Over the last six years, Newton Investment Management has carried out a survey of charities to gain insight into investment practices. Last year’s survey garnered responses from 102 charities with a combined investment pool of around £14bn. The responses showed a rise in concerns among charity trustees and decision makers about climate change and sustainability when it came to their investment portfolios.
“Over the last 12-18 months, climate change has come up constantly in meetings with clients,” says client director and commercial sustainability lead at Newton Investment Management, Kelly Tran. “They want to know how we can take into account climate change in their portfolios at a holistic level.”
These observations are reflected in the 2019 survey. A total of 64 per cent of charities said that they felt that it was their responsibility to think about climate change, with around a third coming under pressure from stakeholders to consider this in their investment strategies. “This pressure has started to effect real change,” says Tran. “More charities are adopting fossil fuel exclusion policies.”
Again, this is reflected in the survey. In the 2016 poll, around 25 per cent of respondents said they will or have excluded fossil fuel investments; by 2019, this stood at a third. “Significantly, 48 per cent of those charities that have debated this topic, but, as yet, have taken no action, also said that they would revisit the decision this year. I think a lot of those charities will decide on a course of action on climate change and that may mean stopping all investment in the fossil fuel industry, or taking other approaches that will signal to the industry that investors want to accelerate the transition towards a lower-carbon world.”
Evolving capitalism
Tran says that during her conversations with charity clients, it is becoming clear that more and more asset owners want to take an active part in the stewardship of their investments and not rely solely on their fund managers. “It seems they are striving for a collective voice, particularly when it comes to engagement with climate change,” she says. “Our clients are demanding more results and action, not just words and promises.”
They are also looking to develop a common language when it comes to the climate crisis and wider efforts to tackle climate change.
“Clients are asking about the carbon footprints of their portfolios. They no longer focus simply on the risk and return profile,” continues Tran. “There is a change from a shareholder capitalism to a stakeholder-focused capitalism. Clients want transparency and are looking at their investment portfolio through a different lens. Previously, the focus would be on financial metrics alone, but charities now want to align their portfolios with the core values of their organisation.”
Pros and cons
But is divesting all investment in fossil fuels the right course of action? According to the 2019 survey, 24 per cent of respondents felt that divestment was the best way to tackle the climate crisis, but the vast majority (70 per cent) think that engaging with companies is the best method.
Tran suggests there are pros and cons to stopping all investment in fossil fuels. “If you take fossil fuels out of the portfolio, that puts public pressure on the companies and immediately divests capital – it is tangible, raises awareness and reduces the carbon footprint,” she says. “But it also excludes fossil fuel companies that are transitioning towards greener energy, for example. The question is whether divestment is better than lobbying behind closed doors.”
Another point to consider, says Tran, is that the secondary market will continue to invest regardless, perhaps with less concern about the environmental or social impact. “Does simply excluding fossil fuel companies capture the nuances of the global energy market or solve the problems we are facing?”
Tran also cautions that screening for exclusion may reduce investment opportunities. “You have to think about where else you can invest divested money. Fossil fuels are used in a huge range of everyday products – medicines, fabrics, plastics – it is a much more complex divestment discussion than excluding tobacco, for example.”
She adds that trustees should ask themselves a set of questions when discussing fossil fuel exclusion: “First, why are you doing it? And how would you measure success? On what time frame? When should you do it? Who is accountable? Are there any alternatives to divestment?”
No one has all the answers, says Tran. “The challenge is immense but investing with a focus on sustainability is the right thing to do.”
Kelly Tran, Client director, commercial sustainability lead – Newton Investment Management
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