DWS recently launched a female-focused fund run exclusively by women. Others focus on tackling climate change or improving biodiversity.
There should be one that suits your preferences.
Look for sustainable companies
If you opt for individual stocks over funds, the process will be similar but more labour intensive.
At a basic level, you could automatically exclude oil companies, arms manufacturers, and firms reliant on single-use plastics.
You may want to go further though.
For example, you could look at a company’s sustainability targets. Have they set a net-zero target and are they taking meaningful action to reach it? If they are, perhaps investing in them could be a good option.
You could look into the diversity within a company’s leadership to see if they’re fostering an inclusive work environment. Perhaps you could take a look at whether a company is paying its fair share of tax.
There’s no right or wrong way to assess a company’s ESG credentials – as of yet we still don’t have standardised metrics. Therefore, you have to make your own decisions and invest based on your own values and morals.
Do your research
The most important thing is to do your research. Ideally, you’ll be doing research anyway if you’re already investing.
It’s important to know about the companies and funds you’re investing in. A lot of funds and companies claim to be ESG-friendly. But, there will be a huge disparity between what this means in reality.
ESG funds also vary in the impact they have. There are lots of claims of ‘greenwashing’ within the finance industry. Essentially, this means companies stick a ‘green label’ on a fund, without fully assessing its impact or perhaps not being clear about its sustainable credentials.
From April, legislation is coming in that will require the largest financial services firms in the UK to make climate-related financial disclosures. It is likely many smaller firms will make similar reports too, so as not to be left behind. Hopefully, this will make it easier for investors to make informed decisions before parting with their cash.
Move your pension
This is one of the easiest changes you can make if you want to invest sustainably. You may even be able to do it at the click of a button. I did!
The majority of UK employees have a workplace pension. This is usually automatically invested in a standard fund.
You can choose to change this. Most providers will offer an ‘ethical’ alternative.
These funds are unlikely to be perfect. In a workplace pension, you will likely only have one ‘ethical’ fund choice. While this can be frustrating, moving your money into it can still be beneficial.
More people making this choice signals to the pension provider that ethical funds are commercially viable and something investors want. Over time, this will hopefully encourage them to develop their offering and create a more comprehensive sustainable pension range.
Lobby for change
Not all companies are perfect. In fact, most aren’t. This is not to say they can’t improve.
If you buy individual stocks, use your vote as a shareholder. You can join up with pressure groups and other concerned investors to voice your opinions and pressure the company into making more sustainable choices.
Those that buy funds can also lobby for change. Fund managers that claim to offer ESG solutions have to practice what they preach. The FCA has previously written an open letter, explaining that these fund managers have to engage with the companies they invest in and encourage more sustainable practices.
There is a strong argument that these practices are more effective than divestment (not investing in certain companies). If, for example, you can encourage large carbon emitters to make major changes, this will result in major change.
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