This article features as part of IFA Magazine’s celebration of World Earth Day.
Gavin Francis, founder and CEO of Worthstone, the UK’s leading impact investment resource for financial planners, has highlighted how sustainable impact funds are really faring in the move towards net zero.
Spoiler alert, the answer to this question is ‘not very’ but there is better data being given to allow clients greater transparency.
COP26, the UN climate change conference hosted in Glasgow last year, might feel like a distant memory eclipsed by other news. But one element of the climate emergency that certainly hasn’t lost any traction is the need to move away from reliance on fossil fuels to more sustainable sources of energy.
Indeed, the government is soon to unveil a new energy security strategy that will boost renewable energy generation and could make planning permission for windfarms easier to obtain.
And, whilst the momentum of COP26 has evaporated, the government’s target to be net zero by 2050 hasn’t. Their Net Zero Strategy (part of their ‘build back greener’ push) sets out policies and proposals for decarbonising all sectors of the UK economy.
As part of this, organisations across the country and globe are redoubling efforts (either through their own initiative or driven by regulatory or market pressure) to achieve net zero – in alignment with the 2015 Paris Agreement. This legally binding international treaty on climate change aims to avoid dangerous climate change by limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C above pre-industrial levels.
All these developments are keeping the sustainability agenda front-of-mind for clients. Many want to know what positive action they can take to contribute.
Despite the efforts of organisations like the Institutional Investors Group on Climate Change (IIGCC), the European membership body for investor collaboration on climate change, the investment community has a way to go when it comes to making meaningful net zero, Paris aligned capital allocation decisions .
Looking under the bonnet
Our recent research into this shows that’s partly because there just aren’t many options. Even amongst funds of the highest ethical and sustainable objectives and policies (of which there are currently around 400) Paris aligned options that help limit a global temperature rise are thin on the ground. Although, markedly better than amongst traditional fund options.
But it’s also made difficult because the data on this is very new and patchy, plus it’s a complex area. This, combined with an inclination to capitalise on investor concerns about sustainability, provides the perfect climate for greenwash to flourish. I don’t know who said it first, but the quote “in the land of the blind, the one-eyed man is king” certainly applies here.
The role of marketing is to present a product in the best possible light and the temptation may be to use unrealistic assumptions. With the data gap that exists this can restrict the view and people may not get the full picture.
Making informed impact decisions
Since 2011, we’ve been helping financial advisers look beneath the label of a fund to see the full picture and make informed decisions.
Following suggestions from our forward-thinking community of financial planners, we’re about to launch our own metric to allow advisers to gauge how Paris-aligned a fund is .
It assesses the ‘implied temperature rise’ of a fund from 1.25°C all the way up to 7°C.
This new measure adds a sixth perspective to our assessment of funds, which also includes looking at:
• Positive impact – we rate a fund’s contribution towards positive social and environmental outcomes by mapping underlying company revenues against the investable UN Sustainable Development Goals to articulate impact.
• Active Agent – we assess asset managers based on their actions across four components to measure their level of commitment to stewardship, active engagement and transparency.
• Avoidance of harm – scores are based on the extent of a fund’s exposure to stocks commonly associated with harmful environmental and social impacts.
• ESG – operational impact measuring the Environmental, Social and Governance (ESG) practices and opportunities associated with a fund’s underlying holdings, providing insight into resilience to long-term, financially-material ESG risks.
• Carbon risk – the material financial risk associated with a fund due to the implications of projected environmental policies and transitional and physical impacts of climate change.
Our research so far shows that whilst the lowest implied temperature rise for our universe of sustainable impact funds is 1.32°C and the highest is 4.77°C; for a traditional fund the lowest implied temperature rise is 1.67°C and the highest 7°C.
Committed to honesty
This undoubtedly means that financial planners who are working with values-driven clients who want Paris-aligned portfolios don’t have it easy. As always, the key is to start with the right data and to understand what that data does -and doesn’t -tell us. If we’re committing to transparency around how a client’s money is invested, that means committing to honesty about what we can claim, and what we can’t.