Over the last 100 years, the earth has warmed by about 1˚C. It might sound insignificant, but when you consider the effect that future planetary temperature rises are likely to have, it is certainly important:
A further rise of 2˚C is predicted to result in eradication of the Arctic seas ice during summertime, leading to faster rises in temperature (since there is less ice to reflect sunlight away from the earth). Violent storms and floods are likely to increase across the world, especially near the coasts. Acidity rises in the seas, killing coral reefs and krill.
Exceeding this 2˚C rise would almost certainly be devastating, leading to rainforests eventually being wiped out, rises in sea levels as the ice in Antarctica melts, huge human displacement and widespread elimination of species groups.
To many people, this prognosis can sound highly alarming and insurmountable. Some people deny humans’ contribution to the rise in global temperatures, but we here at WMM accept the prevailing view within the scientific community that a low-carbon worldwide economy is key to addressing the situation, before catastrophic irreversible damage is caused to the environment.
Assuming you agree, what can actually be done? Normally, answers to this question point to the importance of taking personal responsibility for important areas of our lives such as food consumption, energy use (particularly those reliant on fossil fuels) and responsible waste disposal. Less often, however, do we tend to think about investing.
How investing affects climate change
Yet the subject of investing is incredibly important. Consider, for instance, that just 100 companies are largely responsible for 71% of global CO2 emissions between 1988 and 2015. These businesses are backed up by many wealthy investors, which finance their ventures.
So, if you are looking to build a strong investment portfolio but also make a positive difference towards climate change, how should you approach companies like this? Should you avoid them altogether and commit your money into other, more sustainable businesses, or should you invest in them with an aim to influence them towards taking greater care for the environment?
This is where we get onto the subject of “impact investing.” Broadly speaking, this approach to investing seeks to generate a financial return whilst making a positive contribution to society, governance or to the environment. On the subject of climate change, for instance, impact investing would involve investing in companies or funds which are either reducing their CO2 emissions, or which are proactively working towards a low-carbon economy (e.g. renewable energy businesses).
Impact investing is, therefore, different from “traditional” investing which historically tended to simply focus on investment returns, with little care for an investment’s impact on the world. It is also different from philanthropy, however, which usually cares little for investment returns and rather focus simply on changing the world.
At WMM, we and other financial planners are excited by the idea that you can combine investing with noble, philanthropic aims, such as creating a more low-carbon world.
How to build a “planet-positive portfolio”
So, how can you incorporate more of an impact investing approach into your wider portfolio? Broadly speaking, you should look at two things: look at “green funds”, and take a look at different funds’ strategic approaches when it comes to investing and climate change.
For instance, some funds might focus on offering investments into bonds or shares of companies which actively work to reduce CO2 emissions e.g. Green Bond Funds.
Other funds will not necessarily only focus on companies like these, but rather include companies from a wide range of sectors/industries which are trying to lower their carbon footprint, such as agriculture as waste.
Regardless of which approach you feel is better, the important thing to remember is to diversify your investments and not put all of your eggs into one basket. As much as you might believe passionately in the work that one company is doing to help the environment, please remember that it is still a company and it has the capacity to fail and lose you money.
By building a strategic portfolio with a well-balanced range of funds, you can make a positive difference to the world whilst minimising your investment risk exposure.
The world is facing some dangerous environmental threats, but we also live in exciting times regarding advances in green technology to try and address them. Innovations in wind, solar and geothermal production and distribution come to mind, as well as those in vital infrastructures such as electric/hybrid cars and clean power cells.
The important thing to remember with impact investing, however, is to maintain a healthy balance between its two tenants: generating a return whilst making a positive contribution to the world. It’s important to not lose sight of one whilst focusing on the other.
A fund might well be “green”, but if it is full of poor-quality stock and is constructed badly then you risk exposing yourself unnecessarily to the effects of poor performance. On the other hand, a fund might perform very well but gradually lose sight of its original intention to focus on companies which are minimising emissions (either their own, or overall).
A good financial planner will be able to help you keep an eye on these things, also ensuring that your investment strategy is on track with your own personal financial goals whilst continuing to make a positive environmental impact.
If you would like to speak to us about starting an impact investing strategy, then get in touch to arrange a free, no-commitment consultation with a member of our team.