Financial Planning with Impact
How to “Green” your pension, and make more Sustainable Investments for your Future
In Season 3, episode 2 of the #MettaTalks podcast, we were joined by Sebastian Elwell, Director of Switchfoot Wealth. Sebastian started Switchfoot Wealth to offer financial planning that matches the way we live and work today. By using the best technology and their expertise, Sebastian and his team are bringing financial planning into the 21st century, helping people, businesses and professional advisers make the most of their time and their money.
SwitchFoot Wealth can advise on Life Insurance/Protection, Investment Advice, Pensions, Retirement Planning and more — in their own words, they provide financial planning with impact.
Listen on :
Spotify: https://bit.ly/3L0ZAWw
Google: https://bit.ly/3Lsq4lj
Amazon: https://bit.ly/3oEievT
Apple: https://bit.ly/3oNXGkY
Join us as we chat about the different types of funds and investments, how to “green” your pension, as well as the risks associated with moving pensions.
Check out a few highlights from the podcast below:
–
Heather: Let’s start with the basics, and can you give us the TL;DR — too long didn’t read, on investments for the future. Why would you switch your pension and what’s wrong with the default of regular pensions?
Sebastian: “You can hold cash or investments in different tax wrappers and a pension is just a tax treatment for your investments. That’s very favourable, and it’s for your later life. So we’re all working away hard — at some point, we can all imagine a point in the future where we think I can’t do this anymore. I just want time off, proper time off and at that point in time you’ve still got to have an income. So somebody somewhere will have had to have saved up a pot of money, and if you do that in a tax efficient wrapper, then that’s a pension.
So if you have a pension and you have savings, then one way or another, you own a little slice of lots of different companies, and lots of different assets out there in the world. And those companies can either be doing things like knocking down forests and burning huge amounts of fossil fuels. Or they can be doing things like building solutions to our problems, and clean energy. And that’s really what a green pension is, as opposed to a traditional pension, a traditional pension is not necessarily un-green. But it’s just one where nobody’s thought to think about what are the long term impacts on economy and human health of the companies that you own.
A Green Pension is — somebody has looked at those choice of companies and said, actually, I want to make sure that I’m only investing in the companies that are either limiting the harm that they do, or actively working on the solutions. So we can get into kind of shades of green or the “spectrum of capital”, as I like to call it. But the important point is, you own those companies, you might not realise it, but you’re responsible for their activities. So if 5%, your money’s in Shell, then you own a little slice of Shell, and it’s your fault, what they’re doing, at least in a little tiny way, in aggregate with everyone else that owns a little slice of them.”
–
Wil: Can you talk us through a little bit about the differences in the types of funds or investments or the “Spectrum of Capital”, as you called it?
Sebastian: “Let’s start with the “the traditional investments”. And that’s an accident of history. It’s not the way you’d set it up if you’re starting from scratch now, but a traditional investment strategy is focusing purely on financial metrics and returns. Then, around about 30 years ago, something called “ethical investing” became quite common and popular, and ethical investing, we could describe as exclusions, so — “I’ll invest broadly, but I don’t want my money going in to this fossil fuel company, or that company that I think has done a terrible thing”. So it’s a way of excluding assets. Moving along that spectrum of capital, traditional, through ethical towards perhaps “Sustainable Investing”, sustainable investing, we might say, is an investment strategy that is seeking to avoid doing harm, and doing some good in the world.
And moving up from there, we could move to “Impact Investing”, and impact investing is investing in companies that are actively seeking to solve problems, and you’re still aiming for a financial return. Impact investments are actively solving problems in the world whilst giving you a return. And above that, at the other end of the spectrum of capital, we could perhaps talk about “Philanthropy”. And that’s all about the impact that you’re creating without caring about financial return at all.
So that broad spectrum ranging from- “1. Ignore it entirely”, through to perhaps “2. Excluding the bad companies” through to “3. Avoid harm, do some good”, “4. Actively focus on doing good alongside a financial return”. And at the other end of the “5. Extreme Philanthropy”, I just want my money to do good in the world. I don’t care what the return is, and different investors will position themselves on that spectrum at different points.”
–
Heather: Can you give us a comparison between the types of actions people can take, and the amount of impact that they have? And what that means in terms of switching into these different types of investments?
Sebastian: “So the first thing that you need to do is open up that box and actually have a look at what your pension is invested in. What’s the name of the fund? Can you find out what are the underlying companies within that pension? And how do you feel about that, and having uncovered that information, you then need to find out what’s the approach of the fund manager in managing that money.
To give you a sort of a rather topical example. Let’s say you’d put your money in Nest. Nest is sort of like a default savings scheme, default pension that a lot of people go into, if you put your money in Nest, you’d find that some of your money was in Shell. And so you’re a little bit of an owner of Shell. And you might be horrified by that and think, Gosh, I need to move it. But just to throw a little spanner into the works, there was an organisation called Client Earth that recently started suing the directors of Shell for breach of fiduciary responsibilities. They said that the directors of Shell had an inadequate transition plan for net zero. And they were putting the company at risk because they weren’t taking sustainability seriously. And Client Earth are launching an action personally against the directors for their inadequate plan. But they’re backed by 12 million shareholders, one of which is Nest, the pension company. So that’s where you might be owning that company, nd therefore you’re responsible for its activities — but owning that company also gives you a voice.
Now, for years, I took the view, I just don’t want to own these companies. I don’t think we should own these companies. I think they’re terrible companies. And we just go and seek out those funds that agree with that position. And it’s actually quite easy to do. But that action by Client Earth I went, that’s really cool. Ah, who else can we sue!? Who are the other bad guys out there that we can go after? Well, you can’t do that if you’re not an owner of the company. So you have to kind of take a view as to if you’re going to be in these companies, are you going to use that as an agenda to drive change? Or is that just an excuse for owning them whilst you’re sitting back and doing nothing.
But if you want to get out of it, then you just look at the range of funds within your pension, you find out about them, talk to an independent advisor, talk to one that knows about sustainability and can have these nuanced conversations with you. And then see if there’s another fund within your pension, that’s better. And perhaps if there’s not, you can move your pension somewhere else.”
–
Wil: Have you seen any risks of moving pensions away from kind of the traditional structures? And have you seen any positive impact green pensions are starting to have or are they doing better than traditional pensions?
Sebastian: “Yeah, I’m gonna break that down a little bit. So risks of moving pensions. First and foremost, pensions is a regulated advice area most of the time, so you should be talking to a qualified financial adviser. In my view, an independent advisor is the best sought — an independent advisor that understands sustainability, so perhaps seek them out on the B Corp directory, as well as on the FCA register. That’s what you should be doing with your advisors, you should be checking their qualifications, checking that they’re the right adviser for you, and most importantly, making sure that they’re on the FCA register. And that at least means that you’re covered by the Financial Services compensation scheme.
Are there any particular additional risks of investing sustainably? I’d say no, I’d say there are different risks. In the past, it was always framed as all, if you’re investing sustainably, you’re cutting out some of the market, therefore surely you’re increasing risk. Well, if we think about what the next 20 to 30 years looks like to get to net zero, we are going to have to shut down whole sectors of the global economy. And we’re going to need to grow entirely different sectors of the global economy to take their place, I would see a huge risk in being invested in the sectors that have to be shut down at some point. And I’d much rather have my money in the sectors that are going to continue or that need to grow, in order to service our needs.
There’s more carbon, there’s more fossil fuels owned by listed companies, than we have a carbon budget to burn and stay within a 1.5 degrees C world. So that means either we’re going to ignore that carbon budget, burn it all, in which case, everybody dies, everybody you know, and love gets killed by the climate crisis - don’t need a pension! Or we follow the scientific advice, we don’t burn that carbon, it stays in the ground, in which case, it’s not worth anything anymore. Therefore, those companies that own that, is currently sitting in as a huge asset on their balance sheet are going to have to write those assets down. And we call that stranded assets. So there’s a huge risk in owning fossil fuel companies, because they’re not going to be able to burn all the things that they say they own, and why they’re worth as much money as they are. So in the short term, sure, they’re making huge amounts of profits. But that high cost of energy that we’ve just been experiencing, will be driving people to change, to put solar panels on their roof and to decarbonize and to use less energy and to increase fuel efficiency and all of the rest of it.
So investing sustainably for me says it’s enhancing your long term return potential, and it’s removing certain significant risks from your portfolio. But not at all times in all market conditions. Our research kind of shows that if we went back to 2018, sustainability helped your pension a bit, in 2019 it carried on helping your returns a bit, in 2020 you look like a bit of a genius you know, price was going negative. You didn’t have any of that in your portfolio. Everyone was jumping into the Tech Stocks with the with with the lock downs and everybody suddenly discovered Zoom and Netflix and all the rest of it and your pension was performing absolutely fantastically, that continued through 2021 — what a genius you were for being invested sustainably — 2022 happens. The only things going up were guns and oil, oh dear, you’ve got none of that in your portfolio, you’re massively underperforming, you’re like a complete idiot for investing sustainably, and then normal service resumed in 2023, it probably helps your returns a bit as everybody kind of brings back.
So sustainability isn’t gonna give you superior returns in every market condition at all times. And it’s important not to expect that. But as a long term investor, and if we’re talking about pensions, hopefully, you’re going to be retired for 30 years. And you’re not going to get to retirement for a number of years, yet, your money’s going to be invested for quite a long time. So as a long term investor, on average, over the long term, we would think that sustainability should be adding, potentially quite significantly to your long term returns.”
–
Wil: Do you think we’re gonna see more, kind of not class action, but effectively class action pressure to move the needle with the bigger companies who are behaving less sustainably or completely not sustainably? And do you think we’re going to see more of that kind of conscious acknowledgement? As as you say, we need to be investing in the right thing for the longer term to move the needle to have any likelihood of survival?
Sebastian: “The Office for National Statistics did a survey a big, big survey in the run up to COP26. In the UK, and they found that 75% of people were worried or very worried about climate change. 83% of people had already taken some or a lot of lifestyle changes because of climate change. So I think the financial services industry, certainly the financial planning industry is behind where their clients are on this. Clients are worried about it. But we have a fairly un-diverse advisor community. It’s about 85% male, it’s an average age of about 55. There’s only about 30,000 financial advisors in the UK. And I think a lot of people get what they’ve always got, because that’s all their advisor happens to know or think about. So I think we’ve been underserved by the advisors. But there is definitely demand from the public. And you can feel that more powerfully at different times. You can almost feel that Zeitgeist moving that spirit of the age changing.
There’s a term that I call “Zeitgeist Risk”. So Zeitgeist being the spirit of the age, as our view of what is morally acceptable changes over time, what was once acceptable becomes immoral, then becomes illegal. So if we went way, way back in time, we’d say, East India Company was 50% of UK GDP. Once it was agreed that actually what they’re doing was horrendously wrong, it’s value went to zero very, very quickly. A contemporary example of that might be Russia. You know, for the past 30 years, the behaviour of the Russian government was becoming increasingly problematic. You could almost feel that zeitgeist risk building over time, what point was the right moment to sell out of those stocks, because if you hadn’t done it by the 23rd of February 22, you’re holding was going to zero, and it’s never coming back, that’s a permanent destruction of value, of shareholder value.
Looking forward, you can see zeitgeist risk all over the place, perhaps in Chinese equities, their behaviour towards the Uighur Muslims or intentions over Taiwan, you can feel that zeitgeist risk. But specifically in fossil fuels. You know, the scientists have said, You can’t do this. At the moment, we’ve gone from, hey, let’s shower you with money, if you’re good at getting oil out of the ground, that’s kind of where we still are, to, it’s becoming morally unacceptable. History would tell us from it becoming morally unacceptable, at some point, it will become illegal, the moment is become illegal, your investment value has gone to zero.
I’m not saying you can’t make money out of illegal activities, plenty people do. But you can’t hold it in a pension fund. And you can go to prison if you try it. So from, you know, from a serious investment point of view, that’s game over.”
–
Heather: What are some of the other practical measures people can take to start thinking about moving towards a more impact driven fund? And are there any resources that you might want to point out?
Sebastian: “There’s a whole campaign by “make your money matter”. It’s worth going onto their website and engaging with that, I think they do a fantastic job. The first is really basic. It’s just understand what you’ve got. So I come across people that Oh, who’s your pension with — Aviva? Yeah, but Aviva have thousands of different funds. What’s your pension actually invested in — to get the name of the fund? Can you get a fund fact sheet that tells you what the underlying stocks are? Any type of change or analysis starts with Where Am I Now, where do I want to be, Do I have a problem? Because you might find that you’re in a fund that’s really good. If you’re not, right, what is it that you don’t like about that fund, so that you can start researching alternatives - like I say port of call is your existing pension scheme may well have options that are really good, and you’ve just never bothered to look at them, because pensions are boring! Well if I can persuade you that actually pensions are really important that okay, pensions are boring, but what you do with the money, that is interesting, you know, so pensions are about retirement plans, they’re about things that you want to do in your life.
I can’t recall the precise number at the top of my head, but something like 94% of people just sit in the default fund that they’re invested in with their work base pension. It’s a tiny, tiny percentage that go and explore the other funds within their range. And the default funds are usually not sustainably invested. But the pension schemes usually have an alternative. So go and have a look at it and see whether you like the look of it, see whether it meets your needs or not. So that’s the starting point I think. Beyond that I’m wary of saying anything other than seek financial advice, because we can go off in so many different directions that we couldn’t cover in this podcast.
–
Wil: Talk us through sustainable finance more broadly, because this is a really interesting area of innovative finance that I’ve only just started learning about. I think it’d be really interesting to kind of get your take on on the topic as a whole, if you can summarise it for it.
Sebastian: “So sustainable financial planning. So let, let’s start with, there’s a lot out there about sustainable investing. Sustainable investing, has a long history and pedigree. And it’s really picked up traction in the last decade. So investment managers in a way, are ahead of financial planners — a financial plan is a model of your own personal financial situation, projected into the future. So it’s like you’re trying to be a time traveller in your own life, you say, right, how old am I now? I’m in my early 40s, so I kind of think how might my life change over the course of the next 10/15/20/30/40 years? And let’s take an audit of my current financial situation and project into the future using a set of reasoned and reasonable assumptions about the future. So we can look at what will be expecting inflation to be, what will we expect global growth to be? How will we expect our houses to increase in value? What would we think interest rates might be and what the correlations between the different asset classes and the return on equity that you might expect, and you build one possible out of an infinite number, but one possible future of your financial situation. And once you’ve built one, you can copy it and you can make little changes to it. We call that “what if scenarios”, you can say, well, what if I retire a few years earlier? What if I work a bit longer? What effect does that have? And we can kind of see what decisions have a big impact on your financial situation, and what decisions have a small impact. And it’s a wonderful starting point for thinking about your finances, because it’s couched is it in your own life, and what your needs are, and then you go out and through that lens, look at the world of investments and say, How long do I need to be invested? When do I need to turn this back to cash? And what’s right for me.
The trouble is, that we as an industry, have a number of different datasets that we can go to for those sorts of assumptions about the future, but they tend to be based on the past, they tend to assume a steady state world. And we know the future is not going to look like the past, the next 20 years are going to be nothing like the last 20 years. And it’s not scientifically credible anymore to project those assumptions into the future — which future? the Intergovernmental Panel on Climate Change, when they do their modelling on what does the future economy look like, They break that down into what they call the shared socio economic pathways. And there are lots of them, but they broadly break down into into five major ones. And these are sort of possible narrative pathways, you know, stories about how the economy might develop over the next 80 years or so. So SSP One is a rapid transition to a green economy, well that increases your transition risk. That increases the risk that you’re in a company that becomes illegal because we need to shut that down. But it decreases the physical risk that you’re exposed to from climate change. Compared to the other extreme SSP five, which is fossil fuel development, well, hey, you can carry on investing in your fossil fuel companies, and they’re never gonna get banned. So you don’t have that transition risk. But you’re then exposed to massive physical risk, because that one projects global temperatures, you know, above four degrees C, by the end of your financial plan. And that’s not a survivable level of global heating, global agriculture would have collapsed well before then.
We’ve only got so much money, how do we allocate that out, in order to both mitigate climate change, keep up with rolling regulation, and adapt to the increased temperatures that are coming down the road, because it doesn’t matter. If we stopped all fossil fuels, or unnecessary burning of carbon today, the world would still warm, because the system just takes time to kick that in, and we’re starting from close to 1.5 already. So that sustainable financial planning is just couching that financial plan in something closer to climate science. It’s still nonsense, you know, any, any projection into the future is still inherently just speculation. But having done that, it’s then logical to turn to your investments and say, Are they invested consistently with that worldview, that I’ve just described in my financial plan? And not sort of spring Green investments out of nowhere, onto a client, it becomes very evident that well, yeah, actually having a portfolio that is aligned to net zero is signed up to science based targets to get the carbon emissions down rapidly, is not only good from an altruism point of view, it’s good for my personal financial well being. Because regulatory change, and also because it, you know, that shared socio economic pathway is going to be a much wealthier, happier, nicer place for me to live in than the alternatives that we’ve just modelled out. So it brings that message home quite nicely.”
–
Heather: How would you suggest founders and business owners incorporate sustainability into their business practices to kind of help us at a larger scale? To get us there?
Sebastian: “What does it mean to run a good and successful business? Ever continuing growth is probably the current definition of that. But in the future, that’s not going to be an option. In the short term, we can jump onto green growth, because we know that we’ve got to shut areas of the economy down and grow others. But in the long term, that economy needs to get to a point where actually, it’s not growing beyond that. It’s just servicing the needs of people within that, and that’s a radically different type of economy. So, look to see whether your company can even exist under that sort of environment. Because it’s not a choice. We either do that. Or we magically decouple growth from resource consumption, or everybody dies in the climate crisis. So it’s not a nice to have, it’s a your company won’t survive.
That’s the brutal reality of capitalism, unless your company can survive in an economy that is existing within the planetary boundaries, and ideally also, while simultaneously meeting the needs of people to live well. And that’s a very different way of thinking. And if you conclude that your company is fundamentally degenerative, that its activities hurt the planet, then you need to be thinking, How do I manage shutting this company down, and starting up another one that’s doing something better?
Now, as a financial planner, I can be a brutal capitalist and say, I’m just going to allocate the capital, to those businesses that I think are doing good. And if all of us start moving our pensions that way, that means it’s going to be harder to raise capital for those businesses that aren’t capable of being regenerative that aren’t capable of existing in that new economy. But those businesses are at risk of exposure. And if you’re in the camp, where my industry, financial planning can be either hugely degenerative, or hugely regenerative. So it’s easy for me to go well, I’ll just shift and do the regenerative side of things. But not every business, and not every industry has that choice.
A huge thank you again to Sebastian for joining us on the #MettaTalks podcast. You can connect with Sebastian on LinkedIn, and check out the Switchfoot Wealth website.
Listen to the full podcast episode on :
Spotify: https://bit.ly/3L0ZAWw
Google: https://bit.ly/3Lsq4lj
Amazon: https://bit.ly/3oEievT
Apple: https://bit.ly/3oNXGkY
#Metta #MettaTalks #MettaTalksPodcast #startup #founders #ecosystem #entrepreneur #sustainability #climate #climatetech #climatecrisis #climatechange #climateaction #sustainabilitytips #sustainabilitymatters
