By Josh Gregory, CEO and Founder of Sugi for The Informed Trader
Green investing is having a moment and it’s easy to see why. While 2020 was a difficult year for most of us, 2021 is about looking forward. Creating a more sustainable future resonates with many people and businesses, with the media and, of course, with politicians. We’re already seeing the influence of the Biden administration across the Pond, and in the UK all focus is on the global COP26 conference to be hosted in Glasgow later this year.
Back in the real world, we each play our part. Many of us are aware how our lifestyles affect the planet and are making more sustainable choices every day. Increasingly, we want our finances to reflect our values as well, whether that’s how banks use our cash savings, how pension funds invest our hard-earned income or how we manage our own DIY portfolios. In fact, research by BlackRock shows that over 75% of people in the UK want their investments to have a positive impact.
However, while asset managers and institutional investors are shifting their focus towards green investing, retail investors lag behind. Green investing is too confusing. Not only are we surrounded by a morass of ratings, acronyms and jargon, but often investments claiming to be green are anything but.
For example, the concept of ESG has become mainstream. But ESG ratings – which are determined by complex and opaque methodologies – are not a mainstream metric. They’re a financial risk metric designed to show institutional investors and finance professionals how a company is likely to perform in light of certain ESG criteria. They’re also designed to be used alongside other sophisticated data that often is not available to retail investors. For many people, they’re impossible to decipher.
While such metrics are certainly useful, they’re not what most retail investors want to know when considering sustainable investments. That’s why we’ve taken a different approach at Sugi. We take concepts that many people are familiar with, such as carbon emissions and global warming, and translate them into meaningful and personalised information for retail investors to understand their investments.
We’re all increasingly familiar with the concept of a carbon footprint. The car we drive, the food we eat, the flights we (used to) take: they all have a certain amount of carbon emissions associated with them.
Each company has a carbon footprint too. Its footprint depends to a great extent on the industry it operates in, what it manufactures and how, the amount of electricity it uses and how it transports raw materials and end products.
A company that reports its carbon emissions can also be assessed according to its global warming potential, or ‘temperature alignment’. This incorporates a company’s present emissions, as well as projected future emissions based on its current policies. Temperature alignment is becoming the most meaningful way to understand a company’s overall carbon impact. International consensus is that global warming must not exceed 2C (above pre-industrial levels) if we’re to avoid catastrophic climate change. Ideally, the increase won’t exceed 1.5C. Conversations around temperature alignment are therefore talked about in this context.
If a company is aligned with, say, 3C of global warming, the best outcome would be for it to audit its operations, overhaul its business model and dedicate all the capex required to bring it in line with the 2C target. Unfortunately, in many cases, that’s not commercially practical or desirable. Instead, many companies are choosing to reduce their temperature alignment through offsets, generally by planting trees.
Offsets are a way of removing carbon from the atmosphere to rebalance the emissions either produced by a company directly or for which it is responsible via its supply chain. This is where the concept of ‘net zero’ comes in. ‘Net zero’ is where companies plan to reduce their emissions to zero by a certain date (2030 for ambitious companies or, more often, 2050). As the concept has increased in popularity and companies jostle to promote their ‘net zero’ commitments, offsetting is becoming the method of choice for companies to reduce any residual emissions above zero.
And now you see the challenge. While offsetting has a contributing role to play in reducing global emissions as companies transition to more sustainable business models (and it’s a good option for individuals wanting to rebalance their carbon impact), many companies use it as an excuse for continuing their polluting activities. There’s also a need to scrutinise net-zero plans when an unfeasible amount of offsetting is involved. For example, Shell recently promised to plant a forest the size of Spain to compensate for its continued fossil fuels activity.
What does this mean for the regular investor? It’s not easy to know how green your investments really are. In some ways there’s not enough information; in other ways, there’s too much. And through it all, you need a keen sense of when a company – or an asset manager – is fobbing you off with unrealistic promises.
At Sugi, we crunch the data, cut through the greenwash and show you, in real terms, how your investments affect the planet. You can view the carbon emissions of your individual investments and your portfolio as a whole, comparing your investments with an industry benchmark and with similar investments in the market. You can also view the global warming potential of your portfolio.
Importantly, Sugi calculates the impact of ETFs, funds and investment trusts from their underlying investee companies, rather than taking data from the fund managers themselves, so there’s no massaging the numbers.
We believe this data is crucial to drive real climate action, which is why it’s also free to access. And as we develop the app, we’ll offer more environmental metrics and more ways for you to take action to improve your impact.
Green has become a buzzword – a brand in itself. In many ways, this is a good thing. However, greenwashing is rife and investors are rightly concerned about doing more harm than good. Regulations about which investments can call themselves green, sustainable or responsible are still a long way from being implemented. In the meantime, think about what your next investment will be – perhaps check out the Sugi app – and discover a new way to build a greener portfolio.