How to Get Started With Sustainable Investing? With Georgia Stewart

Articles

22 Oct

The Wallet by Emilie Bellet Vestpod Georgia Stewart Tumelo

Date: Oct 22, 2020

Many of us are trying to consume less, eat less meat, recycle, limit the number of flights we take to have a positive impact on the environment.

However, it is estimated that of the “£3 trillion invested in UK pensions, a lot of it funds harmful industries like fossil fuels, tobacco, and arms”, according to Make My Money Matter.

With workplace pensions, it’s sometimes hard to know where your money is being invested which could be conflicting with your personal beliefs, but there is huge potential for this money to be used for positive change.

Georgia Stewart, the co-founder of Tumelo, an impact-focused technology firm, shares her insights on how we can make sustainable choices with our investments and how to get started investing in companies that align with our personal values. Her mission is to enable investors and pension members to benefit from a more sustainable investment system, giving a voice to shareholders and full transparency as to where their money is being invested.

*Remember: the value of investments can go down as well as up so you may get back less than you invest. Always do your own research - and note that what we discussed in the podcast is not a personal recommendation for any particular investment.*

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What is ethical investing?

ESG, SRI and impact investing – what do these acronyms and jargon mean? When it comes to making ethical and sustainable decisions in an investing context, the terminology surrounding such strategies can make it a challenging space to navigate. To make matters more confusing, Environmental, social and governance (ESG) principles, socially responsible investing (SRI) and impact investing are terms that are often used interchangeably in the investment space. However, it is important to realise that approaches to sustainable investing are nuanced and tend to vary along a wide spectrum of commitment and intensity. Indeed, ESG, SRI and impact investing principles differ in distinct ways that will affect the approaches adopted by individual investors in order to meet their goals.

Investors with an ESG agenda will look at the environmental, social and governance practices of the companies that they invest in, thereby augmenting the traditional finance perspective of investing by identifying potential risks and opportunities associated with the non-financial impacts of the business. Although ESG investors are socially conscious, their main driver of their investment remains the financial performance of a company.

SRI takes ethical investment one step further than ESG. Investors select their investments based on specific ethical criteria shaped by their personal values and beliefs. For example, SRI could mean that an investor chooses not to invest in ‘sin stocks’, which are stocks of companies involved in traditionally unethical activities, such as firearms, or an investor’s SRI approach could be more specific, such as refusing to invest in companies which fail to incorporate gender inclusivity on the agenda.

Impact investing approaches necessitate that investments will only buy the stocks and shares of companies that have a positive impact on society. By allocating capital to companies which facilitate these positive outcomes, impact investing helps these companies to fulfil their goals which are beneficial to society or the environment. This could mean investing in a company which has the sole purpose to improve social housing, for example.

The underlying and unifying belief behind ESG, SRI and impact investing approaches is that it is no longer sufficient for companies to pursue shareholder maximisation in isolation, but rather companies ought to actively consider their wider corporate, social and environmental responsibilities. Although ethical investing is by no means a new concept, in recent years there has been an explosion of people wanting to make a difference through ESG considerations, SRI and impact investing, with estimates that the global ESG business will be worth over $50trn over the next 20 years (S&P Global Insights, 2020). Georgia encapsulates the concept of ethical investment more broadly as investing in companies which have a positive impact over the long term and operate in such as way that they will be able to continue to do so for many future generations.

Unintentional Contradictions

Nearly all companies are now obliged to auto-enrol their employees into a workplace pension. While you are at your disposal to opt-out of the workplace pension, it doesn’t seem sensible to do so given that you are effectively handed ‘free money’ from your employer in the form of pension contributions.

Your employer will usually have a default fund in which your contributions are invested. This can cause unintentional contradictions between your pension investments and how ethically you choose to behave in your ordinary life. For example, you might be a researcher specialising in lung cancer, but your pension could be put into a fund that invests in tobacco. Part of this contradiction exists because there is a lack of transparency in where our pensions are being invested. Moreover, it can be very difficult to find ethical funds to invest in and, of these funds, deciding which are the most reputable. In this case, Georgia recommends expert fund managers to help you on your quest to invest your pension ethically and to avoid the trap of running into an unintentional contradiction, which arises when your ethical life choices are diametrically opposed to the implicit ethical choices highlighted by your investments.

Fund managers are responsible for deploying a fund’s investment strategy and for monitoring the fund’s activities. This means that fund managers are the ones who decide which companies to invest your pension in. The most reputable fund managers are in a very powerful position because, not only do they decide where to invest your money, but they also meet with the management of the companies they invest in and, through this, can influence the ESG practices of these companies. For this reason, it is important that your values align with the outlook of the fund manager investing your pension; if you prioritise the same ethical issues as your fund manager, they are likely to push for the ESG criteria that matters to you when meeting with the companies they invest in.

The Power Of Your Pension

The proportion of pension schemes that consider ESG factors is rising at a rapid pace, with funds considering climate change risk in their investments increasing to 54% in 2019 (EY, 2019). Incorporation of ESG factors into investment decisions is especially relevant when it comes to pensions because of the long-term nature of these factors. Pensions wield huge power when it comes to the potential of making a positive impact because of the long-term investment horizon of the pension capital – if you know that you won’t need the money from your pension for another 30 years, you can invest in longer term projects that you perhaps wouldn’t consider with your other investments.

Beware of Greenwashing

As the number of people that invest according to their ethical principles increases, corporations are coming under greater pressure to provide information relating to their wider corporate and social responsibilities. This pressure can be partially explained by the need to appear legitimate: as ESG trends accelerate, a company’s survival may be threatened if society perceives it to have breached its social and environmental contract. As a consequence, some companies have engaged in the practice of ‘greenwashing’.

Greenwashing, or ‘goodwashing’ more broadly, refers to the exercise of falsely marketing to mirror the values of ethical investors whilst actual business operations fall short of the purported level of ethical practice. Such deceitful practice is by no means uncommon. For example, allegations of below minimum wage pay and poor health and safety conditions at Boohoo came at a time when their mission statement claimed to be ethically conscious, announcing the debut of their recycled clothing range in the same year.

As a consumer or individual investor, it can be difficult to spot greenwashing. There are, however, resources available to help you identify such malpractice: companies such as Share Action prepare guides that assist individuals research the validity of companies’ ESG claims and the Norwegian Pension Fund Observation and Exclusion List can be a fruitful place to start when it comes to SRI. Alternatively, by moving up the investment chain and investing through a reputable fund manager, it is possible to let the fund manager do the ESG research leg work for you.

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