The investment products mentioned in this article are for
illustrative purposes only. They are not - and are not intended to be
interpreted as - any form of financial or investment advice or
The market is awash with green, sustainable, ethical and socially responsible investment products. Type ‘ESG’ into Blackrock’s search function, for example, and you’re presented with over 2,500 funds and ETFs. It’s pretty overwhelming.
But green investments sit within fairly well-defined categories. Understand these categories and that's half the battle won.
There’s a fantastic range of themed investments within the climate space, catered for by actively managed funds, investment trusts and ETFs. Clean energy is one of the most familiar, and there’s no shortage of choice.
iShares Global Clean Energy ETF and L&G Clean Energy ETF, for example, track different indices but both invest in global companies engaged in renewable energy.
Beyond the traditional names in asset management, more specialist investment trusts are emerging. Impax Environmental Markets is the UK's largest environmentally dedicated investment trust, with a focus on energy, water and waste.
The investment theme to watch in 2021, however, is sustainable food. Rize ETF, a new player in thematic investments, has launched Europe’s first sustainable food ETF. There are a couple of actively managed funds in this space too, such as BNP Paribas Funds Smart Food, but not much choice for everyday investors. Expect this to change in the near future.
‘Paris aligned’ investments
Another new concept everyone’s talking about is ‘Paris alignment’. In
2015, the international community agreed (in Paris) a goal of limiting
global warming to below 2 degrees from pre-industrial levels to avoid a
climate catastrophe. Ideally, the increase won’t exceed 1.5 degrees.
How is this reflected in investments? Some products are marketed as ‘Paris aligned’; others reflect the better known target of being ‘net zero’ (carbon emissions) by 2050 or earlier, which is not quite the same thing but the two concepts are often used interchangeably.
ETFs in this space include Franklin Templeton’s S&P 500 and Europe 600 Paris Aligned Climate ETFs and those launched last year by Lyxor
which track Eurozone, European, US and global equities. Some investment
managers are incorporating Paris alignment in their strategies as well.
Aberdeen Standard and Lombard Odier are two examples.
Paris alignment will play an important role in the COP26 international climate change conference, to be hosted in Glasgow later this year. So expect to see more on this in 2021 and the years ahead.
And, of course, you now check the temperature alignment of your own portfolio with Sugi's new portfolio temperature feature. How cool are your investments?
Transition investments or ‘best in class’
You might be surprised (or bemused, upset, furious…) to find
‘sustainable’ investment products that include fossil fuels, mining and
There can be good reasons for this. Not everyone wants to exclude these industries from their portfolios, and if you prefer ETFs to actively managed funds or trusts, it can be harder (and more expensive) to exclude whole sectors.
Instead, some investors prefer to limit their exposure to companies engaged in positive change - moving away from polluting activities (transition investments) or having a lower environmental impact than comparable companies in the sector (best in class).
An example of a fund with this approach is HSBC’s Global Equity Climate Change, describing itself as ‘investing in companies which are positioned
to benefit from efforts to adapt to climate change'. Its top five
sectors include industrials, energy and basic materials.
Another example is the Keystone Positive Change Investment Trust, recently taken over by Baillie Gifford. This trust invests ‘in any sector, whose products or behaviour make a positive impact on society and/or the environment’. Around 30% of its holdings are in industrials and basic materials; it will be interesting to see how much the fund focuses on social rather than environmental impact and how it measures results.
Which leads us to the final category...
Socially responsible, but not all that green
A huge number of investment products focus on social responsibility and good governance, but are not what you'd call green. They may receive a strong overall ESG or sustainability rating, but delve deeper and you find a weak environmental score. They may even score well on the environmental pillar - it’s a financial risk metric after all and doesn’t tell you how green an investment is in absolute terms.
Having said that, many don't market themselves as a green. As always, the devil's in the detail.
Remember that investments can be green without shouting about it. Some sectors, such as technology, healthcare and financial services, have inherently lower carbon emissions due to the nature of their activities and you can create an environmentally conscious portfolio without specialist investments. It may just involve a little more leg work.
Sugi is the first app to show everyday investors how climate-friendly their
investments really are and help them build a greener portfolio.