Greening your savings

David Prosser asks how investment companies can help in tackling climate change.

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Has the COP26 summit in Glasgow left you thinking about how to play a bigger part in tackling the climate crisis? If so, don’t overlook your power as a saver. There are lots of changes you can make to your life for environmental good, from eating less meat to shifting to an electric car, but you can also put your savings and investments for the future to work to support a greener world.

We have an advantage in the UK in this regard – London is one of the best places in the world for investors interested in sustainable finance. In October, the Global Green Finance Index, a project managed by the Long Finance Initiative, put the City at the top of its ranking of more than 80 global financial centres on the quality of its green finance proposition.

Investment companies back renewable energy

Investment companies are an important part of that story. These are collective investment funds that pool your money with those of other savers, and then invest in a particular market or sector of the market. Shares in investment companies are listed on the London Stock Exchange, so it is easy to put money in – or take it out – and sustainable themes have become an increasingly important focus for funds.

This year alone, investors have put £1.6bn of cash into investment companies raising funds to invest in renewable energy infrastructure – the wind and solar production capacity that the world needs as it turns its back on fossil fuels. We’ve also seen funds launched that enable you to put money into areas such as hydrogen fuel, energy efficiency and other types of sustainable infrastructure.

These funds make it possible to invest in areas that would normally be off-limits to ordinary investors. Financing the construction and operations of, say, an offshore wind farm would normally be the preserve of large institutional investors, but investment companies provide an accessible entry point for everyone – and the stock market listing means you can get at your money when you need it.

Not that you have to stick to environmental investment objectives. Investment companies also provide access to other areas of the growing universe of environmental, social and governance (ESG) investments. One good example is the Schroder BSC Social Impact Trust. Launched a year ago to invest in projects with positive social impact, including housing and social enterprises, the fund has found so many opportunities to back that it has just announce it wants to raise another £26m from investors.

Doing well by doing good

One question many savers and investors have about funds that align with their values and principles is whether this means having to sacrifice financial returns in some way. In fact, there is a significant amount of research to suggest this is not the case at all – it is perfectly possible to do well while you’re also doing good.

Research published last year by data provider Morningstar, for example, found that six out of 10 sustainable investment funds had delivered higher returns than equivalent conventional funds over the previous decade. More recently, several studies have suggested that ESG funds weathered the market crisis caused by Covid-19 with greater resilience than other funds.

Past performance is not a guide to the future – there is no guarantee this success will be sustained. And green investment funds, like their non-green counterparts, can fall in value as well as rise. Investors need to be prepared to accept this risk – and to take a long-term view.

Still, the idea that green investments outperform makes intuitive sense. As the world confronts climate change, it is increasingly taking action that damages companies that have poor environmental impacts – through higher taxes and increased regulation, for example; equally, companies with a positive impact get all sorts of encouragement. Funds that invest in the latter therefore stand a better chance of delivering superior returns.

The most important point is that investors now have greater choice than ever before as they survey the options for saving and investing in a way that reflects their views and values. You can put money into an investment company on a standalone basis, but these funds also qualify for inclusion in your individual savings accounts (ISAs) and private pensions, where you’ll naturally be taking a long-term view.