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.
Fossil fuel companies will have fewer financing options in the future after the bank HSBC redrew its commitment to curtail investments in polluting companies.
The shift at HSBC adds momentum to the trend towards divestment of fossil fuel assets, in which investors, including financial institutions, aim to end their backing for carbon-producing industries.
In the case of HSBC, it has been negotiating with some of its big institutional investors about how quickly it commits to ending support for fossil fuel companies. In particular, the bank is under pressure to limit the debt - including the corporate bonds - it facilitates on behalf of carbon-polluting companies.
A group of large investors had tabled a resolution to be heard at the company’s Annual General Meeting urging faster action on fossil fuel financing. HSBC has now agreed to implement its own plan and the investors have agreed to withdraw their motion.
Under the new plan, HSBC will draw up targets to align its financing of companies with the Paris Agreement, which seeks to limit global warming. This will start with oil, gas, power and utility companies in 2021, but be expanded after that. The bank will also phase out the financing of companies involved in coal-fired power and thermal coal mining by 2030 in the EU and OECD, and by 2040 elsewhere.
The episode echoes similar action taking place at Barclays, another large financier of fossil fuels, and it holds important signals for ordinary investors in the stock market generally.
Firstly, the pressure for change here has been brought about by large financial institutions. That pressure may have originated from environmental campaigners, who deserve credit for bringing it about, but it is the weight of investor pressure which has ultimately forced a change. It clearly indicates that these institutions, which have their own shareholders to satisfy, are convinced of the financial importance of environmental, social and governance (ESG) concerns when it comes to long-term investment returns.
If these institutions are adding their weight to the ESG cause, you can be sure others will have made the same calculations.
Secondly, if the climate action at HSBC and at other large institutions is meaningful, demand for fossil fuel assets stands to fall in the future, which could place downward pressure on those assets - company shares and bonds - which do not qualify as ESG.
There are always likely to be investors willing to buy shares in any company, whether they are sustainable or not, as long as those companies produce profits. If large parts of the market ignore those companies, however, investors in them may have to recalibrate their valuations downwards on the basis that they are likely to see permanently less demand.
For many investors, investing in ESG is now as much about future-proofing returns as it is future-proofing their reputation. The pandemic appears to have added more momentum to this trend, both in terms of returns and investor appetite for ESG.
Here at Fidelity, work by our equity analysts during the early stages of the pandemic analysed the stock market performance of companies that ranked highly on Fidelity’s in-house sustainability scores. It showed that they held up much better than companies that ranked poorly.
There may be specific reasons why an ESG approach has outperformed. Avoiding oil companies - which were already dealing with an historic crash in the oil price before Covid-19 hammered global growth and demand - is likely to have boosted ESG funds. There may also be a longer-term trend at play, with investors now seeking out companies with a more clearly sustainable future in light of the pandemic.
Investing via ESG funds is the most practical way for them to gain exposure but, if you are considering investing this way it requires proper understanding of how your chosen fund invests to ensure that you are getting what you expect in terms of ESG credentials.
More on ESG investing.
Important information: Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Investors should note that the views expressed may no longer be current and may have already been acted upon. 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 a Fidelity adviser or an authorised financial adviser of your choice.
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