Four Barriers to Responsible Investing and Four Actions We Can Take

We know that climate change is having a huge impact on millions of people around the world:

Tens of millions have been affected by flooding in Pakistan in what has been described as a ‘Monsoon on Steroids’.[1]
Europe has suffered multiple heatwaves during the summer causing heat-related deaths and numerous wildfires.[2]
The Horn of Africa is experiencing its worst drought in more than 40 years with 18 million people facing severe hunger in Ethiopia, Somalia and Kenya.[3]
China has experienced a record-breaking heat wave with one climatologist claiming it was the world’s most extreme heatwave.[4]
The Western United States is currently experiencing a mega drought exacerbated by climate change.[5]

We also know that we need to address climate change and one of the ways we can do this is by being intentional with how we invest our money and understanding the impact our money can have, both positive and negative, on the climate crisis.

In this article, I want to explore some of the barriers investors face when considering responsible investments and how we can overcome these.

Barrier # 1 – Distraction

Over the summer I read Johann Hari’s brilliant book, ‘Stolen Focus’ which looks at how easily we are distracted from our tasks. Office workers, for example, on average, can only focus on a single task for three minutes!

We are constantly being distracted in a variety of different ways – technology including social media and emails, work-life stress and even our diets all conspire to take away our focus.

This constant distraction and lack of focus can impact on how we address major issues such as climate change. In other words, we end up as passive bystanders rather than actively seeking solutions.

Barrier # 2 – Noise

There is so much noise around ESG and the climate crisis at the moment and sometimes it is impossible not to feel overwhelmed. There are also lots of conflicting opinions and views, some of which, it seems, are deliberately designed to deflect our attention from the fact that we need to transition away from burning fossil fuels.

Barrier # 3 – Inertia

Human beings generally focus on the here and now. For example, we tend to put off saving for tomorrow preferring, instead, to spend for today.

Climate change is often viewed as something that will happen in the distant future or, if it is happening now, it is happening to somebody else, somewhere else, and therefore we don’t need to worry about it.

Increasingly in this country, we are being directly impacted by climate change with droughts and hose-pipe bans in large parts of the country, temperatures hitting record levels over the summer and flash flooding in cities such as London.

We often expect Government to lead the way on climate change but our politicians generally seem to be fairly quiet on this issue. There needs to be significant investment in infrastructure and a joined up, integrated energy policy.

In order to counter inertia, we need to design and then implement ‘nudges’ designed to reduce our carbon footprint. The introduction of a plastic bag charge significantly reduced the number of plastic bags in circulation and the introduction of Auto-enrolment meant that it was mandatory to join a workplace pension and save towards retirement. What other ‘nudges’ can we introduce that might enable us to have a positive impact on the climate crisis?

Barrier # 4 – Confusion

The financial press and investment industry is full of confusing jargon trying to sell ‘ESG’ funds, ‘Ethical’ funds, ‘Green’ funds, ‘Sustainable’ funds that it is difficult for investors to know what they are actually investing in and potentially what they are avoiding.

This seemingly indiscriminate labelling of funds has led to accusations of ‘greenwashing’ being levelled at some fund managers and this confusion can lead to investors avoiding responsible investments altogether.

How Can We Overcome These Barriers?

The barriers and obstacles to addressing the climate crisis can seem insurmountable, however, collectively, where we invest our money can have a positive impact on tackling the climate crisis. I’ve outlined four actions we can consider taking.

Action # 1 – Focus on the Future

The Intergovernmental Panel on Climate Change (IPCC) reported that to keep the rise in global temperatures below 1.5C this century, emissions of carbon dioxide would have to be cut by 45% by 2030. The IPCC also sets out that the climate crisis is inseparable from the biodiversity crisis and the poverty and inequality suffered by billions of people.

It is clear that we have to take action now; if we don’t, we risk future generations inheriting a world that is uninhabitable and beset with civil unrest. Most people want to pass on their wealth to their children and grandchildren but, just as important, is the state of the world that we leave the next generation.

Our future happiness is often defined by a goal or a lifestyle that we are looking to achieve in the future, for example, many people are saving for their retirement. What impact will climate change have on our ability to achieve the lifestyle we want to enjoy in retirement?

By focusing on the future and the lifestyle we want for ourselves and our children, we can influence our current investment choices.

Action # 2 – Workplace Pensions

It is estimated that around US$ 56.6 trillion is invested in pension funds globally[6] and increasingly members and trustees are demanding that scheme assets be invested to achieve a positive impact.

If you are a member of a Workplace Pension, find out where your pension fund is invested.

If you are an employer with a Workplace Pension find out where your default pension fund is invested and consider changing this to a fund that is focused on responsible investment. Many Workplace Pension providers have investment funds, for example, that take into account Environmental, Social and Governance criteria.

Action # 3 - Personal Finances

Find out where your personal finances are invested, for example, your ISAs or other investments. Begin to consider the level of impact you would like to see with your investments. For example, are there particular sectors or industries that you would like to avoid altogether with your investments? Alternatively, are you looking for an investment strategy that is designed to help keep global warming below 1.5C?

We know that many people invest on behalf of their children, for example, in Junior ISAs and Junior SIPPs. If your children are old enough, perhaps involve them in the discussion as to where they would like their money to be invested.

Action # 4 – Work with your Financial Planner

It can be incredibly difficult to research and analyse all of the different pension and investment funds that purport to be ‘ethical’ or ‘sustainable’ so working with a financial planner in this area can be a great idea. For our clients, we help them articulate their values and goals and we design our investment strategy around risk, return and impact so that we can fully align our clients’ values and their wealth.

Take Action

Reading and watching the news over the summer, it is clear that we need to take action to tackle the climate crisis and we can’t just rely on ‘business as usual’. We are facing a huge challenge and one way we can help is to be intentional as to where we invest our money and to have an understanding of the impact our investments are having on people and the planet.