COP26 and your financial plan

How you spend, invest and save can help the climate

The environment has been in the media spotlight again recently when the Conference of the Parties (COP26) met in Glasgow between 31st October to 12th November 2021.

Hosted by the UK and Italy, the event brought together 114 world leaders - including those of the US, India and Russia - to agree on action to tackle rising global temperatures. Queen Elizabeth II urged leaders to act in a video message, joined by others such as David Attenborough.

Some good news seems to have come from COP26, with historic commitments to tackle global deforestation and methane abuse. The Glasgow Breakthrough Agenda was also signed by 35 world leaders - representing 50% of the global economy - to develop new, clean technologies and drive down costs.

However, COP26 has also attracted criticism. China’s President Xi Jinping, for instance, did not attend and also called for a less ambitious target of limiting the global warming increase to 2C (rather than 1.5C, adopted in 2015 under the Paris Agreement). Disappointment has also been expressed over India’s goal to reach “net zero” by 2070; much later than many would like.

All of this attention on climate change has led many people in Britain to ask: “What can I do?” Here, there are lifestyle habits that may need examining. However, how you spend your money and invest can also make a big difference.

Finance and climate change

Litter picking, recycling and regulating fossil fuel-powered travel are all good ideas to reduce your carbon footprint. Yet, as the saying goes, money makes the world go round. Companies (e.g. car manufacturers) are more likely to focus on producing “greener” products if demand pulls profits in that direction. Banks and investment firms, moreover, are more likely to avoid involvement with, say, land abuse if the financial and legal risks become too great.

Here, the COP26 event has made a significant stride forwards, particularly on deforestation. In 2014, most countries pledged to end deforestation by 2030 during the New York Declaration on Forests. Whilst well-meaning, this pledge had no implementation mechanisms and high finance had not been brought aboard to incentivise pursuance. This time, however, the financial sector is highly involved. 30 financial institutions responsible for $8.7tn - including Fidelity, AXA and Legal & General - have committed to move into sustainable farming, rather than “tree slashing” for commodities like palm oil. Much of this behaviour change can be attributed to governments strengthening environmental rules, yet consumer demand is also making a key contribution.

The drive to ESG

For retail investors (e.g. individuals with a pension) it has become increasingly important to check the environmental, social, and governance (ESG) credentials of a fund, or company, prior to investing in it. Younger generations have been especially interested in this style of investing, which has moved from the “fringe” and more into the mainstream over the last 20 years.

Today, about $1 in every $3 under management in the US is classed as “ESG”. This movement is only likely to continue, with the likes of Chancellor Rishi Sunak recently requiring asset managers to set out the environmental impact of every investment product under the new Sustainability Disclosure Requirements (SDR). The public also appears mostly on board, with 70% wanting their money to go towards making a positive difference to people, or the planet.

Many still do not realise that the 2015 Paris Agreement marked a huge shift in Big Money, when it started to move away from the fossil industry. According to Michael Liebriech, founder of Bloomberg New Energy Finance, this was the point where Big Money “Served divorce papers” to coal, oil and gas, and Glasgow will be when the “court order” (“decree nisi”) is served. This, partly, is the reason why oil giants such as Royal Dutch Shell are moving more into natural gas, to try and reach net-zero emissions and put the “customer first”.

It should be noted that ESG investment has received criticism from some quarters. BlackRock’s former sustainable investing CIO, Tariq Fancy, argued that ESG was a ‘dangerous placebo’ and many different alleged ESG strategies have been accused of ‘greenwashing’. We suggest that you discuss these options with your financial adviser.

Strategies for investors

For investors wondering how they can make their portfolio more environmentally friendly, there are a range of options that you could discuss with your financial adviser. The most radical route, of course, is screening to exclude companies, industries and even countries from your portfolio which do not meet your ESG values. This might work for some investors, but is likely to be too restrictive for most. Another option, therefore, is to include positive vetting to identify companies which are setting an example for their peers on ESG matters, and reward them by investing in them. This would allow an investor, for instance, to invest in companies working in areas such as fossil fuels, auto manufacturing and mining provided they are showing evidence of leading the way in their industry towards meeting ESG criteria (and note that even for those without sizable portfolios, it’s worth checking your workplace pension funds to see where the default fund is invested, if this is a concern to you).

Investors do not necessarily need to adopt an ESG strategy for their entire portfolio all at once. Another option would be to pursue integration - gradually including more companies and funds which mitigate ESG risks.

There are, of course, also other ESG options for business owners and major shareholders. If you own your own business, then you can set the ESG agenda to promote environmentally-friendly systems, practices and products. If you’re a major shareholder of another business, you could use your influence within the company to raise matters of ESG importance to the management. This might involve initiating a vote on a change in company behaviour, so that policies and practices help goals such as environmental protection, community engagement or gender equality in the workforce (or board).

If any of the areas covered by this article are of interest to you please do get in touch.