Savers CAN go green without going broke
Higher ESG ratings equal bigger profits and dividends
As the crucial Cop 26 climate change summit in Glasgow approaches, the questions are multiplying. Can the Government cajole the nation to drive electric cars and embrace other energy-saving measures to stop global temperatures rising?
As for investors, a dilemma faces anyone who cares about the planet, but wants a decent return at the same time.
Recent floods and storms highlight the impact of global warming and are making more people consider investments that cut carbon dioxide emissions.
But finding a way through the haze of promises of cleaner air and higher yields is becoming tricky.
Worldwide, an estimated £31 trillion is now invested in funds that have an ESG approach, prioritising the environment, sustainability and corporate governance.
the move into the area is being fuelled by concern over these issues – and the belief that change for the better could be lucrative.
Research from David smith of Aberdeen standard Investments reveals that companies with the highest ESG ratings have been more profitable and paid higher dividends than their lower-rated counterparts. Investors are increasingly shunning companies perceived as being out of step with the ESG agenda, which will further intensify the shift.
But it is not all plain sailing. Liontrust last month failed to reach its £100m target for the launch of a new ESG investment trust, despite the group’s record of good performance. I hope that all fund managers will see this setback as a wake-up call to be more open about their objectives and how they will achieve them.
And the desire to attract cash is leading to concerns that some funds may be ‘greenwashing’.
they may boast of their attachment to sustainability, but are merely box-ticking and thus misleading investors.
the Financial Conduct Authority (FCA) recently warned that ‘ESG assertions must be reasonable and substantiated’.
the severity of the watchdog’s tone suggests fund managers would be advised to comply.
Yet even if they do moderate the greenwash hyperbole, the debate surrounding some funds’ holdings will remain. Passive funds that track the Ftse4Good Us select index – which excludes companies in armaments, fossil fuels and tobacco – often hold shares in tech giants like Amazon, Facebook and Google’s owner Alphabet. these groups have ambitious carbon reduction goals, meaning they score highly on some of the multiplicity of ESG metrics. About 14 different frameworks are used for stock selection.
Nick edgerton, manager of the stewart Investors Worldwide sustainability fund, contends that some business practices at Amazon and the rest make them unsuitable for inclusion.
Others maintain the argument is more nuanced. taking a stake in a company should be a route to reform, a stance advocated by fund manager Baillie Gifford.
Declining to work with a controversial business like Rio tinto, for example, would potentially result in ‘poorer mining standards, more environmental damage, and slower progress towards the lowcarbon economy we all need’.
FUND managers also stress the need to take an objective look at a company’s operations. Matthew Beddall of havelock cites Kronos, a German manufacturer of plastic bottling machinery. Its products may seem to pile further threat on the fragile ecology of the planet. But Kronos can retrofit drinks companies’ equipment to use recycled plastics.
the Cop 26 summit, which starts on October 31, has been described as an inflection point in the progress to a net zero target.
the wish to take advantage of the transition to an ultra-low carbon economy means that I am an investor in several ESG funds and trusts, including Liontrust’s sustainable Future Global Growth. I am relaxed about tech holdings, but want to feel that my money is backing businesses bent on delivering solutions.
Mike Appleby of Liontrust says the group likes technologies that cut energy waste and so lower companies’ bills: ‘take Daikin, a Japanese group which is innovating in air conditioning. they’ve done away with ducting and instead put much more efficient separate units in each room.’
Another holding in the Liontrust sustainable stable is the SDCL energy efficiency Income trust which invests in energy efficiency infrastructure projects.
At present this trust is at a 13pc premium to the value of its net assets, making it an expensive foray into ESG for those who trust the FCA’s intervention curtails virtue signalling and encourages a new era of delivering rewards for investors.
however, Jupiter Green, another trust, is at a 9pc discount and gives useful exposure to renewables through Vestas, the Danish manufacturer of Wind turbines.
Jake Moeller of fund analysts square Mile likes the Ninety One Global environmental fund which owns Waste Management, America’s largest recycling business.
Where there is muck, may there be brass!