The COP27 climate change conference held in Egypt concluded late last year with a number of key agreements that may impact investment decisions in the future. Perhaps the most eye-catching agreement was reached on the last day of the conference, as developed nations agreed to establish a dedicated fund to assist developing countries rebuild infrastructure caused by extreme weather events. The conference also reaffirmed the 2015 Paris Agreement, where nations committed to pursue efforts to limit global temperature increases, and also agreed to focus on low-emissions energy, through wind and solar, to carbon capture and storage.
So what does this mean for investors? Almost every company and investment fund has been influenced by the environmental agenda for some time, and the decisions reached at COP27 underline how businesses will need to consider the environmental impact of their operations in the future. Companies are already moving in a consistent direction of travel towards greater sustainability, better corporate governance and consideration of the social impact of their business.
This drive towards sustainability is being adopted by most global companies, although companies are moving in different ways and at different speeds. Common themes adopted by many companies is to reduce use of fossil fuels in the manufacturing process, moving away from single use plastic to recycled products, and switching to renewable energy sources. It is good practice as well as being good for the planet, as consumers are becoming increasingly conscious about the sustainability of the products they purchase, and companies want to be seen to be doing business with other companies that share similar views, ethos and outlook when it comes to sustainability.
Amidst the clamour to be more sustainable, it is important that investors can rely on the transparency of data, so that they can make informed investment decisions. Over 90% of the constituents of the S&P500 index now issue an annual Sustainability Report, and sets of standards have been introduced covering a diverse range of impacts, from use of natural resources, pollution and waste measures, to impact on local communities, human rights and anti-corruption.
Whilst undoubtedly a positive move, trying to provide investors with key data that allows comparison between different organisations is difficult, as one or more factors can be specific to a sector of industry. A further hindrance are the different measures used by the various global sustainability standards that companies use to prepare the reports, which can make interpretation of the results more difficult.
Given the importance that many investors, consumers and businesses now place on sustainability, regulators are becoming more concerned about “greenwashing”. This is where a company uses language and imagery that claims that its products are environmentally friendly or have a greater positive environmental impact than they actually do. Whether undertaken deliberately or innocently, a greenwashed product can tap into the growing desire that investors and consumers have to invest in a sustainable manner, and companies found guilty of greenwashing can be subject to reputational and financial damage. Take the case of Volkswagen, who admitted cheating emissions tests by adding software that recognised when engines were being tested and changed the engine performance accordingly. Not only did this cause significant reputational harm, but the company also suffered a financial penalty of $4.3bn*.
As awareness of sustainability increases, many investors appreciate that avoiding companies that harm the environment or promote what some may see as unhealthy products, such as tobacco or gambling, is difficult. This is why our Socially Responsible portfolios aim to take a common-sense approach, by focusing on those funds who aim to invest with sustainability in mind, but adopt a strategy that is not too restrictive so as to reduce the universe of available investments, which could potentially hurt investment returns over the longer term.
If you would like to move your portfolio towards a more sustainable footing, then speak to one of the advisers at FAS about our Socially Responsible portfolios, here.
*Source: – justice.gov/opa/pr/volkswagen-ag-agrees-plead-guilty-and-pay-43-billion-criminal-and-civil-penalties-six
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