Sustainable investments have come a long way since the days of simply excluding shares in funds that invest in ‘Bombs, Booze and Baccy’. However, environmentally friendly funds still exist and have been around for longer than we realise. Some were founded in the 1980s.
Most early versions of sustainable investments are now categorised under the ‘Environment Social and Governance’ (ESG) fund sector, which is concentrated mainly on the exclusion of shares of companies involved in businesses considered bad for health, the environment and global security.
Fast forward to today, and assessing the suitability of ESG funds has become a normal element of investment portfolio planning. Indeed, it is now a legal requirement to ask investors about their opinions and attitudes towards ESG funds at the information gathering stage of the advice process.
Fund management companies are falling over themselves to establish their ESG credentials, and new regulations have been developed which force them to grade their funds according to how ESG-friendly (or not) they may be. Fact sheets have to state this grade and explain how funds comply with the new Sustainable Finance Disclosure Regulations (SFDR).
Sustainable Investments and SFDR
SFDR aim to promote sustainable global economic investments to help achieve ‘net zero’ targets. Recent events have emphasised the growing threat of Global Warming and the effects of geo-political actions by rogue governments.
Essentially, there are three levels of SFDR reporting.
Article 6 covers funds that invest in assets considered bad for the environment, health, or social improvement. This can include the three Bs above, along with fossil fuel mining.
Article 7 covers companies who promote good ESG practices, although they may not invest in positive ESG strategies.
Article 8 applies where a fund actively invests in sustainable sectors and is promoted as positively searching for opportunities in ESG markets.
The most important development is that funds are now making a positive effort to invest in industries of the future and screening out everything that could harm society.
Electricity and gas prices are rocketing. Supply chains face massive disruption as global logistics are adversely affected by the war in Ukraine.
We are now seeing politicians of all hues jumping on the ‘green’ bandwagon, promoting local food and energy production. It’s quite ironic that politicians who might previously have sneered at ‘tree-hugging eco warriors’ not that long ago are now riding the groovy eco-revolution train.
The EU has passed a bill that limits gas supply over the winter months. Russia has further reduced supply to EU countries in the economic aspect of the conflict.
ESG funds now invest in almost every sector of international business, such as technology, health care and sustainable energy, in all countries of the world, including emerging markets and all asset categories. There is something for everyone.
The energy market is interesting. A major criticism of sustainable investments in the energy sector is production cost, particularly when compared with traditional carbon-based fuels. When the early pioneers first struck oil in the 1900s, they also experienced problems with costs. There wasn’t much oil and few markets available to sell to. Despite this, governments and companies recognised the potential value and subsidised the industry to help it grow.
The rest is history. Vehicles of all shapes and sizes are involved in the transit of people and goods to every corner of our planet. Obviously, demand increased dramatically as Henry Ford began the mass production of cars, and a couple of global conflicts were won by the side which controlled oil production and distribution.
This highlights how governments can work alongside industry to promote new technology, increase demand and ultimately reduce prices. SFDR will help us move towards electric transportation, fuelled by sustainable energy sources. After all, who doesn’t want the air in our cities to be breathable and not filled with dangerous chemicals? While this may not be as important to those who live in the countryside, the world’s mega-cities are becoming larger, with many residents unable to see the sky for months.
The only question that remains is how long it will take. We are still highly dependent on fossil fuels, which will continue into the coming decades. The good news, however, is that we will gradually wean ourselves off them, and sustainable energy use will increase accordingly.
Sustainable investments in ESG funds are not just a way of buying shares or bonds in ‘green’ companies to grow our wealth and make us feel good; it’s also a way of future-proofing our portfolios as we invest in the new economy. The groovy green train has left the station and isn’t returning.
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