Responsible Investing - Stepping Back From The Abyss

Introduction

Over recent weeks, I have been having lots of conversations with clients, prospective clients and professional connections around climate change and responsible investing. This largely stems from the extreme weather events we saw over the summer and which are continuing at the current time.

I thought I would write an article looking at some of the concerns now being raised by climate scientists and how lifestyle financial planning and responsible investing can go hand-in-hand. I also reference a recent report by Kroll, the financial solutions firm, which looks at the performance of companies who are ESG Leaders versus those considered to be ESG Laggards.

Please do reach out to arrange a confidential discussion if you would like clarity around your current financial situation.

Extreme Weather

No doubt, you saw the headlines over the summer relating to the extreme weather events that were caused by global warming. Some of these events included:

July was the hottest month on record and probably the hottest in 120,000 years.
We saw heatwaves and wild fires in Europe followed by torrential rain and flooding.
There were extreme heat warnings covering large areas of the US.
China experienced record temperature swings hitting a record high of 52℃ six months after a record low of minus 53℃.

In all likelihood we should expect to experience more frequent, prolonged and extreme weather going forward as global temperatures continue to rise.

Despite the warnings of climate scientists that we need to do more to tackle climate change, our progress continues to be relatively slow despite the fact that we currently have many of the solutions available to us.

Tipping Points

This relative inactivity increases the likelihood that the earth passes through one or more tipping points from which it may struggle to recover. These can include:

Changes in ocean currents decades ahead of schedule.
Melting of the polar ice caps faster than expected.
Rapid sea level rise and increases in water temperatures.
Unexpected temperature changes across the globe affecting food and water supplies.
The Amazon Rainforest releasing more carbon than it absorbs.

Paul Gilding, the author of ‘The Great Disruption’ writes in a recent blog post[1] that the extreme weather events that we have seen is evidence that the ‘great disruption’ has begun. He goes on to write that, “we can now expect a destabilization of the global climate system at a scale that is so chaotic, unpredictable and costly, it will trigger cascading disruptive change in the global economy, national politics, investment markets and geopolitical security.”

It is clear that we need to take action now to tackle the threat that climate change moves the planet towards various tipping points.

The Tide Is Turning

Although much of the news is focused on the suffering caused by climate change and the dire warnings issued by climate scientists, there is much to be optimistic about especially given that many of the solutions to tackle climate change are available to us now.

Furthermore, along with governments, businesses and family offices, more and more wealthy individuals are recognising the need for change.

We are seeing governments enact measures to tackle climate change, for example, in the US, the Democrats passed the Inflation Reduction Act, part of which will see increased federal spending on reducing carbon emissions. The UK are leaders in renewable energy albeit there are signs that the government might back-track on some of its pledges.

Businesses are increasingly adapting their practices to help tackle climate change, for example, Apple is committed to making all of its products carbon neutral by 2030.

Financial services regulators, in particular in the UK and Europe, are focused on measures whereby asset managers have to disclose how Environmental, Social and Governance (ESG) factors are taken into account within their investment funds. The European Commission has already introduced Sustainable Finance Disclosure Regulation (SFDR) and the UK’s Financial Conduct Authority (FCA) is expected to follow suit in the near future.

On an individual basis, there are huge amounts within bank accounts, pensions and investment portfolios and more and more wealthy families are considering how they can invest their wealth to have a positive impact on the world as well as achieve a positive financial return.

Investment Performance

As responsible investing is relatively new, there isn’t significant past performance data that stretches back for several decades as there is for more traditional investments. However, a recent study[2] carried out by Kroll, the risk and financial solutions firm, looked at 13,000 companies across the world and investigated the relationship between a company’s total stock return (dividends plus capital appreciation) and its MSCI ESG rating over the 2013-21 period.

The report found:

Globally, ESG Leaders earned an average annual return of 12.9% compared to an average 8.6% return earned by the Laggard companies.
In the US, the ESG Leaders earned an average annual return of 20.3% compared to an average 13.9% annual return earned by the Laggard companies.
The positive relative performance of ESG Leaders versus Laggards was generally consistent across all major geographic regions and for most industries.

Lifestyle Financial Planning and Responsible Investing

Lifestyle financial planning and responsible investing can play a vital role in helping clients live their best lives whilst also managing their wealth in line with their values.

One of the most enjoyable parts of my job is to help clients articulate their desired lifestyle which can involve planning a successful retirement in several years’ time or designing a strategy to pay wealth to future generations.

Designing the ideal lifestyle often requires long-term financial planning especially given that with increased longevity, retirement can now last for decades. As such, more and more people are concerned as to whether their lifestyle will be feasible in years to come if climate change continues on its current trajectory. Will we see entire eco-system destroyed or parts of the world uninhabitable as we reach retirement?

If our goal is to pass wealth to future generations should we not also be mindful of the world they will inherit.

More and more people are now having conversations around how their wealth is managed and the impact their investment decisions are having on the environment and society.

There are no easy answers and much confusion given how the investment industry has increasingly placed labels on their funds such as ‘green’ or ‘ESG’ or ‘sustainable’ in an attempt to attract investor money.

As a boutique financial planning and wealth management firm, our approach is different. We only look after a relatively small number of clients which means we can have more personal and detailed discussions as to where clients would like to invest their wealth so that it is aligned with their values and can support their wider financial planning goals.

Conclusion

It is understandable given the recent news stories that more and more people are concerned about climate change. Climate scientists have been saying for years that we need to tackle global warning and governments, businesses and individuals are looking to play their part. We do need to move more quickly and we have many of the solutions that we need.

Where we invest our wealth can play a vital part in achieving a positive impact for society and the environment as well as helping us achieve our financial planning goals.