Special Features

What does green investing really mean to today’s financial advisers?

Andrew Adcock | Crowd for Angels
|
19th July 2021
Andrew Adcock Crowd for Angels
"Even companies traditionally regarded as being “dirty” such as the oil majors are now looking at how they can 'green' their activities going forward."

Green investing, ESG and now green and ethical mortgages and insurance policies are de rigeur requirements for the financial adviser of today. The sector has come a long way since impact investing was conceived by farsighted and enlightened providers and from the early days, when green and ethical funds were very much niche offerings, with perhaps passable performance.

Today, it is main stream and a combination of demand for an ethical investment option by the public, regulation and good performance means that the sector cannot be over looked.

More and more advisers find clients are questioning the type of investments whether funds or shares that they wish to put their money into as issues such as climate change and deforestation become part of the main political debate. It is not only millennials and generation Z who wish their finances to be aligned to their outlook and beliefs.

Even companies traditionally regarded as being “dirty” such as the oil majors are now looking at how they can 'green' their activities going forward. Philip Morris International becoming a lifestyle business is a recent example.

As a provider, Crowd for Angels is fully aware that advisers need many strings to their bows to offer their clients the right solution. They need to educate their clients and indeed brush up on what is on offer to them. We have been asked to explain in layman’s terms, which may well be helpful to you and your clients what green investing really means 2021.

The term 'green' can be somewhat vague. When people talk about 'green investments', they're speaking generally of investing in activities that can be considered good for the environment directly or indirectly. In this context, green investing refers to investing activities that promote environmentally friendly business practices and the conservation of natural resources.

Green investments are often associated with socially responsible investing (SRI), or now with the more inclusive environmental, social and governance (ESG) title, an investment process that considers social and environmental factors within the context of traditional quantitative securities and investment analysis.

The measurement of the sustainability of an investment is based on ESG issues. The term was derived from the ‘Triple Bottom Line’, also known as the ‘People, Planet and Profits’ (PPP), a concept introduced in the 1990s. It argued that businesses should focus on each of the three ‘P’s and not just on profits, since they were equally important for any commercial enterprise to be sustainable. This concept evolved into the focus of ESG, which today is the bedrock of SRI.

For advisers, having a talking point such as this is useful when discussing ESG investing because clients are at least familiar with the idea of protecting the world in which they live from pollution.

However, the environment is only one aspect of ESG investment, and there does not seem to be the same degree of awareness around the social and governance aspects. It means advisers may find themselves having to explain these issues to clients in a way that they do not necessarily have to with environmental issues.

Clients of financial advisers who work in a corporate environment are much more aware of social and governance issues, such as increasing the number of women in top positions. It is not only the biggest household names that struggle to recruit into these positions but it’s on the agenda.

However, financial advisers do need educating about how companies are run, who are on their boards, how they approach inclusiveness on the board in terms of female representation and ethnicity, and how they approach climate change.

ESG forms a key part of a discussion about investing in general and it makes sense to discuss it all at once at the same time. What are clients' values? Where would they sit and how important they are to them, when it comes to making investments? A bespoke portfolio – screening out one or two stocks means greater cost.

Advisers also need to be aware that in spite of Brexit, the EU sustainability legislation still applies in the UK. The legislation is a taxonomy that defines what is green. The taxonomy sets four overarching conditions that an economic activity must meet to qualify as sustainable. A company’s business has to contribute to at least one of six environmental objectives to qualify as a green investment. These are: climate change mitigation; climate change adaptation; sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; and protection and restoration of biodiversity and ecosystems.

As a result The London Stock Exchange Group introduced a Green Economy Mark in 2019. This recognises listed companies and funds which derive 50% or more of their revenues from environmental solutions. With a growing proportion of asset owners and managers seeking to deploy capital into sustainable investments, the Mark presents an investible universe of ‘green economy’ equities, enabling a broad exposure, rather than a focus on one area.

One example of a company with the LSE Green Economy Mark is AIM-listed solar panel manufacturer Verditek in which Crowd for Angels has invested £225,000. It has a market capitalisation of c£11 million. The investment is through a 7% Secured Bond with a two year term. Verditek is raising up to £500,000 on the Crowd for Angels’ platform on the same terms.

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