The climate crisis: How ESG investing can help

Alarmingly, images documenting the catastrophic effects of climate change have become the norm in the past few years. Since 2019, the world has seen petrified koalas clutching onto an Australian fireman, sun-cracked lakes in North America and century-old glaciers collapsing helplessly into the sea. The summer of 2022 in the Northern Hemisphere has proven no exception to this heart-breaking trend, with wildfires spreading throughout parts of Southern Europe.

Heatwave ESG

This blog will focus firstly on why wildfires, in particular, are becoming more frequent, as it has become an important talking point. Secondly, it will detail what is meant by the term ‘investment chain’. Finally, readers will learn of the various ways in which their investments can play a much-needed role in the fight against climate change.

Why are wildfires becoming more frequent?

In 2020, National Geographic published an important piece which documented the scientific link connecting wildfires to climate change. The piece stated, “climate change has inexorably stacked the deck in favour of bigger and more intense fires in Europe and the United States over the past few decades”.

National Geographic noted the major contributors to the increasing severity and prevalence of wildfires are “increasing heat, changing rain and snow patterns, shifts in plant communities, and other climate-related changes”. These various changes to the natural environment have “vastly increased the likelihood that fires will start more often and burn more intensely and widely than they have in the past.”

The key takeaway

Climate change is driving two key factors which create perfect conditions for fire, those being a reduction in precipitation and warmer temperatures.

At the time of writing, large parts of Southern and Central Europe are experiencing heat waves. In Southern France, the Iberian Peninsula, Northern Italy and across Greece, temperatures are expected to soar into the mid-forties.

For context, the highest ever temperature recorded in Europe was 48°C in Athens on July 10, 1977. More records are expected to fall this week, with the United Kingdom’s Met office predicting the country’s hottest ever day. Several other records are expected to tumble across Europe as the intense heat sets in.

Heatwave ESG

The average summer temperatures have risen throughout Europe since the 1970s (Guardian, 2022). 2020 hit the record as the hottest European summer, with 2022 expected to break the record again. Climate scientists warn without immediate action, the situation will worsen in the summers to come.

The climate crisis is happening now!

The climate crisis is well underway. Make no mistake about it. Wildfires, droughts, extreme weather systems, species loss, ocean acidification, toxic air, acid rain and dangerous levels of UV are now common throughout the world. Immediate action is required.

This blog will now explore how investors can use the power of their portfolio to make a positive impact on issues including climate change.

How to make a positive impact with your investments

Before we delve into impact investing, it’s important to firstly cover the investment chain to underline the important role every participant/actor plays.

The investment chain is the complex link that connects the capital of individual/retail investors with businesses via capital markets/stock markets. The chain includes asset managers, institutional investors, trustees, investee companies, service providers, pension funds and governments.

Investment chain example

An individual who saves into their retirement savings plan each month will only see the value of their portfolio fluctuate as the underlying investments change in price. But underneath the numbers seen on the screen, are millions of complex cogs at work.

In this example, the saver takes the investment decision to buy units in a US technology fund operated by an investment bank. The fund managers at the investment bank have a mandate to seek opportunities within the US technology market. Once attractive opportunities are identified, the fund managers will invest the capital into the company(s) they deem most promising/attractive.

This capital is then invested by the company to help them expand, purchase equipment, fund research, hire employees or whatever their requirement may be. The invested capital will play an important factor in the success and influence of the company. This very basic breakdown shows how capital moves along the investment process from an investor to a company.

The rise of impact investing

The metric of success the vast majority of investors still use is investment return. However, times change, as do priorities. Investors, institutions, pension funds, and especially governments are now beginning to ask more than just, “has the investment yielded a return?”. Actors are now beginning to ask with increasing frequency “what is the environmental and social impact of my investment?“. 

Common questions from deVere Group clients now include whether the company:

  • prioritises environmental best practice measures.
  • disposes of its waste responsibly.
  • operate in jurisdictions with low environmental and health and safety protocols.
  • release a large amount of greenhouse gas emissions.
heatwave ESG

These are just a handful of questions that begin to form a classification of whether a company can be considered responsible. There are various rating agencies, fund houses and market analysts who provide their own ESG classification, each using their own metrics.

Morningstar is one such provider that offers ESG ratings; their version is the Morningstar Sustainability Rating. This metric is designed to support investors in evaluating the relative environmental, social, and governance risks within portfolios. The ratings are determined using bottom-up assessments of the underlying holdings within a portfolio, underpinned by Sustainalytics’ methodologies for assessing governance issues, corporate and sovereign ESG factors and ESG risk.

With all the framework and resources now in place, the question for investors is, do you wish to use the power of your portfolio to drive positive change? If the answer is “yes”, keep reading.

How you can take action now

deVere Group is committed to providing investors with the ability to align their investment portfolio with their ethical beliefs over the medium to long term. deVere Group’s ESG offering provides clients with a range of options that suit all risk appetites and growth objectives. By utilising the best available data and undertaking extensive independent market research, deVere Group is able to offer industry-leading sustainable investing options for clients. 

deVere Group’s ESG investing offering provides clients with the ability to gain exposure to sustainable; mutual funds, structured products, real estate and private equity. Since its launch in 2019, the program has grown massively in popularity, with vast numbers of clients now incorporating an ESG strategy within their portfolio. For more information please contact your financial advisor, or click here to register your interest in the programme.

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