Following our Investment opportunities in a low-carbon economy event earlier this year, we invited Ian Simm, Founder and Chief Executive of Impax Asset Management Group and guest speaker at Imperial College London Business School, to answer your questions about taking responsibility for your investments to help create a sustainable future.
Your personal finances may seem remote from the problems facing the planet, particularly the state of the global environment. However, with a little effort to “join the dots” of finance, everyone who wants to future-proof their finances can take a few simple steps to align where their money goes and how it is used, with a clean, green future. Let’s take four areas of everyday finance and see how this can be done:
Where is my pension invested?
Everyone needs a pension, and those lucky enough to be able to work for many years will probably be making regular contributions into a plan. Typically, pensions pay beneficiaries from current assets, meaning that at any point in time, your pension will be invested across many sectors of the economy and a large number of countries. Where they are invested depends very much on the discretion of the pension plan managers – and unsurprisingly, their views on environmental risk, such as climate change, vary enormously.
Since the signing of the Paris Agreement on climate change, there has been growing pressure from governments, regulators, and pension scheme members across the EU for pension plan managers to address these risks and invest in sustainable growth opportunities. Although there is currently no standardised process for this, a number of pension funds now employ strategies that feature increased exposure to sectors that are in-line with sustainable development goals. For example, the National Employment Savings Trust (NEST), the UK government-run pension scheme, has allocated a portion of its assets to a fund that invests in companies well placed for the transition to a lower-carbon economy. You can contact your pension plan manager to find out where your funds are invested.
How green are my savings?
Since 1999, the Individual Savings Account (ISA) has allowed people to protect up to £20,000 from income and capital gains tax. Out of the seven types of ISA, the classic Stocks & Shares format is the most flexible, allowing for direct investment into companies, bonds, or funds of an investor’s choosing – ideal if you are confident enough to manage your own investments and have a sustainable fund in mind. However, for those who are not, some providers, such as Virgin and Triodos Bank, offer thematic funds that invest in companies with a lower environmental impact and those providing solutions for environmental issues alongside ISAs that may suit. Though take note of the annual ongoing charge of these funds as they can be expensive.
Is my bank facing up to climate change?
The basic principle of banking is simple: they take our deposits and then lend these out again. Traditionally, banks have used a narrow range of financial and commercial criteria to help them select the most suitable borrowers with the lowest risk that they will default on a loan. But now, many banks are going further and refusing to lend to companies in sectors that stand a significant risk from environmental factors, either directly or indirectly. In fact, the Task Force on Climate-related Financial Disclosures (TCFD) recently published a number of important recommendations to help the international financial system, including asset owners and banks, improve its understanding of the systemic risks of climate change.
Similarly, The Equator Principles (EP), launched in June 2004, is a framework for assessing and managing environmental and social risk in project finance (typically infrastructure projects that exceed $10m in capital costs). It is adopted on a voluntarily basis by banks across the world, including HSBC and Barclays. You can easily find out if your bank adheres to the EP by looking at their yearly reports and data on their websites.
Am I making the most of sustainability discounts on my mortgage?
Mortgages are very much part of the banking system – borrowers can screen for lenders that align with their own sustainable development principles as they would when choosing a bank account. However, there are also specialist mortgage lenders and building societies that offer a discounted rate, or higher amounts of funds, if the intended purchase has favourable energy efficiency features, such as double-glazed windows. Loans are also offered at discounted rates if the funds are intended for energy efficient improvements on existing properties. Taking sustainable action on your house can help save money.
Future-proofing your finances and aligning them with sustainable investment goals does not have to be a difficult endeavour. Improved reporting standards and access to data has made it simple to find out if the actions of a financial company align with your own. And if they don’t, the means to challenge them have never been more open.
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