How to Invest to Support COP26 and Climate Change

The COP26 summit took place in Glasgow in November. World leaders gathered to discuss the future of the environment and the fight against climate change.

After two weeks of discussion and deliberation, the following measures have been agreed:

• The member states were asked to come back next year with a plan to keep the rate of global warming under 1.5% by the end of the century.
• Initially, it was proposed that the member states should aim to phase out the use of fossil fuels, such as oil, gas, and particularly coal. However, the agreement was amended to demand a reduction in the use of these fuels rather than a complete wind down. As countries such as China and India rely more heavily on fossil fuels, a deadline for phasing out was deemed to be unrealistic.
• 100 member states, representing 85% of the world’s forests, have agreed to stop deforestation by 2030.
• The US and China, who have not been traditional allies in the last few years, have agreed to work together to address the climate crisis. Jointly, these two countries are responsible for 40%¹ of global carbon emissions, so this could be significant.
• Some efforts will be made to cut methane emissions, although China, India, and Russia have not agreed to this. These countries are the top three in the world in terms of methane emissions, so without their cooperation, it is unclear how much impact this will have.
• The commitment to help poorer countries tackle climate change and cope with the impacts of severe weather were re-affirmed. It was noted that progress in this area had not been satisfactory so far. The UK has pledged £290 million in new funding, however this goes a small way towards the £100 billion of annual global support that was promised in 2009, but not delivered.

There were high expectations for the COP26 summit, but the actual outcomes were fairly modest, and have been criticised for not going far enough. The theme seems to be steady improvement rather than sweeping reforms.

Climate change and sustainability seem to be at the forefront of the world’s agenda. It is worth considering how you can invest to not only support the efforts, but also to benefit from the progress.

Why You Should Consider Sustainable Investing

Ethical investing has been a strong theme in recent years, with sustainable funds generally outperforming traditional funds in 2020.

There are a number of reasons why you should consider sustainable investments for your portfolio:

• To help support the efforts against climate change and pollution.
• To choose to work with companies with strong Environmental, Social, and Governance (ESG) credentials. By creating demand for sustainable investment opportunities, you can help encourage other companies to improve.
• To participate in innovation and technological advances.
• To invest in companies who are looking to the future and seeking more viable ways of doing business over the long-term. The world’s resources are finite, and companies relying on traditional methods of production could have a limited lifespan.
• Because it is a sound investment choice. The decisions that guide a company’s ESG principles are also likely to promote business growth. You can find out more about the investment logic for sustainability here.

Growth Areas for Investment

Fossil fuels, factory farming, mass tourism, and heavy manufacturing are all falling out of favour. Not only are they damaging to the environment, but they are also unlikely to be sustainable over the longer term.

So where should we look for the investment themes of the future?

• Clean and renewable energy is the most obvious theme, as this will reduce reliance on fossil fuels and make energy more affordable for everyone. Currently, renewable energy production is not at a sufficient level to fully replace fossil fuels, which is why investment in this area is so important.
• Sustainable farming and alternatives to meat. One third of methane production is caused by livestock and farming² so supporting sustainable practices, local production, and meat alternatives is likely to have a significant effect on climate change.
• Infrastructure in developing countries.
• Sustainable and local tourism.
• Electric vehicles.
• Robotics and drone technology.
• Healthcare, including medicines, treatments, and devices. While this does not directly affect climate change, it can save and improve lives, so is a worthy inclusion in a sustainable portfolio.

Risks to Be Aware Of

Any investment includes an element of risk. Even cash is not risk-free, as your capital will be eroded in real terms by inflation.

Some specific risks applicable to sustainable investing are:

• Many of the initiatives are still in the early stages. This means that some could fail, or at least take a while to get off the ground.
• It is easy to get carried away by the next big trend. Avoid investing too much in any one area, as this will increase your loss if things go wrong.
• Corporate resistance. There are excellent reasons for moving to more sustainable business models, but the obstacles might be insurmountable for some companies.
• Greenwashing. Some companies give the impression of having a strong ethical mandate but their actions would suggest otherwise.
• Consumer behaviour. Ultimately, it is the customers who decide whether a business will be successful or not. Many people like the idea of sustainability, but are not prepared to face higher prices or inconvenience.

How to Include Sustainable Investments in Your Portfolio

Sustainable investing doesn’t need to be all or nothing. Many ESG-centered funds select companies not because they are perfect, but because they are doing well in some areas and continually improving.

Similarly, you can choose to include a few sustainable investments in your portfolio, or adopt a fully ethical investment strategy (And anything in between).

The options are now much more varied than an off-the-shelf ethical fund. You can choose from passive funds, specialist funds, risk-rated multi-asset funds, model portfolios, and bespoke discretionary portfolios. Your portfolio can be adapted as your wealth grows and your needs change.

The key is to ensure that your funds are well-diversified (even within the sustainable universe) and that you take an appropriate level of risk.

Ethical investing used to be seen as a compromise – charges were higher and returns were lower, but that was the price you paid for investing with your conscience. This is no longer the case – sustainable investments are a sensible inclusion in any portfolio.

We are proud to offer you seven risk rated TRAILS™ Ethical models. These models allow you to invest your money in a well-diversified portfolio of funds, that adhere to higher social and moral values, whilst still giving you the opportunity for long term growth.

Please click HERE to peruse our TRAILS™ Ethical Brochure.

If you would like to find out more about sustainable investing, please do not hesitate to contact a member of the team.

¹ CO2 Emissions by Country – Worldometer (worldometers.info)
² What’s the beef with cows and the climate crisis? | Cop26 | The Guardian