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Opinion: Can ethical investing really help in the fight against climate change?

Pensions expert Ralph Benson looks at the rise of ethical investing and how it can benefit the planet.

Ralph Benson

WHAT LINKS CLIMATE change, the Black Lives Matter movement and the Facebook whistleblowing controversy? They’re all impossible to ignore when it comes to investing your money ethically.

As global leaders and climate activists gather in Glasgow this week for COP26, in the face of the threat of climate catastrophe, the term ‘ethical’ will be bandied about in relation to all topics, from government finances to corporate responsibility.

We, as potential pension investors, can play our part in this by ensuring that the money we save is channelled into ethical investments. This subject has been stirring up changes in the financial world this year in particular, since the publication of the latest IPCC Report on Climate Change. In the UK, Film Director Richard Curtis has become an unlikely champion of ethical investments with the creation of the Make My Money Matter campaign

Some good news

So how can regular people make their money matter and work for the betterment of the planet? And does investing responsibly mean making financial sacrifices? Well, the opposite is true.

Investing in an ethical way can protect you from risk and increase your returns. For example, when the oil price crashed last year, many ethical funds were insulated from the worst of it because they are fossil fuel-free.

What’s more, investing your money ethically is one of the best ways you can make an impact on some of the world’s most pressing problems. From investing in energy efficiency and promoting economic empowerment to forcing change in how companies are run, ethical investment choices can make a difference.

But when it comes to pensions, the real reason ethical investing matters in Ireland is that it actually interests people. This is a way to move on from the snooze fest of pensions and talk about putting your money into things that matter to you.

What is ethical investing?

Ethical investing means selecting your investments based on a certain set of moral or ethical principles. Typically, it is about putting money into investments that are sustainable in terms of the environment, social impact, and good governance (termed ‘ESG’), as well as profit.

Ethical investing involves decisions on what to exclude, and what to include in your portfolio.

In 2021, the link between ethical investing and results has become clearer. In March, for example, major fund managers refused to put their money behind Deliveroo’s stock exchange listing, due to concerns around workers’ rights and the gig economy.

One fund manager, which runs a major ethical fund in Ireland, even called the delivery company ‘uninvestable’. Deliveroo’s share price is down around 6% since the flotation. Or take the case of oil company Royal Dutch Shell, which was ordered by a Dutch court to cut its 2030 emissions by 45% compared to 2019 levels.

Companies finding themselves on the wrong side of the ethical investing debate as time goes on could be seen to be taking excessive risks with their investors’ money.

If money talks, what do your investments say about you?

Investing ethically starts with individual actions. Where’s your money invested? How are those funds run? And does that chime with your values?

It’s true you have to go out of your way to find them, but plenty of ethical investment options are available in Ireland these days.

There are bare-minimum funds that avoid ‘sin stocks’ like tobacco or weapons. There are funds focused on specific industries like solar and wind energy. And there are funds that aim to make a positive social impact, as well as a financial one – for example, by investing in companies that promote gender diversity and women in leadership.

Of course, for most of us, our biggest investment will be in our pension, and that’s where we need the Irish investment industry to sharpen up.

Things are changing, but the pace needs to increase. In particular, investors want better choice and transparency – and don’t see why they should pay a premium to invest their money in line with their values. How will the pensions and investment industry respond?

Three big tests for the Irish investment industry

We need to get three big changes right to make ethical investing a success in Ireland:

1. The industry needs to help regular people navigate the world of ethical investing:

Right now, it’s the wild west. How are we to judge the ethical credentials of a company like Tesla, which is leading the decarbonisation of the car industry, but holds billions in electricity-eating Bitcoin?

We need some consistent, simple standards to help investors judge ethical investments before their eyes glaze over. There’s a scale of 1-7 for risk and return that many investors find helpful. Something similar for the ESG of investments is surely in order. Change is coming, particularly when it comes to measuring sustainability.

The EU is forcing funds that claim ESG credentials to back it up. They’ll also need to spell out whether they simply promote ESG or if the sustainable investment or a reduction in carbon emissions is a specific objective.

2. Investors need better options:

Company pensions are the weak point here. Large corporate pensions through the main insurance companies comprise billions of euros of assets in Ireland.

But frequently these pension savers have a very limited range of investment choices. There’s no reason all these pensions can’t have ethical options – and it’s up to individual savers to press for change.

3. The ethical investment debate is a great opportunity for the Irish pension industry to engage its customers:

Right now, the topic of retirement funding is a sure-fire way to have an audience dozing on their rocking chairs. Ethical investing makes people sit up. Who doesn’t have an opinion on climate change?

What if discussing your pension was a conversation about how you can direct your money into companies and projects that reflect your values? A way to invest in infrastructure in local communities in Ireland, or green energy, or medical innovation.

Ethical investing is exciting because it gives us, the investor a sense of control, makes us think about how we want our money invested, and about the long term. That makes it a perfect fit with pensions. After all, if a pension is anything, it needs to be sustainable.

So you want to have an ethical pension – what to do?

There is a lot you can do to make a difference with your pension.  Here are two suggestions:

1. Most of us pay into a pension fund supplied by our employers, so it often feels like our choices are limited. But you can spark action. The people responsible for your company pension are now required to take sustainability into account.  

So, find out who the trustees of your company pension are, and ask them a few hard questions. For example, what ethical funds have they considered offering? How can you avoid investing in fossil fuels under their pension options? Are they facing resistance from the pension fund administrator when it comes to introducing sustainable fund choices? Remind them that better alternatives are available. 

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If we could modernise the fund choices in just a handful of the largest company pensions in Ireland, billions of Euros could be reinvested sustainably.

2. These days most of us have had several jobs in our career, and often leave substantial pension pots behind. Here, you have total control.

That’s why many people choose to cut the cord with the old company and move their pension savings into an account with wider investment choice, access to ongoing advice, and control over when to draw down the money. So, consider dusting down your old pensions and working with an advisor you trust to invest them in a sustainable way.

Pensions and the climate have this much in common: inaction is their greatest threat. The COP26 meeting is a reminder that we all have the power and responsibility to act to secure the future – for ourselves and the planet.

Ralph Benson is co-founder and head of financial advice at online advisor Moneycube.ie, and co-founder of PensionsAwarenessWeek.ie.

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Ralph Benson

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