Ethical, Green and ESG Investments: The fight against climate change

The key to a good performance during inflationary times is a well-diversified portfolio and, following on from COP26, green investments have been at the forefront of everyone’s minds.

To secure global net zero, developed countries must make good on their promise to mobilise at least $100bn in climate finance per year, with international financial institutions working towards unleashing trillions in private and public sector finance. This means that every financial decision will need to take climate into account, including all private investment decisions, but also all spending decisions that countries and international financial institutions are making as they roll out stimulus packages to rebuild economies from the pandemic. Banks, insurers, investors, and other financial firms need to commit to ensuring their investments and lending is aligned with net zero.

While becoming net zero is vital, a huge advantage to green and ethical investment products is that they tend to be less volatile and susceptible to impact from macro environmental factors. The aim of ethical investing is to match your concerns with an investment return. We firmly believe that ethical investing does not mean foregoing performance. The commitment to encouraging inward green investment in the UK from the October budget and the potential legislation arising from COP26 could potentially lead to phenomenal change.

The demand for Environmental, Social and Governance (ESG) investments is rising, which fuels the need for companies to increasingly offer more funds that match these criteria.

As companies are generally beginning to take steps towards ethical and sustainable practices, opportunities for ethical investments increase. Likewise, companies are aware of these ethically conscious investors, which in turn encourages them to embrace ethical operations. This circle is constantly growing and by taking part, we can help bring positive change to the world.

ESG investing is set to create a seismic change in the market, but how does it differ from its ethical and green counterparts?

Ethical investment is an established investment approach that considers social and moral preferences, typically excluding companies with exposure to “vice,” such as armaments, gambling, or alcohol manufacturers.

Green investing focuses on environmental and climate change; investing in conserving natural resources and clean energy sources, such as solar, wind and wave power.

ESG takes into account their namesakes – Environmental, Social and Governance considerations – with a clear focus on the 17 UN sustainable goals and rating companies by their approach and/or exposure to environmental, social and governance issues. Socially responsible investing incorporates the positives above, but also removes companies involved in industries such as thermal coal mining and power generation, and excludes companies involved in reputational controversies too.

Impact investing refers to investments made into companies, organisations and funds with the intention to generate a measurable, beneficial social or environmental impact, alongside a financial return. This may include investments in unlisted or start-up companies.

Charities and Endowments have been one of the large proponents of ESG investing and the fastest adopters of this product. Rapidly growing social awareness of environmental and sustainability issues, combined with personal preferences, and growing regulatory requirements to consider and manage defined sustainability risks, is propelling huge demand in ESG.

A key component driving the ESG investment approach is the UN principles of responsible investing and their social development goals – which is casing a huge societal shift, but also reflecting demand for greater social awareness and focus on sustainability.

Following the unveiling of the UN Principles for Responsible Investment in April 2006 and the UN’s 17 Sustainability Goals in 2015, in 2017 the Law Commission sought to integrate these policies in new legislation passed in 2018*. This put an obligation on pension fund trustees to bring ESG considerations into their statement of investment principles; forcing investors and Asset Managers to consider an ESG approach to every investment that they make.

Similarly to how SSRIs have volatility indicators, EU legislation from March 2021 on sustainability-related disclosures in the financial services sector, the Disclosure Regulation, has already made a huge impact on manufacturers, requiring disclosure requirements and includes the use of sustainability indicators. This is enabling end users and their advisers to make informed decisions on the products available to them. The UK have fully committed to honouring this legislation, regardless of Brexit withdrawal agreements.

The FCA’s aim is to support the financial sector in driving positive change, including the transition to net zero, with policies in place to ensure consistency across ESG investments and financial management firms are expected to explain how their investment recommendations will meet client’s investment objectives, including risk profile and capacity for loss – alongside their individual sustainability preferences.

Under draft Regulation (EU) 2019/20188 the core of the investment regulations highlights that any investment recommendation must focus on the client’s best interests and consideration of risk, while using an ESG lens to examine the suitability of the level of disclosure from the manufacturers, balanced with the levels of tolerance and full evaluation of the client’s profile to ensure that the client’s best interests remain at the heart of investment decisions.

Transparency and Trust – Working towards your goals

We are committed to maintaining the excellent knowledge base and experienced skillset we are fortunate to have working together as a team at Beaumont Wealth, and this in turn ensures consistency is at the heart of maintaining our client relationships. This enables us to work closely with you to keep your investment portfolio on track to help you achieve your goals – including your environmental ones.

You don’t need to remember these regulatory details – our team are fully appraised of ESG regulations and how to evaluate these alongside your goals and adversity to risk to best manage your portfolio in line with the latest regulatory guidance.

Our investment committee carefully considers the impact of local and global events and we combine this with our financial knowledge to diversify portfolios to minimise risk and maximise potential opportunities.

Our clients’ social and moral preferences are a priority consideration when making investment decisions. If ethical portfolios, green initiatives and ESG are of interest to you and your connections, please do not hesitate to get in touch with our advisers to discuss these opportunities further.

*Pension Protection Fund (Pensionable Service) and Occupational Pensions Schemes (Investment and Disclosure) Regulations 2018.