Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
THE move to include environmental, social and governance criteria into stock market portfolios is well-established. Investors have a wealth of choice, with funds focusing on everything from biodiversity to green infrastructure to renewable energy. However, for investors trying to build a diversified portfolio, incorporating areas such as commercial property or fixed income, it has been a whole lot harder.
There are sound reasons for this. If someone holds shares in a company, they are a part owner and therefore have a say in how it is run. They can turn up at shareholder meetings and bang the drum about climate change or board diversity. They can vote against inactive management teams. They can team up with other shareholders to engage with corporate leaders and press for changes.
For fixed income investors, it is a different relationship. The fixed income investor is lending money to a company, but doesn’t have a say in how the company is run. Therefore, forcing change is far more difficult. It has been done, but often only where an asset management group is also an important equity owner as well.
However, this is changing. The first significant shift has been the emergence of a ‘green bond’ market. This is where companies and governments issue bonds specifically ear-marked for green projects: a company may be looking to move its energy supply to renewables. The government of Spain recently issued its first green bond, for example, designed to pay for clean transport, waste water, pollution and biodiversity initiatives among others.
The market for green bonds is now around $1.4trillion in size1 with issuance expanding each year. Many of the EU’s Green Deal initiatives are likely to be financed by green bonds, bringing new choice to investors. Against this expansion, there are now a number of specialist green bond funds, including funds from Allianz and iShares.
The concerns around green bonds have been that issuers are carving out their green projects, making the rest of their bonds ‘browner’. There have also been concerns about the ‘greenium’ – a premium paid for green bonds over normal bonds. There is no reason to think this will narrow, but at a time when bond returns look unappealing anyway, it is a point worth considering.
There are also signs that ESG considerations are becoming more important in commercial property. With around 18% of the UK’s carbon emissions coming from non-domestic buildings, this is a vital area of focus if the country is to reach net zero emissions.2
Equally, as companies commit to net zero, the buildings they occupy are a key contributor to their carbon footprint. They are pushing back on landlords to create ‘smarter’ buildings – with solar panels, energy efficiency measures and easy access. Landlords such as Aberdeen or Columbia Threadneedle recognise the competitive opportunity in creating greener buildings which should attract greater tenant demand.
Overall, the expansion of ESG considerations into new asset classes is welcome, enabling investors to build fully diversified sustainable portfolios. For example, the Foresight UK Infrastructure Income Fund, which features on the Fidelity Select 50, aims to deliver an income from the renewable energy and infrastructure sectors.
ESG investing has also helped fund groups create sustainable multi-asset funds that give investors everything in one place. Increasingly, investment managers are moving to a world where ESG is the norm, rather than the exception.
More on Sustainable and ESG investing
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. The Foresight UK Infrastructure Income Fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The fund also uses currency hedging. Currency hedging is used to substantially reduce the risk of losses from unfavourable exchange rate movements on holdings in currencies that differ from the dealing currency. Hedging also has the effect of limiting the potential for currency gains to be made. The Foresight UK Infrastructure Income Fund investment policy means it invests mainly in units in collective investment schemes. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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