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What is inflation, and is it impacting you?

Clim8 Team

19 October 2021 Investment Academy

inflation

Let’s start with the basics: What is inflation?

Inflation is the rate at which prices rise (thus reducing your ability to buy what you’re used to). If the cost of a £1 jar of jam rises by 5p, then jam inflation is 5%1 .

It applies to services too, like having your hair cut or popping to the dry cleaners. 

The market determines inflation, and in the past 18 months, COVID-19 changed our spending habits, e.g. from going less to the cinema to spending more on subscriptions like Netflix. 

You may not notice inflation levels from month to month, but in the long term, these price rises can have a significant impact on how much you can buy with your money.

It’s worth noting that inflation can be difficult to predict, even for the most knowledgeable economists. 

Central Banks have printed a lot of money to stimulate consumer demand, and a strategic decision is needed to keep the global economy afloat during the COVID-19 pandemic. Demand for goods and services has now strongly recovered, but the supply side now looks challenged, experiencing supply shortages (energy, labour). 

How is inflation impacting our energy supplies? 

On energy prices specifically, the lack of investments in fossil fuels over the last 24 months is impacting everyone’s finances. The shift to a decarbonised energy system would make our economies less dependent on energy price swings while paving the way for a sustainable world.

How is it measured?

The Office for National Statistics (ONS) keeps a record and a close eye on the prices of lots of everyday items such as toilet paper, bread, and milk2 .

This list of items is called a “basket of goods,” and it’s constantly updated. 

This list adapts and changes in alignment with what the spending trends are. For example, during 2020, our spending habits changed. We no longer needed gym memberships, and items like hand sanitiser, masks and smartwatches were added to the list. It also often ends up in the news, like the current fuel crisis, where we’ve seen the price of petrol climbing well above the recent ONS data. 

What is the inflation rate used for?

Inflation is used to inform a wide variety of decisions, like how much the price of pensions will rise or if the price of everyday items will rise. 

It’s keenly watched by economists too. They see inflation as a sign of what’s going on in the economy.

Why is everyone talking about inflation right now? 

In recent years we’ve not had to consider the impact of inflation as much as we did years ago. But since COVID-19, the global economy has taken a bit of a bumpy ride. This, hand in hand with the switching to renewable energy sources means we may be seeing more inflation fluctuations than before3 .

Is inflation on the rise? 

The short answer is yes. Before the pandemic hit, inflation in the UK was around 2%, which is a percentage that the Bank of England aims for and expects. 

But due to a mix of circumstances, such as Brexit, COVID-19, and a whole host of other events, the topline figures for inflation have been impacted significantly – most years, we expect a 1% increase per year, but in Aug 2021, we saw inflation spike to 3.2%4 .

It’s not fully clear if this rise is a trend (the new “normal”) or a temporary anomaly.

So, to conclude. Should we be worried?

It’s complex, so there’s no definitive answer yet. 

We asked our investment team for their take and if we should be concerned: 

“Central bankers and policymakers around the globe currently believe that the current acceleration in inflation is transient and will likely return to normality (which is around 2%) as we approach 2022. 

But there are many risks to this consensus, driven by a prolonged energy crisis, labour shortages, and rising food prices. We’re keeping an eye on this as we consider what’s next for the markets.”  

Be sure to follow us on social media and subscribe to our newsletter to keep up to date with our insights into the market. 

Sources

1. BBC

2. Office of National Statistics

3. Bloomberg Green

4 POLITICO

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Sustainable Investing Guide: Suggestions for investing without compromise

Clim8 Team

23 April 2021 Investment AcademySustainable Investing

sustainable investing guide

Considering the extensive information and news flow published in 2020 about sustainable investing, you are probably wondering where to start. Sustainable investing can be an ‘alphabet soup’, with countless acronyms and jargon and you may also be wary of greenwashing. How can you put your money to work for the planet without compromising on returns? Vincent Gilles, our Chief Investment Officer offers his views on a sustainable investing guide to start you on your journey.

1. Eliminate the negative

Ask yourself the following questions: what do you not want to invest in? What does not align with your values? Build an exclusion list specifying those sectors in which you do not want to invest. Oil and gas, airlines, tobacco and arms are regular contenders on sustainable investors’ lists.

2. Find the positive

Think about your values. What do you care about and wish to impact – social equality, clean water, recycling? Define where you most want your investments to make an impact and make a list to help you narrow down your choices.

3. What’s in a name?

Sustainability-focused funds are fairly easy to identify these days. Names tend to fit the purpose. Look out for titles that include words such as ‘clean’, ‘green’ or ‘sustainable’ as around 80% of ‘sustainability’-focused fund names will contain at least one of these words. However, as we point out in the Greenwashing guide, a name is just a starting point. In our view, you should take it with a pinch of salt until you can back it up with solid evidence.

4. Delve into the history

Not all sustainable funds are brand new and fresh to the market. This is a good thing, as they will have a track record of their past performance. Many funds have been around for years and some were simply rebadged as ‘green’ funds. This doesn’t necessarily mean they are misleading or greenwashing as ‘negative impact’ assets may have been sold off and replaced with ‘greener’ ones. After all, we are focusing on transitioning our economy.

However, some digging may be required to verify what activity has happened. Ask the fund management team or asset provider if the information is not available on their website.

5. Keep your eyes peeled for greenwashing

With everyone trying to jump on the ESG bandwagon and insufficient regulations yet in place, greenwashing in our view can seem rife. Misleading claims may  encourage investors with good intentions to put their money into funds that do not actually benefit our planet. Don’t fall into this trap –  read our Greenwashing guide

6. Misleading metrics

It’s one thing saying a fund is aligned to some Paris Agreement metric but how does the fund manager report its impact and adherence to those goals? Ultimately, you want to know what impact your money is having. Unfortunately, many current metrics cannot yet be verified with universally proven methodologies. The good news is that change is coming as accuracy improves with coherent reporting frameworks. Until then though stick to known measurable targets such as, for example, levels of carbon emissions. Expect to see those appear clearly in an impact report on any report on any ESG provider’s website.

7. Return with impact

Investing sustainably does not necessarily mean accepting lower returns. This is, in our view, an age-old misconception. Look for information on a provider’s website that will show you both financial and impact performance over longer periods of time. Always bear in mind that past performance is not a reliable indicator of future results.

8. Aligned to global principles

For example, look out for evidence that the provider has signed up to the United Nations’ Principles of Responsible Investment (PRI); guidelines instructing providers on how they can effectively incorporate ESG thinking into their investment philosophy and processes. Providers signed up to this code of conduct are certifying  that their firm has made a public commitment to responsibly invest. 

With investing, your capital is at risk. This information is for illustrative purposes only and does not constitute investment advice. Past performance is not a reliable indicator of future results.

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Sustainable Investing Glossary

Clim8 Team

23 April 2021 Investment AcademySustainabilitySustainable Investing

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A

Active investing

The process of directly trading individual stocks or bonds in the hope of making a profit by ‘beating the market’. This can be achieved when either an individual chooses where to put their money themselves e.g. day trading or when they invest money in a  fund where the investment manager makes active investment decisions on their behalf.

Actively managed fund

A fund where a management team or investment manager actively decides how to invest an investor’s money  in order to meet predefined investment goals. 

B

Biodiversity

The variety of life found in a single location, ranging from animals and plants to fungi and viruses. Biodiversity encompasses genetic variation within species depending on the ecosystem they are part of e.g. African vs Indian elephants

Brand purpose

The reason a brand exists beyond making a profit e.g. Unilever’s Lifebuoy soap aims to reduce the spread of disease caused by lack of sanitation in developing countries by actively encouraging people to make handwashing part of their daily routine.

C

Carbon capture and storage (CCS)

Also known as carbon capture and sequestration. The process of permanently removing carbon dioxide from the atmosphere at source and then storing it, typically underground. The source of the carbon is usually a factory or power plant. (Our view is this is a controversial approach both in terms of cost and safety).

Carbon footprint

The total sum of greenhouse gases produced by a group, individual or company to support human activity both directly and indirectly. Often measured over a given timeframe. 

Carbon negative

Also known as climate positive. An activity or company that is removing more greenhouse gases from the atmosphere than it is emitting. 

Carbon neutral

An activity or company that is removing the same amount of greenhouse gases from the atmosphere as it is emitting  or one that does not emit any greenhouse gases at all (though in our experience, there are very few examples of the latter). This only applies to Scope 1 and 2 (definition below). They are generally said to be releasing net zero carbon emissions.

Carbon offsetting

The process of a company placing funds into certified and tradable carbon removal schemes in order to counteract their carbon emissions output. Carbon offsetting is typically split into two categories:

  • Avoidance – projects that avoid emissions from being released from the outset e.g. forest conservation prevents deforestation and provision of clean stoves in developing worlds prevents wood being burnt for cooking.
  • Removal – projects that remove emissions from the atmosphere after they have been released e.g. planting trees.

Carbon positive

Also known as climate negative.  An activity or company that is removing less greenhouse gases from the atmosphere than it is emitting. 

Carbon pricing

The cost applied to carbon emitted into the atmosphere. Pricing is typically determined in two ways:

  • A carbon tax – a set price allocated per tonne of CO2 emitted.
  • An incentive to emit less – usually the purchase of a limited number of permits (known as carbon emissions trading).

CDP (formerly known as the Carbon Disclosure Project)

The CDP is an independent not-for-profit charity that set up and now manages the global disclosure system which aims to help investors, cities, regions and companies handle their environmental impact. It houses large databases of company environmental information including in depth insights on carbon emissions and environmental strategies.

Center for International Climate and Environmental Research (CICERO)

CICERO is a climate research institute based in Oslo, Norway that works with governments and organisations worldwide, providing insight on how to solve climate change challenges. The institute is particularly well-known for the research it did on the effects of man-made emissions on the climate, the management of international agreements and civil society’s response to climate change.

Circular economy

An economic system that eliminates waste and aims to ensure materials and products are continually kept in use whilst retaining their total value. The system focuses on removing pollution and regenerating natural systems. 

Climate change

Climate change is the long-term alteration in the planet’s average weather patterns. Although climate change has occurred several times throughout Earth’s history, the term specifically refers to the change in weather systems and rise of average temperatures experienced since the mid-1800s (the beginning of the Industrial Revolution). High levels of carbon dioxide have subsequently been released into the atmosphere causing unprecedented changes in weather systems, never seen before in history. 

Climate disclosures standards board (CDSB)

An international group of environmental Non-Governmental Organisations (NGOs) and businesses that have united to form a non-profit organisation. The CDSB is committed to changing today’s global corporate reporting model to one that equates natural capital (see Natural capital for definition) with financial capital. 

Companies are provided with a framework that aims to enable them to report on environmental information with similar or substantially the same rigour as financial information. This degree of transparency is intended to provide financial institutions and investors with the level of detail required to analyse the risks and opportunities associated with climate change.

COP

Conference of the Parties (COP) is the major decision making body of the UNFCCC (see below for definition). All 197 nations (known as parties), bar a few failed states1 signed the UNFCCC treaty in 1992. The parties meet annually to vote on the latest decisions for implementation.

COP is the only climate crisis forum in the world where the poorest countries’ opinions carry equal weight to the richest countries’ opinions. No agreements can be made unless there is a full consensus. The next COP meeting, COP26, will take place in Glasgow, UK in 2021.

1 states that cannot perform the two fundamental functions of the sovereign nation state in the modern world system

Corporate governance factor

Also known as governance or governance factors, it makes up the G in ESG (see below for definition). Corporate governance is a toolkit of rules, processes and practices that dictate how a company is governed and to what purpose. It spans a wide range of factors from outlining the distribution of responsibilities and rights amongst different stakeholders to rules on how decisions are made. 

This structure aims to enable the governing body (typically the Board) to deal more effectively with the daily challenges of running a company. Company laws are designed to ensure companies are operated and managed in a way that is in their shareholders’ best interests and that conflicts of interest are appropriately mitigated.

Corporate social responsibility (CSR)

Also known as corporate responsibility or corporate citizenship. Corporate social responsibility is when a company consolidates social and environmental issues into its planning and operations. It is a self-regulating model that shows company employees, external stakeholders and the public that businesses can be a force for good. 

D

Decarbonisation

The transition of an economy from one that relies heavily on burning fossil fuels to one that uses advanced methodologies to sustainably reduce and compensate greenhouse gas emissions.

Diversity and Inclusion

Also known as social justice. Diversity refers to the characteristics and traits that make individuals unique such as gender, race, age, orientation, disability, religion, beliefs etc. whilst inclusion refers to the social norms and behaviours that ensure people feel welcome in their surrounding environment. 

When applied to the workplace, diversity implies that the group of people employed by an organisation directly reflects the diversity of society in which it operates. Whereas inclusion infers that every individual is treated fairly, able to contribute to the organisation’s success and has equal access to resources and opportunities. 

Divestment 

Also known as divestiture. Divestment is the opposite of investment. The process of selling an asset such as equipment, real estate or a subsidiary for moral, political, social or environmental reasons e.g. Fossil fuel divestment means selling off investments in the fossil fuel industry. 

E

Environmental factors

Environmental factors refer to the E in ESG (look below for definition). This includes all the physical and non-physical influences that affect the organisms living in that area. When applied to a company framework, these factors pertain to all environmental elements in the political, regulatory, technological, economical and demographic landscape affecting how a company survives, grows and operates e.g. waste management, energy use, greenhouse gas emissions, treatment of animals, climate change, biodiversity, natural resource use. 

ESG

ESG stands for Environmental, Social and Governance – three key factors required to measure and evaluate the ethical and sustainable impact of an organisation. Commonly used to gauge a company’s future financial performance and its behaviour against other companies.

ESG Investing

Method of investing focused on delivering ESG criteria and impact when building portfolios or selecting which company to invest. 

Ethical investing 

Investors that are actively avoiding putting money into companies that have a negative impact on society e.g. tobacco, arms and gambling. 

F

Fossil fuel

A non renewable source of energy that releases carbon dioxide and other greenhouse gases when burnt. Sources include coal, petroleum, oil shales, bitumens, natural gas, tar sands and heavy oils and are generally found beneath several layers of sediment and rock. These contain carbon and derive from the remains of organic matter produced by photosynthesis; a process that began over 2.5 billions years ago. 

G

Green bond

Loan issued by a company or government to finance new and existing environmentally focused projects such as renewable energy. Investors put money into this loan in return for green bonds. 

Greenwashing

A type of marketing that uses inaccurate or misleading messaging to imply a product, service or organisation is more environmentally-friendly than it actually is. (Learn more in our Greenwashing guide)

H

Hydrogen Fuel (H2)

A zero-emission fuel, otherwise known as a clean fuel, that when burnt with oxygen in a fuel cell only produces water. Hydrogen can be sourced from a variety of domestic resources including nuclear power, biomass, natural gas and solar power, using extraction methods such as biological processes or electrolysis. Hydrogen is currently very expensive and is still not produced at industrial levels but many Governments have committed vast amounts of subsidies that should help costs reduce to a level that could make H2 competitive within 10 years.

Different types of hydrogen fuel exist:

  • Grey hydrogen – the most common and dirtiest hydrogen fuel. Grey hydrogen is made from fossil fuels using an energy-intensive process called steam methane reformation. 11 tonnes of carbon dioxide is emitted for every tonne of hydrogen produced.
  • Blue hydrogen – same process as grey hydrogen but carbon is captured and buried underground.
  • Green hydrogen – the cleanest and most expensive hydrogen fuel. Pure hydrogen is extracted from water using electrolysis (a powerful electric current runs through water separating hydrogen from oxygen), powered by renewable energy sources (definition below).

Human rights

The basic rights and freedoms that every human on this planet from birth until death is entitled to without discrimination and regardless of nationality, ethnicity, religion, sex, race or any other status. Human rights include the right to work, education, life and liberty, and freedom of expression and opinion.

I

Impact investing

Investments are made based on the level of environmental and/or social impact achieved as well as financial return. Investors base decisions on impact evidence rather than where their values lie.

Impact measurement

An evaluation of how an organisation’s activities affect the planet both positively and negatively through calculating how a company’s profitability would be affected if their social and environmental impacts were monetised. 

K

Kyoto Protocol

An international treaty that entrusts state parties to reduce their nations’ carbon emissions. It was established in 1997 in Kyoto, Japan at COP3 (see definition above) though only enforced on 16 February 2005. 

M

Modern slavery

The severe exploitation of people for commercial, criminal or personal gain. These people are ‘controlled’ and forced to do an activity against their will. They are often unable to leave the situation because of threats, coercion, violence, deception or abuse of power. Modern slavery comes in a variety of forms including bonded or forced labour, forced marriage and human trafficking. 

N

Natural capital

The world’s stocks of air, land, water, renewable and non-renewable resources (plants, animals, forests and minerals). These stocks are considered capital because they provide goods and services to humans and other species and are the basis for all economic activity.

Negative screening

The process of deliberately excluding companies in investment decisions that are involved in objectionable activities or sectors such as fossil fuel production and arms. 

Net zero carbon

Net zero is reached when a company’s carbon emission rate equals its carbon absorption rate throughout its full value-chain i.e. Scope 1, 2 and 3 (see definitions below). In order to achieve this, companies find ways to improve operational efficiency and subsequently reduce carbon emissions in line with a predetermined science-based target (see definition below) of 1.5°C. 

Any remaining emissions that cannot be removed will be reconciled by allocating funds to certified greenhouse gas removal schemes.

Non-renewable energy

A source of energy that cannot be replenished in our lifetime and will eventually run out e.g. Oil, Coal.

P

Paris Agreement

Also known as Paris Climate Agreement or Paris Climate Accord. The Paris Agreement is short for the Paris Agreement Under the United Nations Framework Convention on Climate Change and is a legally binding international treaty on climate change adopted by 195 countries and the European Union. 

It was established at COP21 (see definition above) in Paris, France in 2015 and requires that every state party does everything in its power to limit global warming to 1.5°C. The treaty sets out to improve on what was agreed in the Kyoto Protocol (see definition above).

Passive fund

A fund that replicates an index. The most famous type of passive investment is Exchange Traded Funds. In passive investment, the involvement from fund managers is minimal and, as a result, costs are usually much lower than those of actively managed funds. 

Passive investing

An investor buys and holds a diversified mix of assets for long periods of time with minimal trading efforts. The most common form is index investing when investors buy assets that mirror the market index.

Physical risks of climate change

Risks associated with climatic events such as hurricanes and droughts that will affect a company’s physical assets i.e. supply chain, markets, customers and operations.

Portfolio

A set of investments in any kind of securities (listed or not), selected along specific strategies or criteria.

Positive screening

Actively looking for companies to invest in that have sustainability practices embedded in their core structure such as socially responsible business practices or environmentally friendly products. 

Product carbon footprint

Also known as life cycle product carbon footprint. It is the climate impact of a product and is measured in carbon dioxide equivalents (CO2e). The footprint is calculated by measuring the total greenhouse gas emissions throughout the product life cycle, from extraction of raw-materials to end of life. 

Purpose-driven company

A purpose-driven company focuses not only on profit but takes a stance on issues beyond their products and services. 

R

Regenerative

Something that can be restored, regrown or renewed. 

Renewable energy

Also known as alternative energy. Renewable energy is a source of energy that never runs out e.g. Solar, Wind, Tidal

Responsible investing

When an investor considers ESG (see definition above) risks and opportunities in the decision-making process. 

S

Science-based targets (SBT)

A set of goals, informed by independent climate science, that provide a company with a clear pathway to reducing their greenhouse gas emissions. Targets are required to be in line with the Paris Agreement (see definition above).

Scope emissions (1, 2 & 3)

Company greenhouse gas emissions are split into three scopes:

  • Scope 1 – also known as direct emissions. Emissions generated from company activity that can be directly controlled by the company e.g. heating, fleet vehicles, refrigeration
  • Scope 2 – also known as indirect emissions – owned. Emissions created during energy production prior to the company purchasing it and when energy is consumed by a company.
  • Scope 3 – also known as indirect emissions – not owned. Emissions generated from every other activity throughout a company’s value chain outside Scope 1 and 2. They include both upstream and downstream emissions. 

Security

A financial instrument issued by a company that is bought, owned and traded by other enterprises and individuals. Examples include stocks and bonds.

Share

A single unit of equity ownership in a financial asset or company. It ranks lower than debt in case of company liquidation. The rise in value of a company is best encapsulated in shares rather than debt (see above).

Social factors

Social factors refer to the S in ESG (look below for definition). The company’s attitude towards social issues including human rights, labour standards, adherence to workplace health and safety, diversity and consumer protection. They also include how the company interacts with suppliers, the local community, customers and other businesses.

Socially responsible investing (SRI)

Also known as social investment or sustainable investing. Actively seeking out companies to invest in that generate financial returns and make a positive contribution to society. This approach allows for companies that are not inherently sustainable but are investing in clean technologies e.g. a fossil fuel company investing in renewable energy.

Stocks

A share of ownership in one or more companies. 

Stock picking

Identifying and choosing stocks to invest in based on a particular set of criteria.

Stranded asset

Assets that have been prematurely devalued and no longer able to earn an economic return. Many fossil fuel assets risk being ‘stranded’ soon. 

Sustainable finance

Any form of financial process including capital flows and risk management activities that integrates ESG criteria (see definition above) into decision-making processes and strategies.

Sustainability

The process of maintaining change in a balanced environment so needs are met today whilst not compromising future generations.

T

Taxonomy regulation

A classification system developed by TEG (see definition below) that provides businesses and investors with a set of criteria detailing which economic activities are deemed sustainable.

Technical Expert Group on Sustainable Finance (TEG)

A group of 35 international finance experts founded in 2018 to assist the European Commission in developing the following areas:

  • Taxonomy regulation (see definition above)
  • EU Green Bond Standard
  • EU climate benchmark and disclosure methodologies
  • Guidance on corporate disclosure of climate-related information. 

Transitional risk

The financial risks associated with the transition to a low-carbon and more climate-resilient global economy deriving from substantial technology, legal policy and market changes. 

U

United Nations Framework Convention on Climate Change (UNFCCC)

The UNFCCC was the first international environment treaty to tackle climate change. Founded in 1994 and ratified by 197 countries, the original objectives were to “stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system and prevent human damage and interference with the climate system.” 

The UNFCCC is the parent treaty of the 1997 Kyoto Protocol and 2015 Paris Agreement (see definitions above).

United Nations Global Compact

The UN Global Compact is the world’s largest corporate sustainability initiative. Businesses are encouraged to sign up and commit to sustainable and socially responsible practices. The initiative is based on 10 guiding principles covering environment, labour, human rights and anti-corruption that organisations should embed in their value systems and their approach to doing business. 

United Nations Principles for Responsible Investing (PRI)

A network of international investors founded by the UN, created a voluntary set of six principles. These principles encourage investors to commit to incorporating ESG factors into their investment processes. 

United Nations Sustainable Development Goals (SDGs)

Also known as the Global Goals. A set of 17 goals that were adopted by every United Nations member state in 2015 to tackle the planet’s greatest challenges across society, environment and economy today. They are a universal call to action to protect the planet, end poverty and improve human lives worldwide by 2030. 

V

Values based investing

Investing in companies that align with not only gain financial return but align with personal values.

W

Waste management

All activities and actions, from collection of waste through to recycling, that are required to manage waste.


With investing, your capital is at risk. For illustrative purposes only and does not constitute investment advice

2 Comments

Investments and Greenwashing: avoiding pitfalls to make an impact

Clim8 Team

23 April 2021 Investment AcademySustainabilitySustainable Investing

greenwashing

What is greenwashing?

When a company promotes unsubstantial and misleading green claims about its products or services, it can be called greenwashing.

Often used as a smoke and mirrors ploy, greenwashing distracts customers from the reality of a company’s operations and outputs. Fossil fuel companies are infamous for it. For example, they spend vast media budgets on promoting their latest green technology innovations, which only accounts for 4% of revenues. All the while, pumping billions of pounds worth into new oil research [1]. 

In the investment industry, greenwashing refers to money managers who claim to offer ‘sustainable’, ‘green’ or even ‘responsible’ portfolios without in our view transparent and conclusive evidence of their impact. 

Currently, according to research conducted by The 2 Degrees Investment Initiative 85% of so-called green-themed funds (a specific niche of the wider overall market) all ‘green funds’ have misleading marketing [2].

Paved with good intentions: what drives greenwashing?

Greenwashing, in our view, leverages customers’ good intentions for cynical ends. In the belief they are investing their money to  benefit the planet, on top of growing their nest egg, customers may ultimately be harming it further. 

Even when they implement better investment standards in good faith, investment firms can find themselves greenwashing. A lack of understanding of impact investing, or the desire to appear further along on that journey than is truly the case can drive companies into a greenwashing quagmire. 

Marketing departments must be fully in sync with the investment team, so that a clear and transparent roadmap can be implemented.

How is greenwashing hurting the investment industry?

Greenwashing in our opinion is detrimental to the entire investment and asset management industry regardless of whether individual companies are doing it or not. Younger generations are generally savvier and more demanding. They tend to actively seek out additional information on companies to see whether what is being advertised is backed up with hard evidence. A whiff of greenwashing could damage customers’ trust in the entire sector.

Why greenwash?

In the last few years, customers have become more eco-conscious, leading to a mass inflow of money to ‘greener’ funds. The ‘green’ investing sector hit $1 trillion in 2020 [3]. Many firms realised that their existing portfolios could not benefit from this trend, not having the necessary green credentials to take on their competitors. 

A wave of passive ‘ESG / green’ funds subsequently appeared in the market (see glossary for ‘passive fund’ definition) from companies wanting a foot in the door of this rapidly growing sector. However, due to a lack of regulation and active decision-making in passive funds, despite their ‘green’ claims, a number actually allocated funds where they shouldn’t have. As an example, one third of ‘low-carbon funds’ in the UK are currently invested in oil and gas stocks [4].

Unfortunately until effective regulation is fully implemented, it seems to us greenwashing is here to stay.

Coining greenwashing

The term ‘greenwashing’ was first coined by an American researcher and environmentalist, Jay Westerveld in 1986. Visiting a resort in Samoa, Westerveld noticed they were promoting a new ‘reusable towel service’ which was ‘better for the environment’ yet several hundred metres away, they were cutting down thousands of trees for their latest expansion. The messaging was incoherent. Westerveld defined the term ‘greenwashing’ in an essay he wrote based on the irony of the ‘save the towel’ movement in the hospitality industry [5].

What regulations or laws are in place to prevent greenwashing?

A regulation came into force on 12 July 2020 though most of the provisions will not apply until 2022 and 2023 (since Brexit, we now have no clear information on how and if the UK will enforce any regulations). However, Her Majesty’s Treasury has stated that the sustainability and responsible investing agenda is and has been a focus of its Asset Management Taskforce. Further, the UK government has committed to reach net zero by 2050 and is currently conducting a review on how best to fund the transition to net zero1.

However, the EU Taxonomy Regulation (see glossary for full definition) is currently being further established; a set of recommended criteria that will help investors determine whether funds are ‘sustainable’. However despite the recently approved recommendations put forward to the European Commission, official roll out on transparency will not take place until 2022. 

In the meantime, we would encourage firms with ESG offerings to carefully consider the requirement to be fair, clear and not misleading in their communications. This includes in setting out information about their investment process and investment decision-making so that it is clear to consumers what they are investing in and to help to ensure the industry provides consistent messages to the communities we serve 

Do penalties exist?

Not explicitly. Though, in our view, it can surely  only be a matter of time before greenwashing becomes history. And if regulations don’t lead the way, our view is savvy consumers will. Damage to a brand’s reputation can potentially be irreversible, especially in the financial services industry, where customers trust firms with their savings.

How to spot greenwashing in the investment industry?

Until additional regulation kicks in, customers have a responsibility to put their investigative hats on. In our opinion, here is how:

  • Enquire about the firm’s expertiseIt is key to assess the experience of the fund management team and their sustainable investing credentials. How do they stay abreast of all the latest climate change news? Regular training should be in place to ensure the investment team is staying on top of trends. If those answers are difficult to come by or unconvincing, this should be a red flag. 
  • Transparency is key – The investment firm may well be investing in sustainable initiatives but are they themselves sustainable as institutions? They should have net zero carbon plans (see glossary for definition) in place as well as a Diversity & Inclusion policy which should be implemented via a diverse team across the whole organisation. Energy efficiency certificates can be verified on certifiers’ websites. Beyond companies having plans, customers should also ask for evidence that those companies  are acting on these plans backed up by real evidence. You have to walk the walk as well as talk the talk. 
  • Demand information on how they embed ESG – The term ESG (see glossary for definition) is endemic. However, the current lack of full regulation makes it easy for investment firms to claim their funds are ESG-aligned. Therefore, customers should challenge the investment manager on their strategy to embed ESG in the investment process. While the following may be highly regarded systems that can be leveraged to enhance better decision making – Global Reporting Initiative, Sustainability Accounting Standards Board and the World Benchmarking Alliance, if it emerges that ESG filtering is more an add-on than core to the strategy, then more digging in our view is required. 
  • Question the fund’s investment strategy and process approachFrameworks and methodologies should be clearly  aligned with their sustainability goals. Do they disclose their underlying investments and how those are tackling sustainability issues?  Impact reports on how beneficial their investments have been for our planet in our view should be published annually and backed by solid evidence. Transparency in our opinion has to be key. 
  • It is all in the wording –  Be wary of websites flush with vague wording such as ‘we believe sustainability should be at the core of everything we do’ without hard evidence to back up such statements. Generic fund names e.g. ‘Sustainable ISA’ can also be misleading. Look for hard evidence as well as how such firms have defined sustainable investing.
  • Seek out engagement levels – Management teams should lead the way and hold their investment companies to account, constantly looking to improve their practices. What is their voting policy? Engagement is paramount in the transition to a greener economy. 

Until regulations come fully into play, make sure you keep your wits about you. We expect more transparency and regulation to drip through in 2021, which should be helpful, at least in raising awareness.

You can track the European Taxonomy regulation progress via the European Commission website

With investing, your capital is at risk. For illustrative purposes only and does not constitute investment advice. Past performance is not a reliable indicator of future results.

Notes

1John Glen addresses Investment Association on Sustainability and Responsible Investment – GOV.UK (www.gov.uk)

Sources

[1] Independent

[2] Reuters

[3] The Motley Fool

[4] The Financial Times

[5] The Guardian

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How To Start Sustainable Investing: The Key Questions

Clim8 Team

13 May 2021 Investment Academy

Investing in stocks & shares, bonds, funds and commodities can be seen as a smart way to grow your money over time. It can help you achieve your personal goals and give you the financial freedom to tick off lifelong dreams.

In this article we’ll answer the key questions that many people ask before they start investing.

What can I invest in ?

There is a wide range of available investments, from businesses to property, cash, commodities and even cryptocurrencies, you can invest in many things. In many cases it is possible to invest directly (i.e. own the physical asset) as well as indirectly (e.g. own shares of a physical asset).

There are a number of ways to invest indirectly too. Here are two of the most common indirect investment types:

  • Stocks & shares

You can buy shares in businesses and markets in the hope that their value will increase over time, meaning your investment is worth more than the amount you originally invested.

  • Funds

You can also invest in a fund (a collective investment vehicle which “pools” assets), which is made up of a number of assets, whether stocks & shares, property or bonds. This will be looked after by a professional fund manager, who will invest your money usually in one of two ways:

– An ‘active’ fund. This aims to outperform the market by actively selecting stocks and shares and/or other assets.

– A ‘passive’ fund. This kind of fund simply tracks an index and could even be structured as an Exchange Traded Fund (or “ETF” for short).

How long should I invest for?

Investing is a personal journey, so the length of time you hold your investment should depend on your own circumstances and what you’re looking to achieve. As a general rule, investments in stocks and shares should be seen as a medium to long term investment. These investments are generally not appropriate to be held over the short term due to the fluctuations in value that can be experienced.

Investing your money for longer periods of time also means your investment may benefit from the compounding effect, which is in short when your investment increases due to interest being earned on accumulated interest. Compounding was described by none other than Albert Einstein and more recently, the legendary investor Warren Buffett as the “8th wonder of the world”.

How much should I invest?

You should only invest from your savings, always making sure that you have enough to fall back on – at least three months of living expenses is generally considered the general rule of thumb. However, you should also consider your assets to debt ratio. Typically, it is best to repay debt before making investments as the interest on debt can be higher than the returns that can be earned by investments.

How much risk should I take?

Every investment carries an element of risk. There are no guarantees and the value of your investment can increase or decrease over time. Investments are not like savings accounts, but at the same time, they are not subject to the same risks of the rate of inflation/cost of living eroding the real value of your money that can occur by simply leaving your money in cash.

Think about risk on a spectrum, from low, to medium, to high. Investments with a lower level of risk typically offer less in returns annually. However they expose investors to a lower level of potential loss than higher risk investments. Higher risk investments often generate higher returns but carry with them higher risk of loss of your initial capital. This is generally viewed as the risk/reward pay off.

Where should I invest my money?

Think carefully about the types of companies and industries that you want to support. Do you want them to have a social conscience? Do you care if they are a force for positive change in the world? And from an economic perspective, are these businesses likely to grow in coming years or die out as industries focus on becoming sustainable? You should also consider diversification (i.e. different assets, geographies, etc) when considering where to invest your money.

One aspect to think about is that with society more aware of its responsibilities than ever, and the impact of environmental, social and governance issues on the environment, long term sustainable investing is becoming an increasingly important consideration.

What is the investing process?

You can breeze through the onboarding process with the Clim8 app in just a couple of minutes, choosing your risk profile and how much you want to invest. Lots of people start investing by making use of some or all of their £20,000 stocks & shares ISA allowance. This allowance currently means you won’t pay tax on any profits earned from investments.

Before making your first investment, it’s important that you have a basic understanding of these questions, which we hope will put you in a strong position to start thinking about investing with confidence.

Clim8 Invest is a simple way to invest in a sustainable portfolio of carefully selected companies already making a positive impact on climate change.

Investments of this nature carry risks to your capital. Investing in private equity involves a high degree of risk. Please invest aware. Please note this information is for illustrative purposes only and it must not be construed as investment advice.

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