GREEN IS GOOD
Recent years have been ones of weather extremes. This year saw record rainfall in February in the UK, and last summer a heatwave engulfed Europe. With such terrifying evidence of climate change, combating it has never been more urgent. With this in mind, Rebecca O'Keeffe discusses the viability of sustainable investments.
Why do we need to be concerned about the environment when investing?
The World Economic Forum has warned that extreme weather and lack of action on climate change will be among the top threats facing companies over the next decade. Last July, a joint statement from four bodies, including the Bank of England and the Financial Conduct Authority, said that climate change poses 'far-reaching financial risks' to regulated firms. Businesses can no longer afford to bury their heads in the sand.
Do green investments offer as great a return as traditional ones?
While sustainable investing is now more mainstream, the idea still persists that you have to sacrifice profits for principles - meaning you must accept lower returns if you want to invest for environmental or social good. But the evidence suggests otherwise. A London-based asset management company found that around 88 per cent of studies show that companies with solid ESG (environmental, social and governance) practices perform better than those that don't, while 80 per cent show films' share prices perform better.
If this is the case, why would anyone still opt for non-sustainable investment?
Some financial advisers caution clients planning a green investment, not because returns will be lower, but because the risks are higher. Socially responsible portfolios offer choice and excellent performance. However, as there is a more limited range of investment options, this can lead to a greater concentration of risk and higher volatility. This means returns can be exaggerated compared with traditional investment portfolios - both going up and going down.
So, what is the right thing to do?
If you're investing ethically, there are a number of factors that might cost you in terms of performance. For example, excluding controversial sectors, such as tobacco and alcohol, means you avoid consumer stocks that tend to do well in market downturns. However, we perhaps have to just suck up a slightly more modest return in order to create a better world. Shaving off the greed element and ensuring businesses can make reasonable returns in a way that benefits the collective is important. When choosing investments, consider backing the industries of the future, not the past, to make money in an environmentally sustainable way.