When you use a retail bank, they earn money by investing your money according to the bank’s priorities so that it can meet its promises to you (guaranteed or maximised returns, e.g.). Your money is then passed to an investment organisation; these companies prioritise financial returns, once they have screened out any investments that are deemed inappropriate (the most controversial areas, e.g.). This might mean that some of your money gets invested in something that has high financial returns and is not currently deemed as risky (a company whose profits are high, for example, like oil companies). Because organisations causing Climate Chaos are often highly profitable and very valuable, they are quite likely to form a significant part of where your money is invested.

Your savings and pensions are invested in one or several portfolios whose value and return constitute your capital. A portfolio is a grouping of financial assets such as companies stocks, bonds (debt hold upon companies or states), commodities (oil, steel, gold, corn, …) or currencies. A portfolio can also consist of property rights on non-publicly tradable assets such as shares of non publicly traded companies, real estate, land or art. Most portfolios seek diversification in their composition to not put all eggs in the same basket. Portfolios are held directly by investors and/or managed by financial professionals and money managers through saving and pension plans. Investors can also have multiple portfolios for various purposes (retirement, paying children studies, buying a house).

Investors may construct an investment portfolio in accordance with:

  • Their tolerance for risk and their appetite for high financial returns (adventurous, balanced, conscious)
  • Their investment horizon (cash-equivalent, short-term, long-term)
  • Their knowledge of the specific market they invest in
  • Their ethical values

Take away:

Take the time to define what you expect from your portfolio. This will be key to find the investment solution which suits you. For example, you may keep part of your saving directly accessible in a mainstream ethical plan, while another part may be invested in the longer term in an impact investment fund (see definition below).

Ethical investing refers to the practice of using one’s ethical or moral principles as the primary filter for the selection of investment options.

  • Ethical investing depends on the investor’s conception of what is ethical and what is not. This alignment between a set of value and economic activities may be rooted in religious, political or environmental concepts.
  • Most ethical investment solutions use a negative screening to eliminate from their portfolio specific industries whose activities are opposed to their values (example: firearms manufacturers).
  • Some ethical funds also use positive screening to select specific companies whose activity or ethical positions are aligned with their values (example: fair trade companies)
  • Ethical investors typically avoid investments from sin stocks, companies involved with stigmatized activities, such as gambling, alcohol, smoking, or firearms.
  • Ethical funds does not always take into account climate change and environmental protection in portfolio management.

Take away:

You should carefully ask your financial advisor or read the documentation to check if the ethical options you are offered coincide with your ethics. You may ask for examples of selected or excluded companies.

Also known as social investments, sustainable investment, socially conscious investments or responsible investment. Responsible investors use several strategies to maximize financial return while attempting to also maximize the positive impacts or reduce negative impacts of investments. They will then apply different methods:

  • ESG integration is one of the most common responsible investment strategies and entails the incorporation of environmental, social and governance (“ESG”) criteria into the fundamental analysis of equity investments (see definition of ESG criteria below).
  • Negative screening excludes certain securities from investment consideration based on social or environmental criteria. Divestment is the act of removing a specific company stock or a type of asset from a portfolio based on mainly ethical, non-financial objections to certain business activities of a corporation. For example Norway’s $1.1 trillion sovereign fund just divested companies solely dedicated to oil and gas exploration and production.
  • A Best-in-class approach ranks all companies in a specific sector and select those topping the ranking regarding environment or social criteria. This method typically does not exclude all oil & gas companies but select the most responsible company in the oil & gas industry.
  • Shareholder engagement or shareholder activism attempt to positively influence corporate behavior. These efforts include putting pressure on its management, initiating conversations regarding issues of concern, and submitting and voting resolutions during shareholders annual meeting. For example, in 2017, shareholder activists forced the company Nike to disclose all its donations to political organisations.

Take away:

Social and responsible investments (SRI) funds are a guarantee that non-financial issues are taken into consideration. But this does not mean that you money is not invested in companies that destroy the environment. These investment solutions are offered by most financial service providers. That is why you may consider them as a better-than-nothing option. Moreover, returns on investment may be comparable to mainstream solutions.

To assess a company based on environmental, social, and governance (ESG) criteria, investors look at a broad range of behaviors.

  • Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks. For example, are there issues related to its ownership of contaminated land, its disposal of hazardous waste, its management of toxic emissions, or its compliance with government environmental regulations?
  • Social criteria look at the company’s business relationships and human resource policies. Does it work with responsible suppliers? Does the company donate a percentage of its profits to the local community? Do the company’s working conditions show a high regard for its employees’ health and safety? What are the policies taken by the company to avoid gender or racial discrimination?
  • Governance criteria look at transparency, legal compliance and shareholder relations. For instance, investors may want to know that a company disclose and give reasonable top-management benefits, or that stockholders are given an opportunity to vote on important issues.

Take away:

No single company may pass every test in every category, of course, so investors need to decide what’s most important to them. On a practical level, investment firms that follow ESG criteria must also set priorities: climate protection first or gender equality first for examples.

Impact investing refers to investments “made with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return. Impact investments provide capital to address social and/or environmental issues. Impact investing is still a niche market, but it develops rapidly

Impact investors can provide financing solutions to Social Purpose Organisations (SPOs). SPOs create new business models to address social, environmental and economic challenges and are often delivering products, services and assistance to populations that are excluded from mainstream markets or out of reach of the public sector.

Most reputable financial institutions will take a position on the ethics of money management; they may call this ‘Responsible banking’ or similar. The responsibility they may be referring to is financial, i.e. making sure they give you ‘value for money’ and not necessarily socially or environmentally responsible. Also, look out for ‘best-in-class’ fund screening, Positive Screening and Negative Screening; Best-in-class investments are made in the most responsible organisations within a sector, and can be seen as a way of encouraging a shift to better policies, but bear in mind that it could, ethically, be ‘the best of a bad bunch’. Positive Screening selects organisations that are actively pursuing responsible corporate behaviour (i.e. can demonstrate they have ethical goals and outcomes). Negative screening is deliberately avoiding organisations that perform poorly in ethical terms. By screening funds, you can make a better ethical position, but it is difficult to avoid all ethical concerns because financially viable organisations often operate in different cultures with different expectations.

We cannot advise on the financial impact of shifting your money, you should seek independent advice. Do bear in mind that by investing in a more limited choice of areas, you may be more exposed to risk. Conversely, there are arguments that investing in unsustainable companies may give poor returns as Government policy and regulation shifts to tackle the Climate Emergency.