But pensions are just one kind of investment that can speed the energy transition. Investing to Save the Planet, a new book by Financial Times journalist Alice Ross, offers a valuable introduction to the wider world of green finance. There are already plenty of guides introducing the basics of investment, but this is one of the first written for specifically for those interested in making their money work for a sustainable future.
Ross offers a lucid, measured, and up-to-date overview that takes account of how the pandemic has opened further opportunities for green investment. The book gathers the essentials of the voluminous green finance advice dispersed through financial journals and websites into a single 200 page paperback, introducing the kinds of investment avenues most accessible to private investors — shares, bonds and pensions — and discussing their most urgent questions: How do returns from a green portfolio compare with standard investments? Should green investors avoid carbon-generating companies completely? Just what counts as a green investment anyway?
What is and what isn’t green
As the opening chapter notes, the concept of using investment to encourage economic and social change isn’t new. The world’s great religions and wisdom traditions have always urged those with money to use it wisely: divestment by Quakers from shipping and plantation businesses helped bring an end to the slave trade; and the withholding of investment from banks and other companies entangled in the South African economy contributed to the collapse of apartheid.
The first big wave of investment in the green economy in the 2000s, when billions were poured into solar, wind and other renewables, was interrupted by the financial crash. The current wave was spurred by the publication in 2015 of the Paris Agreement and the UN sustainable development goals, and has continued to gather momentum: in 2019 US investors channeled four times as much and European investors twice as much into sustainable funds as they had in the previous year.
The surge in green investment is not just due to increasing concern over climate change but also sustained evidence that it secures good returns. Green shares have outperformed their peers on the world’s stock markets over the past five years, and a commitment to sustainability is increasingly considered an indication of a well managed enterprise attractive to all investors, green or otherwise.
The trend has generated an ever more extensive green investment lexicon used by companies, trusts and funds to burnish their environmental credentials. Ross spends much of the book seeking to guide the reader through the confusion of labels that have attached themselves to investment products.
A ‘sustainable’ fund, for example, does not necessarily consist solely of what we might normally think of as green companies. Indeed they may have none, being made up instead of ‘best in class’ businesses fund managers consider to be making good environmental progress relative to their peers. Many funds for example have holdings in tech giants like Microsoft or Apple that have made well publicised commitments to greening their day-to-day operations, and might even include those fossil fuel companies deemed to have better environmental records than their competitors.
The now ubiquitous ‘ESG’ label can also confuse. Often misunderstood as referring exclusively to environmentally sound companies, it actually applies to companies that score well according to ‘environmental’, ’social’ or ‘governance’ criteria. A company might have a good ESG rating because of a commitment to social responsibility — it may treat its workers and the communities in which it operates well — or because it is considered to practice good governance, observing modest pay differentials, or good financial management.
Caution must be exercised even when a firm is deemed to be ‘green’: there are no established industry standards for how to measure sustainability. The most direct way might be to index companies according to their carbon emissions, and a convention has emerged for identifying the different kinds of emissions firms generate. As Ross puts it: ‘Scope 1 emissions are direct emissions from things that companies own. Scope 2 covers indirect emissions from the electricity or other power used by the company. Scope 3 covers other indirect emissions in a company’s supply chain and also, in the case of an oil and gas company, for example, the emissions caused by consumers when they use the energy.’ But currently most companies disclose at most their scope 1 and scope 2 emissions — and analysts estimate that 90 per cent fall within the scope 3 category.
Better metrics are evolving: this year the European Union published guidelines for a sustainable finance taxonomy that will include requirements for all companies to disclose scope 3 emissions, and central banks are beginning to ask companies to undertake climate change ‘stress tests’ requiring them to report on their status relative to the Paris Agreement targets.
But Ross notes that even if some kind of carbon index does establish itself, true green investment will still require the investor to exercise their own judgement. Some industries may generate relatively high levels of carbon and yet form part of a thoughtfully constructed green portfolio.
Mining, for example, is a carbon intensive industry — with often dubious labour practices — that is nevertheless critical to the energy transition, extracting lithium, cobalt, and other metals and rare earths used to make renewable technologies like storage batteries and solar photovoltaic cells. Other sectors seem unambiguously green but score badly on other criteria: tech companies may have set groundbreaking net zero targets but they produce a relentless churn of products that generate mountains of e-waste. And electric vehicle manufacturers consume formidable amounts of raw materials and are notorious for the demands they make on their employees. Ross asks, with — I’m sure — nobody particular in mind, that ‘If a company was aiming to do great things for the environment by creating electric cars, would you still want to invest in it if it were run by a person who seemed a little unhinged and if it treated its workers badly?’
Investors must also consider the possibility that effective green investment might be achieved by taking a stake in companies in the process of making — sometimes labyrinthine — journeys towards becoming green, and not just those pioneering sustainable technologies.
Most of the leading oil and gas companies, for example, are actually well placed to make formidable contributions to the energy transition. With their engineering expertise, established infrastructures, and financial reserves, they have the firepower to lead the development of new sustainable fuels such as green hydrogen, and the carbon capture techniques necessary for drawing down and storing carbon already accumulated in the atmosphere.
The record of the oil majors so far certainly leaves much to be desired: to date they have invested less than one per cent of their total capital spending on renewable energy. But Orsted, Denmark’s national oil company turned green energy powerhouse, shows what is possible. In the space of just a few years the corporation has turned itself into the world’s largest renewables business, a multi-billion programme of investment in wind and solar making it a favourite with investors, boosting its value to nearly half that of BP. And BP itself may be gradually following suit. Earlier this year the corporation announced plans to cut its carbon emissions to net zero by 2050, the most ambitious climate target yet set by a major oil company.
So investing in the energy transition can mean investing in those companies making the transition, as well as those leading the field. Indeed Ross is sceptical about the effectiveness of simply divesting altogether from carbon-intensive sectors. The hard logic of the markets is that shares which are sold always have a buyer: if a company’s share price falls low enough it will entice investors less concerned about sustainability to step in and take advantage of a bargain. This year, when fossil fuel companies have been left exposed by the drastic fall in oil prices caused by the pandemic, may be an ideal time for activist investors to turn the screw by taking or retaining their stakes and ramping up demands for change.
The expanding green finance universe
The book’s central chapters offer something of a whirlwind tour of the rapidly growing range of opportunities available for investing in emerging green businesses. These include not just those in the now familiar renewable sector, but new fuels like the aforementioned hydrogen, critical for greening modes of transport like shipping and flight that cannot be easily be electrified; storage batteries that allow the energy generated by wind and solar to be used when the air is still and the sun has gone down; alternative meats and milks cultivated in labs rather than through carbon-intensive cattle farming; new methods for growing food indoors that cut the need for pesticides and ease the burden on land (in a fascinating aside Ross notes that one such ‘vertical farming’ company is growing food in abandoned London underground tunnels); and innovations for optimising energy efficiency, including a new generation of low-power air conditioners and electric boilers.
Discussing how investors might take stakes in these enterprises Ross pays equal attention to bonds as well as shares. Investors with long time horizons — spanning decades rather than years — will want to put most of their savings into shares, the value of which are more likely to accumulate significantly over time. But bonds issued by companies and governments to finance projects, traditionally held by investors as a store of value to guard against periods when share prices fall, can be particularly effective for holding companies to account. Ross observes that ‘One criticism of equities is that they are simply a sliver of a share in a company: owning them doesn’t direct your money within that company. But corporate bonds can be used for specific things, and thus can give you greater clarity over how your money is being used … There is an immediacy to the way a company needs a bond to be refinanced that can focus the mind.’ ‘Green’ or ‘transition’ bonds earmarked specifically for sustainable projects are being issued more frequently.
Ross also discusses pensions, offering similar advice to that given by Go Invest Green. Those with workplace pensions should note that they may well have the option of an ethical as well as a default fund: if they have not been given the option or are unimpressed by what it offers then it is worth their taking up the matter with their HR department or writing a letter to the company’s pension trustees — a little action can go a long way.
Given that pensions are the only investment that most people will currently or ever hold the book might have devoted more pages to consideration of the green merits of the most common workplace pensions, and the possibilities that self-invested pensions — SIPPs — can afford for taking full control of how savings are directed.
But the rest of the book provides valuable tools for interpreting how green a pension might be and, through its extensive coverage of green shares, bonds, trusts and funds, many suggestions as to how a self-invested pension might be constructed. If you’re interested in using the Go Invest Green app and going on to find out more about the wider world of green investment we can certainly recommend Investing to Save the Planet as an excellent starting point.
For a sampler of the book see Alice Ross’s introductory article on the Financial Times website and a recent interview on the Money to the Masses YouTube channel.
Investing to Save the Planet by Alice Ross is published by Penguin.