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How to Invest Without Damaging the Environment

In the aftermath of the US election, it’s not hard to imagine conscientious investors redoubling their commitment to investing in ways that take climate change into account

Jon Hale 1 March, 2017 | 9:03AM

The 2016 election may have a galvanizing effect on climate-aware investing, given the new president’s stated doubts about climate change, push for environmental deregulation, and support for the fossil-fuel industry, especially coal.

Most energy and utilities companies will continue their move away from fossil fuels and toward alternative energy because it increasingly makes economic sense to do so. Large companies throughout the global economy will continue to take steps to lower their carbon footprints, and regulators, stakeholders, and investors will continue to support the transition to a low-carbon economy.

In the aftermath of the election, it’s not hard to imagine investors redoubling their commitment to investing in ways that take climate change into account. There are several ways fund investors can do this. The most prominent is to get rid of funds with exposure to fossil fuels. Fossil-free funds generally exclude companies that own oil, natural gas, and coal reserves. Some fossil-free funds may also exclude companies involved in the refining and transport of fossil fuels, suppliers of oilfield equipment, and utilities that rely heavily on non-renewable energy for their power generation.

Fossil-Free Funds Investors can search for fossil-free funds at a website called Fossil Free Funds, run by As You Sow, a not-for-profit that engages on behalf of shareholders with companies about environmental and social issues. Morningstar provides fund and industry data for the site. You can adjust the filters to choose UK market and see which funds perform well – and which disappoint. UK registered funds on the site with no fossil fuel exposure include Fundsmith Equity, Jupiter European and St James’s Place International Equity.

Check out the Fossil Free Funds website to see what your funds’ exposures are. Your funds may have some fossil fuel exposure, but it could be low enough to be acceptable to you. Low-Carbon Funds Investing in low-carbon funds is another possible approach for investors who want to express their concern about climate change in their portfolios.

Such funds don’t necessarily eschew fossil fuel exposure altogether, but instead invest in companies with lower carbon emissions and thus a low overall carbon footprint. Far from an exact science, carbon foot printing of portfolios is an attempt to quantify the greenhouse-gas emissions of companies a fund holds.

The Fossil Free Funds site also includes a fund carbon footprint measure, calculated by measuring, estimating in some cases, a company’s GHG emissions from its direct and indirect activities with data provided by South Pole Group. The emissions of each company in the portfolio are weighted by the investment amount to calculate a fund-level carbon footprint. As we might expect, large-value funds have heavier carbon footprints than do large-growth funds.

Morningstar Environmental Pillar Scores

A third option is to use the Environmental Pillar Rating, a component of the Morningstar Sustainability Rating for funds. The Morningstar Sustainability Rating is based on Sustainalytics’ ESG ratings of companies in a fund’s portfolio, with deductions taken for company involvement in ESG-related controversies. We also calculate separate Environmental, Social, and Governance scores and ratings. These are available in Morningstar Direct

While the Environmental Rating does not focus solely on climate change, its measurement of how well companies are managing environmental issues includes a range of relevant indicators. In addition to carbon emissions, these include evaluations of a firm’s environmental policies, management systems, reporting, and any environmental controversies in which a firm is involved. If a fund has an Environmental Rating of High, that means its portfolio places in the top 10% of its category based on how well the underlying holdings are handling various environmental issues, including those directly related to climate change.

A High rating does not mean the fund is fossil-free or even low-carbon, but it does mean the fund’s holdings manage environmental issues relatively well compared with companies typically held in by funds in the same category. By investing fossil-free, or low-carbon, or in an otherwise environmentally aware manner, you are adding your investment voice to those of other investors in support of the transition to a low-carbon economy.

There are other ways to invest more directly in areas like alternative energy or in stocks of companies making cutting-edge products that will reduce reliance on fossil fuels. But using one of the methods outlined above, investors can incorporate their concerns about climate change into their core fund portfolios.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Fundsmith Equity R Acc4.32 GBP-0.01
Jupiter European2,445.83 GBP0.10
St James's Place Intl Equity Acc1,020.02 GBP0.40

About Author

Jon Hale  Jon Hale is a consultant with Morningstar Institutional Investment Consulting.

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