Ethical investing: a beginner’s guide
The Rise of Ethical Investing
The trend for socially responsible investing is rapidly gaining pace, and the sector is showing no signs of slowing down. Rather than being the relative niche area it was a decade ago, there is much more choice in today’s markets on where you can benefit from ethical investing.
The faster the world’s governmental, public, and private institutions move towards NetZero commitments, the better it will be for the planet as well as its economies and businesses. Governmental pledges and interest from investors are attracting huge amount of capital to support sustainable businesses. The trend is reminiscent of the financial world buzzing around the Kyoto Protocol over a decade ago, with banks, entrepreneurs and brokers rushing to benefit from every angle of it. However, this time it looks even more critical and at a larger scale.
Socially responsible, sustainable, ‘impact investing’ as it is referred to under the same umbrella as ethical investing, is a trend thought to have been driven by younger investors – the Millennials and Gen-Z generations – who are known to be more ethically conscious consumers. This, intertwined with the growing number of government pledges to NetZero commitments worldwide, with approximately 71 percent of global economies having now committed to NetZero by 2050. Moving to NetZero, sustainable society will completely and fundamentally change the way we travel, work and produce food, meaning the energy transition will drive impact investment in the next 20-30 years.
The total cost of NetZero, provided by the Climate Change Committee (CCC), is estimated to be £49.1bln annually. This sounds a big number, but in reality represents just 1.3% of total UK GDP per annum.
Governments should be leading the incentives and catalysing private investments into the innovative areas to increase their NetZero commitments. This is likely to be supported by range of innovative funding tools and guarantee schemes. At the moment the cost of NetZero is still expensive and there is a gap in innovative technologies still at early stages of maturity and abundance of financing. While financing is available, if the market is not there yet, it cannot deliver. Many are struggling to find the right opportunities, because of the gap of technology cost and maturity in the Energy transition.
So, the major focus of governments is now how to make the cost of NetZero technologies down so that the market can afford them. The Government policies must to be the driving force to make the technologies affordable, creating the market, so the consumers can afford zero emission technologies such as Hydrogen, EV charging technologies.
The good thing is that while the market is waiting for the governments to make clear policies and incentives, major investors and market players are working efficiently so that they do not to miss opportunities. For example with Hydrogen, while the Hydrogen policies are yet to be matured, the larger players are already deploying capital in the first larger scale projects, in order to position themselves in the market. Early entry into industries allows investors to position themselves and build relationships with the market.
All major investors, such as pension funds and commercial banks are formalising their ESG standard lens filters. For businesses, having the right ethos and environmental, social and governance (EGS) values creates huge opportunities to be at competitive advantage in terms of fundraising. So, for investors, it is wise to act early and get ahead of the curve.
One of the main objectives of post Covid-19 recovery set by developed country’s Governments are to widen investment in infrastructure and technology. Particularly, prioritising technology in the NetZero contest, including ESG and sustainability.
Governments worldwide are supporting the post Covid-19 recovery through various tools, such as tax and incentives support from Government during certain times until they see clear recovery. Investors should be encouraged to enjoy these time limited opportunities on ESG and greener infrastructure investments tools.
Moving towards ethical investing
In essence, ethical investments have a positive impact on the planet while also making a financial return – surely a win, win situation? In theory, yes, but as with all investing, you need to find the right stocks or funds in order to achieve the best financial returns – and weigh this up against the ethical gains at the same time. There is no industry standard approach to socially responsible investing. How impactful an investment is will come down to personal values and opinions, so it is inherently more complicated.
Whether you invest in a fund or individual shares; have a large or small investment portfolio, there are a number of factors to consider before making the venture into socially responsible investing. Most importantly, you need to have a clear idea of your values and think about what ethical measures are most important to you.
About the Author
Zula Luvsandorj is a project finance expert specialising in green energy.