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Finance / Sustainable finance

Investing to make the world greener

Moving personal investments to funds that meet environmental, social and governance criteria can make a difference, says Financial Times journalist Alice Ross in her new book.

After reporting on finance for the Financial Times for 14 years, journalist Alice Ross decided it was time to explain to the general public how everyone’s investments can help tackle climate change and move forward the clean energy transition, as she explains in conversation with Energy Monitor.

alice-ross-FT
Alice Ross, FT journalist and author of Investing to Save the Planet.

Why did you decide to write this book?

I was motivated by personal reasons. I was feeling quite stressed by climate change and I was asked to write a piece for the FT money section, and so I decided to write about what investors were doing to tackle climate change. I was surprised by how much was going on. There was so much happening, things I had not thought of before and lots of positive developments to report that made a nice change from reading and writing about awful news related to climate change.

What do you hope to achieve with the book?

I didn’t set out to convince people of anything. I have tried to be factual and to simply report what is happening on the ground. I wanted to write about positive things and inspire people that they can actually do something.

I also wanted to demystify the financial industry, to explain what environmental, social and governance (ESG) means. It can be confusing that BP, for example, is included in some ESG funds because although it is an oil and gas stock, the company often has good governance. At the opposite end of the scale, in 2019, Triodos sold its shares in Spain’s Siemens Gamesa Renewable Energy due to concerns it could be violating human rights in its business operations in the occupied territories of western Sahara, even though its environmental score was high.

Should private investors demand their pensions and other investments have no links to fossil fuel companies?

I don’t have a personal view. I am vegetarian and so would not feel comfortable about investing in a meat company. Whether individuals, banks or pension funds should divest or engage with fossil fuel companies is a personal decision, although there is lots of evidence that positive engagement with these companies is effective. The simple view of divestment is that selling shares means a company’s share price will go down, but there is no evidence for this, as in the short term other investors will often step in.

Some people even argue it could be damaging at this early stage of the energy transition to dump fossil fuel stocks altogether. A January 2020 report by Bank of America Merrill Lynch warned that as energy companies had already been a frequent target of divestments, a key risk for the energy transition was that there wouldn’t be enough capital investment in the sector in the years ahead to sufficiently support the transition to a low-carbon economy.

However, if divestment becomes a wider movement with consumers choosing to boycott goods, this can change the tone of the conversation and get governments and regulators to look at the issue and bring about change.

Not all fossil fuels are born equal – some, such as BP or Shell, have said they will invest heavily in renewables and transition to net zero, while others such as ExxonMobil are doing very little about climate change. Should there be a category of ‘transition companies’ for investors?

I think that would be tricky, in practice. People’s ideas of transition are very different and the terms could mean different things in different parts of the world. Companies are changing all the time and being classified as a transition company could quickly become out of date.

Is ESG investing here to stay?

Fourteen years ago, when I started writing about personal finance, the green element in investment was very niche and was not taken very seriously. People working in this part of the industry were seen as do-gooders, who were not interested in maximising revenues. But ESG and green financing is becoming much more pervasive. I think this trend is here to stay. Climate change is not going away.

As I show in my book, record numbers of people want their investments to be sustainable. A report by the UK Department for International Development found that 68% of UK savers want their investments to consider their impact on people and the planet alongside financial performance. US investors ploughed $20.6bn into sustainable investments funds in 2019, nearly four times as much as the previous year. Deloitte predicts that ESG funds could make up 50% of total professionally managed investments by 2025 and, in January 2020, index provider MSCI said all investors should incorporate ESG principles in their investments to mitigate the risks of climate change.

Sustainable funds are often outperforming traditional funds. A report from the London Stock Exchange in 2019 showed a 41.1% rise in the FTSE Environmental Opportunities All Share index in the preceding five years versus a 33.4% rise in the FTSE Global All Cap index. While there is no clarity over just how risky fossil fuel companies will be in the future, it seems increasingly clear that in the long term it makes financial sense for investors to avoid fossil fuel companies.

You suggest in your book that the bond market is the asset class that really matters if investors are to change the tide on climate change and help speed up the clean energy transition.

Yes, many financial experts believe the biggest way to make an impact is to cut off a company’s access to financing. If nobody will give you a mortgage, you can’t buy a house. If an oil and gas company can’t get funding for its new project to drill in the Arctic, the project won’t take place.

Who will lead this trend, incumbent companies or new entrants to the market?

The jury is out on this. Huge companies have lots of cash for R&D and so innovation can come from them and they may lead the change to cleaner energy sources. At the same time, people at the head of new companies working in this field are leading the way and several have already become billionaires. The most obvious person is Elon Musk, but there are many others who have made their fortunes with ‘green’ products. Also, this trend will grow as younger generations or Gen Z, who typically care more about the environment, start to head big family companies.

Banks and big investment companies are generally seen as the baddies and just focused on profits. Do you really think they can help clean our energy sources and fight climate change?

The financial industry is opportunistic. If financial companies can sell something by sticking a label on it, they will. It is their business to sell products. ESG is one of these labels and it is difficult to analyse exactly how green or clean investments are given there is no standard understanding of what ESG means. We could be very cynical and say companies are just saying what people want to hear, but I am an optimist. Regulation is pushing for more sustainable investments and I think companies are looking increasingly at doing more than simply maximising profit for shareholders.

Investing to Save the Planet: How Your Money Can Make a Difference by Alice Ross will be published on 19 November by Penguin Books.