Are your investments destroying the planet?

Experts warn that few people know how or where their money is really invested, and the environmental impact could be huge.

Investors might not want to invest in companies that use heavily polluting fuels (Getty)

Tomorrow marks the beginning of “Good Money Week”, another of those campaigns designed to raise awareness of some seemingly minor issue that is always affecting someone else, somewhere else.

But if you’re reading this section, the chances are this one is about you and your money and the attempt to raise awareness of sustainable, ethical and responsible investment. It hinges around the question of whether you know – really know – how your savings, investments or pension is invested on your behalf.

If you don’t you’re in good company. Around half of UK investors aren’t clear about what companies or industries are supported by their investments, and while far more – around two thirds of British investors – want their money to turn a profit as well as do good socially and environmentally, the truth is that most of us are supporting some of the most damaging industries out there. And because of the changing ways we are investing our cash, the figures are rising fast.

Passive agrressive

Since 2007, “tracker” or “passive” funds – have grown four times faster than actively managed funds, investing around $6 trillion worldwide. It comes as little surprise seeing as they offer a low-cost investment option by simply investing in all the companies in an index such as the FTSE All Share, rather than engaging in more expensive active decision-making or fund management. They’re particularly popular with younger investors and are the default investment option for many pension schemes.

But an in-depth study of the market by responsible investment specialists Castlefield Advisory Partners reveals that six of the UK’s biggest tracker funds have £504m invested in the tobacco industry, (4.4 per cent of their combined value) and eight of the biggest funds have £1.2bn invested in fossil fuels (9 per cent of their combined value).

“Trackers might appear to be a cheap investment solution, but we are concerned that people may not be fully aware that they are financing damaging social and environmental activities and putting investors’ money at risk,” says John Ditchfield, Partner at Castlefield.

“Automated robo-investors are pumping hundreds of millions in pension savings and other investments into businesses which individuals would not choose to support and may actively want to avoid, for example tobacco and heavily polluting fossil fuel companies.”

And it’s clear that the majority of British investors don’t want that.

Knowledge and power

Around 60 per cent of us think investors should avoid financially backing companies or industries that negatively impact on people, society and the environment, according to Triodos Bank, particularly avoiding areas including child or forced labour, arms and munitions, animal testing and factory farming, tobacco, and inevitably, businesses involved in tax avoidance, accounting or remuneration controversies.

Instead, the same proportion would like to put their money behind organisations and sectors that have a positive impact, citing healthcare, energy efficiency and renewables, and sustainable business.

But with half of UK investors claiming they have never been offered a socially responsible investment (SRI), Triodos has called on banks and other financial providers to be more transparent when it comes to disclosing where and how its customers’ money is being invested. More than half of UK investors feel this should be standard, with 60 per cent urging the major stakeholders in the auto-enrolment workplace pension, including Government, to not only be clear about the ultimate destination of millions of people’s savings, but also offer SRI options as standard within the workplace pension.

Good money or good returns?

But awareness is only one of the major hurdles facing the SRI sector. The other is the perception of profit.

The SRI market is worth £15bn in the UK today, with assets under management of around £1.5tn, too many investors fear an SRI investment portfolio would scatter decent returns to the four winds. That’s despite the fact that over the past five years the FTSE All World (ex-fossil fuel) has regularly outperformed the FTSE All World index, and this year the MSCI SRI index has outperformed the MSCI World index.

Now what?

Behind all this though, there is a building momentum to embrace SRI choices in our everyday investments, but it may be the pragmatists driving the change rather than enviro-campaigners as wider changes take hold – not least the Paris Climate Agreement, now ratified by more than 70 countries and about to come into force with its effect on coal, oil and gas industries and those who invest in them.

Indeed, Mark Carney, Governor of the Bank of England, has warned that action to limit climate change could turn huge reserves of oil, coal and gas into unburnable “stranded assets” leaving investors with huge losses.

All of a sudden, it seems a successful long-term investment could depend on being a responsible one. But with so many trying to jump on the SRI bandwagon, what actually constitutes an SRI investment according to your personal ethics is a tricky problem to solve.

So, where could you invest your money for a reassured conscience as well as decent returns among a confusing array of funds claiming to be ethical? Investment research and ratings service Fundcalibre suggests:

• Edentree Amity UK – run by Sue Round, one of the country’s longest-serving ethical managers, this fund invests in a large number of smaller companies.
• Rathbone Ethical Bond – investing in investment grade bonds, this fund has a higher income target than most of its peers and ethical exclusions are simple: no mining, arms, gambling, pornography, animal testing, nuclear power, alcohol or tobacco, which rules out about one third of the index. 
• Standard Life Investments UK Ethical – with a rigorous ‘no compromises’ ethical screening, manager Leslie Duncan will aim to keep 50-100 holdings for between three to five years with the expectation of growth and to a lesser extent income.