Personal Finance, Global Issues
Specialist subjects call for specialists so we have invited guest bloggers to share their knowledge and thoughts on some key impact topics to help us all make the best choices about our actions.
Rebecca Kowalski has been working for financial advice firms in Scotland since the 1990s. She is qualified as a Chartered Financial planner and has specialist knowledge in sustainable investment. She is currently Sustainable Finance Specialist at Unburdened and Conference Curator at Goodstock
Rebecca’s interest in sustainable finance stems from her environmentalist daughter’s concerns about the climate and nature crises. She believes that the finance profession has the ability and responsibility to add its skills and voices to the call for urgent climate action. This is part one of a 4 part series on greening our money.
Please note that Rebecca is not authorised to give personal financial advice and none of the content of her articles should be construed as such.
Over to Rebecca…
image of a hand placing coins in a blue piggy bank. Photo by maitree rimthong: https://www.pexels.com/photo/person-putting-coin-in-a-piggy-bank-1602726/
In this series of articles, I intend to explain how the financial decisions you make and actions you take can help tackle the environmental and social issues that you care about. I will share an insider view of the potential for financial products and services to help create positive change or reduce harm. I’ll also highlight the pitfalls to avoid and provide tips on how to maximize the effectiveness of your financial choices and amplify your voice.
In the first article, I’ll endeavour to answer the crucial question from which all further actions should flow:
Does how I save or invest, borrow or lend my money really make a difference?
Saving for a safer future
When we think about looking after nature, tackling climate change and creating a better society, we may think first of charities and campaign groups, government spending and the efforts of international organisations like the United Nations.
The funds that we hold in our pensions and investments typically invest in publicly-traded, large international businesses, such as Microsoft, Toyota and Nestle (other businesses are available). Companies like these may not seem the most obvious saviours of people and planet.
The money we hold in our cash savings and current accounts provides funds which our banks may lend to businesses whose activities we may not approve of, whether that is destroying rainforests or manufacturing weapons that are used to harm civilian populations. We may enjoy a “free” bank account, but it is the profits made from the bank’s lending division that are facilitating this.
The good news is that over the last five to ten years it has become easier to find and select financial products that align with our personal values or with the society and economy that fits our vision and hopes for the future. The key question we should start with however is the following:
If we select ethical or environmentally-friendly savings and investment options, will our choices as small players in a huge financial system have any real impact?
The reason this question is so important is that we need to ensure we are not “greenwashed” and led to believe we have made a choice that is all talk and little action. Most financial products are offered by large companies with large sales targets and generous marketing budgets, and we need always to remember that we want our money to fund a better world, over their profits and market share. We don’t want to be lulled into complacency and think “I’ve done sufficient, I’ve greened my pension”, if this turns out to be a weak solution.
Money’s Superpowers
I believe that money can make a difference, if we really lean in to applying it as a lever of change.
Our money’s power comes firstly from the fact that finance underpins everything; all economic activity in all corners of the world, whether that’s the fossil fuel industry pumping out its emissions or solar panel manufacturers rolling out a lower cost, more secure and sustainable energy source. Money funds both the global fast-food provider causing plastic pollution, excess water usage and obesity and the companies developing plant-based products or using purely recycled and local ingredients.
Money’s second superpower comes from the way it turns the personal into the collective. Most of us have relatively modest amounts to save and invest but these amounts will typically be pooled into funds with thousands of other investors and collectively that larger amount of capital can have influence and a voice. In this super-connected world that we live in, the direction in which our capital collectively flows can send wide reaching signals.
By choosing investment products that pursue positive environmental and/ or social outcomes, where do those signals go?
To the sellers of the investment products, who then ensure they provide financial and human resources to support them.
To governments, who not only need “green money” to fund their net zero transition, but also need confidence to create bold environmentally positive policy.
To your colleagues, friends and fellow citizens, many of whom are not ready to choose a sustainable path until they see this as being a popular choice.
And also to the Directors and Executives of the businesses whose shares or debt your money will invest in, as explained below.
How your values can affect the value of things
Your pension or ISA funds will typically invest in publicly listed companies, buying shares in that company on a stock market. The money used to buy a company’s shares is usually going to the seller of that share, not directly to the business itself. If you sell a share in an oil company and buy one in a wind turbine manufacturer on a public stock exchange, you are not giving money directly to the wind turbine company to spend on constructing more equipment. However, business executives and owners (who will generally have large holdings of shares and options to receive more in the future) want those company shares to be in demand and trade at a good price. In fact, their salary and bonus may depend on it.
The signals that your money sends can not only affect the reward that the Executive receives and the price its shares trade at, it can also affect how easy it is for a business to raise new borrowing and how much it needs to pay in interest on that. Banks have been slow to respond to pressures to stop funding new fossil fuel development but there are signs that the most controversial elements of this activity are beginning to be curbed. A combined pressure from investors, customers, commercial risk management, regulatory and reputational factors.
One way of directing the flow of money is via exclusion of “bad companies” from your investments..
This is a long-established strategy that has been employed by “ethical” or responsible funds since the 1990s. These funds will typically avoid “sin stocks”, such as tobacco, alcohol and gambling but fossil fuels are also sometimes an exclusion (although the devil here can be in the detail - with some funds seeing some fossil fuels as less harmful than others (raises eyebrows!). This strategy is also known as divestment.
There is a valid argument that this practice has less of an impact, as there will always be another investor prepared to buy the shares of the excluded company. Nevertheless, whether on moral grounds or as a pressure technique, there are many investors large and small who choose the divestment route.
There is another strong argument that excluding some companies is a wise long-term investment decision. Oil companies may be paying juicy, carbon-budget packed dividends in the short-term but when will their license to trade end or their products become far less profitable and attractive than renewable energy sources? Over and above this, what harm are their activities doing to the rest of the companies you hold in your pension? Could the oil company that earns you an investment return of 10% reduce the return earned by all the other companies you hold that have premises, supplies and transport routes disrupted by floods, storms and wildfires?
In my personal view, there are many companies that, despite being led by profits first and foremost, can nevertheless be influenced by investors to deliver those profits in a more environmentally and socially positive way. There are others, like the fossil fuel producers who turn their backs on or delay the transition to renewables, with whom there appears to be no sign of appealing to their better nature or sensitivities. Their power is too vast and ingrained. We can endeavour to send signals to them via our voting, consumer choices and campaigning, as well as the sheer brilliance of some of the alternative solutions we are rolling out.
Money has Influence
However, most businesses which deliver the goods and services that are part of our way of life can and are being influenced and held to account, from car manufacturers to house builders to water utilities. This influence and “holding to account” combination is the second way in which your money can bring about positive sustainable outcomes.
Many investment funds hold large amounts of company shares. This gives the fund managers the ability to vote on significant issues raised at the company’s annual general meetings. This may be a vote on the company’s proposal to re-elect the Directors, or it may be a campaign group or investor’s request that the company sets a target to reduce carbon emissions.
As well as through annual voting, there are other opportunities for investment managers to influence companies. These include:
Gathering data on their sustainable and environmental credentials and highlighting where they can improve.
Educating them on sustainability issues and science.
Requesting them to make positive change via communications with senior employees and Directors.
Placing more significant pressure, such as joining collaborative campaigns, going public about their concerns or selling the shares.
Each of these steps is part of a practice known as investor “stewardship and engagement” and it is applied with varying degrees of effort and intention by many investment managers. Engagement can be motivated by a wish to improve the financial performance of a company, as well as its environmental and social behaviours.
Some fund managers are better than others at applying this practice as a driver of change and I will look at this in more detail in future articles.
Following the recent US election and the concerns many people have on how this will impact climate policy, many commentators have looked to the momentum we have in green technology, renewable energy and transport and corporate disclosure on carbon reporting and other environmental metrics to give us hope for the future. Now is definitely not the time to ease off of the levers that show company owners and Directors that we want and need a safe and healthy planet and society.
The investment industry and financial services profession no more perfect than any other sector of our economy. You could compare it to a teenage child. You will not agree with everything it says, it can talk a different language, it will often look to take more than it gives and you won’t change it overnight. But we need to look through to the potential, work with the imperfections and recognise that it’s an important part of our future. I know from experience that parenthood can be very lonely when things don’t go according to plan, but when you tune into sustainable finance you are absolutely not alone. There is opportunity to become part of a growing and increasingly informed and empowered investing and saving community.
Do you have questions or comments? Is there a particular aspect of green finance you would like covered in future blogs? Pop a comments below or get in touch with us at hello@dolilthings.org and we’ll put your questions to Rebecca
In her next blog for us, Rebecca will be looking at products for a better planet (looking at bank accounts/pensions/investments and how you can find greener/more ethical options).
Thanks for reading
Lil has no affiliation or financial relationship with any organisations mentioned. We always recommend you seek your own independent advice.