Investing for good

29 March 2021

There’s no clear consensus on how individual citizens should best use their investments to save the planet. That doesn’t mean we shouldn’t try.

A shorter, less technical, version of this blog can be found on my financial coaching website.

In this article I cite a number of funds purely for illustrative purposes to help explain the different approaches to incorporating climate change into investment approaches. Some of these funds I have invested in, others I have not. The appearance or non-appearance of a fund in this blog should not be taken as advice to invest or not invest in that fund. Nor should it be taken as an endorsement of that fund manager’s approach on climate change – these are merely examples to illustrate the approaches I outline and there are many great fund managers beyond those listed here.

How should we invest to support progress towards addressing climate change?

Friends of the Earth are clear: we should divest from companies involved in extraction of fossil fuels.

Others disagree. Speaking to the Financial Times in 2019, Bill Gates said “Divestment, to date, has probably reduced about zero tonnes of emissions.” Instead, we should be investing in the breakthrough technologies that we need to bend the curve of emissions: artificial meat substitutes, low carbon cement production, and so on.

At the furthest end of the spectrum, Merryn Somerset Webb of the Financial Times asserts that we should buy more oil stocks: we still need oil, and it’s better that as many oil stocks as possible are in the hands of responsible owners who will engage with them to transition faster to a low carbon world. If we divest then these companies will be owned by unscrupulous investors who care much less about climate change than we do.

Pretty bewildering huh?

In this article I’m going to try to work my way through these complex arguments. I’m going to focus on climate change, but the principles could apply to other environmental or social issues. In almost all cases, you can replace [climate change] by [your favourite environmental or social concern].

I’m going to focus on how investors can best help bring about change on climate issues through their investment decisions. I’m setting aside for now the question of whether this has a cost in terms of returns (as you’ll see we’ve enough to cover as it is). I’ll come back to the trade-off question in a separate article.

Five roads to virtue

There are broadly five ways for us as retail investors to use our investment power to influence progress towards climate change goals. There is also any number of approaches that blend these five in different proportions.

Let’s go into each of the five in more detail.

1. Divestment

In relation to climate, the divestment debate has tended to focus on oil and coal companies but could be applied more widely. It’s become common for university endowments to come under pressure from student bodies to divest from fossil fuels. The approach has the advantage of sending a clear and unambiguous message. And it can salve the conscience by avoiding the indignity of making investment profits from dirty activities.

Example

An example of a fund that operates a divestment approach is the Vanguard ESG Developed World All Cap Equity Index Fund. The fund information states that amongst the companies excluded are those that derive revenues above a threshold level from non-renewable energy, i.e. companies that own proved or probable reserves in coal, oil, or gas. As a result, no oil majors appear in the list of investments.

The economic logic is that if sufficient numbers of investors choose not to invest in the shares of oil & gas and coal companies, then their cost of equity will rise. This will raise the threshold rate of return on investments, therefore reducing investment in those industries. In extremis, these companies could be starved of capital altogether.

It’s long been recognised that there’s a possibility investor preferences could drive differences in cost of capital (see for example Luo and Balvers 2017 and references therein). If there’s a group of companies that are shunned by part of the market, then supply of capital will fall and its cost go up. The problem is that it’s been much more difficult to find evidence of these cost of capital changes happening in practice. Hong and Kacperczyk published a famous paper in 2009 providing evidence that the ‘sin’ industries of tobacco, alcohol, and gambling were just such an example in secondary equity markets. These industries had outperformed by an apparently inexplicable amount over several decades, and the authors put this down to an increased cost of capital due to the sector being shunned by ethical funds. However, a recent paper by Blitz and Fabozzi finds that this may simply be down to the exposure of these industries to the most recently identified fundamental risk factors that are drivers of market returns. So unambiguous evidence of changes to companies’ cost of equity driven by investor preferences is hard to come by.

While evidence for sustained changes in cost of equity are mixed, there is some evidence for impact of changes in equity issuance and investment driven by fund flows. Lou and Wang analyse behaviour of firms affected by extreme buying or selling pressure arising from aggregated flows into and out of mutual funds. They show that this buying or selling is not informative about the prospects of the individual firms (the pressure arising from the fund flows is exogenous) but it does lead to short-term increases or decreases in share price of affected firms. They show that firms issue less equity if the fund flows drive their price down (we’ll come to the reverse result later). Moreover, these firms also on average cut investment. The effects on share price and investment persist for up to two years.

Although this at first seems positive for the divestment argument, there are two problems. The first is that even firms experiencing the strongest selling pressure only cut investment by 4.3% on average. This is economically significant, but not a game changer if it were translated to oil & gas majors given the scale of the climate challenge. Moreover, the effect is concentrated in firms that are most financially constrained and dependent on equity issuance to finance investment. However, an analysis by Schroders found that well over 90% of new funding for Oil & Gas and Utility & Energy companies came from debt and syndicated loans over the period 2010-2018, with less than 10% coming from equity issuance. Analysis of monthly bulletins by S&P Global Market intelligence suggests this imbalance became even more extreme during 2020: of $137bn of capital raised over the year, fully 95% was from debt issuance. So even if divestment restricted access to equity markets for the Oil & Gas industry, it’s not clear it would make a lot of difference.

What about debt? The International Energy Agency has reported a significant recent increase in borrowing costs for firms in the Oil & Gas sector. Another recent paper looks at corporate bond spreads in the US and concludes that in industries most exposed to environmental risk, worse performing firms on environmental dimensions face higher spreads and hence higher cost of debt. However, further analysis indicates that the most likely cause of the higher spreads is a risk-based explanation rather than being due to a constraint on capital supply. Indeed when it comes to primary markets a recent paper from Robeco Asset Management finds no evidence that (lack of) sustainability affects the ability of companies to raise new debt or equity capital over the period 2010-2019 that they studied.

So at the moment, starving fossil fuel firms of capital doesn’t seem to be working. However, in the medium term debt markets may well be a more fruitful approach. Syndicated loans made up the majority of debt financing. A relatively small number of global banks dominate syndicated loan finance. With a number of major banks just starting to pull back from financing fossil fuel investments, and with at least some evidence that environmental considerations can affect cost of debt, this is probably the more promising divestment channel.

Putting this all together, it is challenging to find evidence that equity market divestment approaches meet their objective of increasing the cost of capital for targeted firms or starving them of investment. It could be that over the periods studied the volumes of capital directed towards divestment strategies just weren’t big enough. Or it could be that they never will be.

So although divestment seems a simple approach to the issue of climate change, there are multiple problems with it as an approach.

First is that few people are prepared to do without the proceeds of the oil and gas industry. If we still need oil and gas companies for the foreseeable future, isn’t it hypocritical to wash our hands of investing in them?
Second, if we don’t invest in them as listed companies they may simply be owned or even taken private by less scrupulous owners who care even less about the climate and will be free to act as they wish out of the public eye.
Third, stopping listed oil and gas companies from extracting reserves doesn’t solve the problem. It’s estimated that listed companies own a little over a quarter of fossil fuel reserves. Even if divestment completely stopped extraction of listed company reserves (which is unlikely) then we’d still have in private and state owned company hands around three times the reserves needed to fry the planet.
Fourth, as outlined above, it doesn’t seem to work. There’s no concrete evidence of divestment campaigns being successful in raising cost of equity for affected firms or reducing access to capital. Indeed, evidence currently is that unsustainable firms don’t seem to face greater problems than sustainable ones in raising financing. Of course, this could change if more people adopted divestment strategies. But that would require a mass change in behaviour that isn’t immediately on the horizon.
Fifth, even if divestment hits share prices, it doesn’t affect incentives. This is because an oil and gas company can’t suddenly decide not to be an oil and gas company. Therefore, the executives just have to accept any share price hit and move on. There’s no action they can realistically take to avoid divestment.

The main benefit of divestment in equity portfolios is therefore the communication and signalling impact. This shouldn’t be discounted. But perhaps it can be combined with approaches that are economically more effective.

More promising is divestment through the debt channel, and large banks have a particular role to play here. In fact, banking with an institution that is a heavy financer of debt for new coal projects is probably worse than holding oil companies in your equity portfolio. So lobbying your bank to cut back on coal financing, or vocally moving to one that is doing so, is likely the best divestment action you can take on climate change.

Divesting from fossil fuel companies in their equity portfolios doesn’t seem to be a very effective way for retail investors to exert economic influence on climate change. Any impact will be through the political signalling of such an action. Finding a bank that doesn’t finance fossil fuel debt (especially coal) is likely a better divestment strategy.

2. Tilting

The logic behind tilting is subtly different to divestment. Rather than trying to starve an industry of capital, tilting aims to create incentives for companies to change direction.

There are many variations of this approach, so I’ll use a simple example. In this example a fund invests in different sectors according to their market capitalisation weights. So let’s suppose that energy forms a 4% weight in a global equity market index. Let’s further suppose that within that 4%, Exxon accounts for 5% and BP accounts for 2% by market capitalisation.

The tilted fund maintains the sector weighting, so 4% is invested in energy. However, it assesses the sustainability pathway of each company within the energy sector. As a result of this suppose it applies a weight of 0.5x to Exxon, which is on a slow transition pathway, and a weight of 2x to BP, which is on a rapid transition pathway. As a result, within the energy portion of the fund, 0.5 x 5% = 2.5% is invested in Exxon and 2 x 2% = 4% is invested in BP. Despite BP being less then half the size of Exxon, the fund ends up holding nearly twice as much in the greener company.

Example

The snappily titled Legal & General Future World Climate Change Equity Factors Index Fund adopts an approach based on tilting. The fund tracks the FTSE Russell All-World ex CW Climate Balanced Factor Index. In relation to climate, the index reduces (but does not eliminate) exposure to companies engaged in exploration or production of fossil fuels. Within each other industry sector the index tilts holdings towards low CO2 emitters and away from high emitters. The fund can also entirely divest from firms that are considered particularly problematic and who do not respond to engagement.

Tilting is an example of the incentives created by exit, or the threat of exit. (For reviews of this literature see the paper by Edmans and Holderness, or, for a summary without equations, Edmans.) Why does tilting help? By selling down Exxon and buying BP, the fund contributes to downwards price pressure on Exxon and upwards pressure on BP. This hits Exxon executives and rewards BP executives through their shareholdings. Why is this any different from divestment? The crucial difference is that tilting creates an incentive for Exxon to become more like BP. With divestment there is no strategy that Exxon directors can follow that will affect the outcome (they can’t realistically stop being an oil company). Moreover, Exxon and BP are affected equally. With tilting there is an option for Exxon’s board: they can become more attractive to the fund by adopting a more aggressive transition pathway.

Governance through exit is also helpful if executive pay arrangements are too short term, as exit can create alignment between the executive’s short-term incentives and investor concerns about long-term direction of the company.

For tilting to be effective, it must therefore be dynamic, with weighting decisions regularly reviewed. It is interesting that the Legal & General fund outlined above has an over-ride that allows for complete divestment from industry laggards, and they have indeed exercised it on a few occasions.

Overall, the evidence in favour of tilting is much stronger than divestment, particularly when it comes to holdings of equities within a fund. And through its impact on the share price and executive equity incentives, it can work regardless of what is happening in relation to debt financing, where retail investors tend not to play a role. Another big advantage of tilting compared to divestment is that it can be applied across all sectors. Every sector has better or worse companies from a climate perspective but you can’t divest from everything. A tilting strategy can go after them all, unlike divestment, which will typically only address the energy sector or problematic sectors like controversial weapons.

Tilting as an approach to climate-friendly investing has strong evidential underpinning, and can be implemented without completely cutting exposure to fossil fuel sectors. It is also a strategy that can be extended across all sectors.

3. Engagement

Engagement involves holding shares in companies and using your influence as a shareholder to drive change in the company. A recent example: shareholders in HSBC, co-ordinated by ShareAction, pushed the bank to adopt much more aggressive climate targets including a phase-out of funding of coal projects.

Example

Aviva Investors has announced a Climate Transition Engagement Programme focussed on its investments in 30 “Systematically Important Carbon Emitters” in which it holds shares. It will follow a five point Climate Engagement Framework requiring a clear plan to net zero, and tangible follow up actions (for example altered CAPEX plans). There is an escalation programme that, in the event of a sustained unsatisfactory company response, can lead to divestment across the asset manager’s equity and debt holdings.

Engagement is a potentially powerful channel. It doesn’t always require a majority of shareholders to act as a catalyst for a company to change. And as the HSBC example shows, shareholders can have a significant impact on banks’ approach to debt financing of carbon-based fuels – a reason why investors focussed on this target. Other prominent cases of investor engagement, as with Shell, BP, and Barclays suggest that this is not a one-off.

Is there evidential backing for engagement more widely? The reviews by Edmans and Holderness and Edmans also provide a useful entry point to the literature on this topic. When it comes to evidence on voice directly, it is most positive in relation to relatively aggressive hedge fund activism that delivers outcomes, as for example found by Brav, Jiang, Partnoy, and Thomas and by Klein and Zur.

What about less aggressive engagement? Here the evidence is harder to come by, but in part this may simply reflect the limits on observability. In their review of the Hermes Focus Fund, Becht, Franks, Mayer, and Rossi find that much of the impactful engagement was “behind the scenes”. Becht, Franks, and Wagner study engagement records at Standard Life Investments and find an intricate relationship between company engagements and buy-sell decisions, with involvement of the stewardship team being particularly important in relation to sale activity.

More direct evidence in relation to engagement on ESG issues comes from Dimson, Karakas, and Li. Based on a proprietary dataset from a large asset manager, they report a success rate of 13% for engagement based on environmental and social themes and 24% for governance themes. They find successful engagements lead to enhanced share price returns and, in the case of environmental and social themes, enhanced accounting performance. Engagements are more likely to be successful if collaboration with other socially engaged investors is possible.

Overall the evidence in favour of engagement is cautiously positive, and there may be richer rewards to be had in combinations of voice and exit as studied by Becht, Franks, and Wagner within a single asset manager.

How can you tell if your fund manager is engaging on climate issues? Most fund managers operating in the UK are signatories of the Stewardship Code, which requires them to give extensive disclosures on their policies, their approach to sustainability, and how they engage with companies. Just search for [Name of Your Asset Manager] Stewardship Report.

In relation to climate change specfically, you can see if the asset manager is signed up to Climate Action 100+, the Net Zero Asset Manager’s Initiative, or The Institutional Investors Group on Climate Change. Or you can try to find out how they voted on signature resolutions like the HSBC resolution sponsored by Share Action. It takes a bit of digging as it is possible for an asset manager to sign up to one or more of these initiatives without really doing much, so you need to triangulate a number of sources. It can also be confusing because in some cases a fund manager will have a particular sustainable fund that will adopt a more assertive engagement approach than their other funds.

But the evidence is that robust engagement produces results, and that by investing money with an asset manager that is actively engaging, you will be making a difference.

Engagement produces results and is an important component in the armoury of any climate-aware investor.

4. Impact

Rather than avoiding the problem, investors may choose to try to fund the solution. This is the basis of impact investing. The idea is that, by making capital available for the technologies needed to solve the climate crisis, you can use your investments to help make the world a better place. This might include investing in clean energy funds, or funds that aim to invest in a basket of companies with products that help address environmental problems or other sustainable development goals. In this section I’m going to focus on the example of clean energy.

Example

BlackRock’s iShares Global Clean Energy ETF “seeks to track the investment results of an index composed of global equities in the clean energy sector.” The fund includes 33 companies focussed on renewable energy and provides focussed exposure to this market segment.

The economic rationale for the impact approach is that by investing in industries that help solve climate change, it increases capacity for investment, and lowers cost of equity for companies in those industries. This accelerates development of solutions to the climate crisis.

But is this actually what happens? We saw earlier that Lou and Wang found that firms subject to extreme selling pressure due to mutual fund flows experienced a falling share price and responded by raising less equity capital and cutting investment. What about firms subject to buying pressure? The authors found that such firms saw share price increases and did indeed respond to higher equity prices by raising more equity capital. However, this extra capital did not show up in higher investment on average, to a statistically significant degree. This was presumably because most firms are already investing in all the positive net present value projects available to them. So firm behaviour was asymmetric. However, when they drilled into firms that were financially constrained and dependent on external financing, they found that those likely to have better investment opportunities did use the equity raisings to invest more.

If we look at the renewable energy sector, there has been a huge inflow of money into renewable energy funds that is driving valuations skywards. A recent article in the Financial Times shows the extent of the issue: the S&P Global Clean Energy index now trades at a PE ratio double that of the S&P 500 having been broadly comparable at the start of the pandemic. So the increase in share prices observed by Lou and Wang has certainly happened. But will it trigger an increase in investment? Lou and Wang studied the issue at the company level, but it’s perhaps more relevant to consider it at the system level.

The International Renewable Energy Agency in their 2020 report on renewable energy financing show that equity investment has been declining in importance compared with debt over the last five years. Debt now makes up nearly two thirds of backing for renewable energy. This reflects the increasing role played by existing large firms (utilities and energy companies) in the sector, as well as the greater maturity of renewable energy as a market. The increased interest from retail and institutional investors in renewable energy projects may reverse this trend. Indeed we’ve already seen a number of renewable energy SPACs launched on the US market and we can expect to see more in 2021, following a decline in renewable energy IPOs in recent years.

Anecdotally, it does seem that the flow of funds is leading to new vehicles being set up to intermediate between the desires of investors to be involved in the sector and the opportunities that are available. The presence of more public market alternatives, whether SPACs or direct IPOs, may also create the benefit of providing more exit opportunities for private equity and venture capital. Renewable energy exits for these players are currently dominated by trade-sales rather than IPOs. This may in turn attract more venture and private equity capital into riskier early stage ventures.

This is an extremely complex area, but overall it seems plausible that impact investing, focussing on critical technologies such as renewable energy, food system reform, clean transport, low carbon building materials and so on could create pull through incentives for more investment.

But is it sustainably lowering cost of capital in the sector? It’s easier to get a handle on this question when looking at bonds rather than equities. This is because the expected return on bonds is defined at issue, whereas for equities it’s a matter of speculation. A study of green and non-green bond pricing based on the US Municipal Bond Market finds no evidence preference-driven bond pricing. In other markets, evidence of a negative spread of 15-20bps on green bonds is found, although whether this is because of risk characteristics or investor preferences is unclear. So the evidence that investors are prepared to accept markedly lower returns for green investments is not so strong, so perhaps cost of capital isn’t being reduced after all.

If cost of capital is not being sustainably lowered in the sector, then it isn’t clear that impact investment will lead to a long term increase in real investment. This suggests a risk that the recent explosion of valuations in the listed renewable energy sector has bubble characteristics, driven simply by the wall of money arriving set against the limited listed investment opportunities, and investors chasing what they see as the possibility for higher returns. If sophisticated actors elsewhere in the chain don’t view this as sustainable, then it may not affect cost of capital or real investing behaviour. The reality is that issues like volatility in energy prices and lack of clarity of long-term government policies may well be more critical for investment in clean technologies than the availability of capital.

What about investing further down the chain? Undoubtedly there are high risk technologies where greater direct investment could make a difference to capital availability and help new technologies get across the “Valley of Death”. However, these are investments that in practical terms it is very difficult for normal retail investors to make in an informed way. There are several renewable energy investment trusts listed on the FTSE All Share that can invest in a mix of public and private renewable energy opportunities. There is also the possibility of investing in Venture Capital Trusts for a higher risk profile. But these options are not for the faint hearted and should be considered in the context of the investor’s risk profile.

Overall, the case for impact investment (at the level of public equity markets) as a lever for driving change appears to me to be rather weak. Throwing money at the problem at the level of public equity markets is arguably like pushing on a piece of string – the changes instead need to come in the fundamental incentives for companies to invest, which will be set by government regulation and consumer behaviour.

Directing our money towards narrowly focused impact funds is likely to contribute to increased valuations for companies that benefit from those funds. Whether this leads to greater investment remains a difficult question to answer, and currently the case is not made.

5. Integration

Integration (commonly called ESG Integration in the industry jargon) means fully taking climate (or other ESG) risks and opportunities into account when deciding how to value a company, and whether to buy or sell its shares. If this just sounds like common sense, remember that some investment strategies don’t take environmental considerations into account at all when buying or selling stocks. Index strategies just buy stocks according to market capitalisation weights. Quantitative strategies like momentum may look purely at share price dynamics and ignore environmental factors altogether.

Example

The Royal London Asset Management (RLAM) sustainable funds range follows an integrated approach. They state that their “process allows RLAM to fully integrate financial and ESG analysis in a way which provides them with insights that other investors may miss”. Although some funds in controversial sectors or with problematic reputational records may be excluded, the core of the approach is to aim to outperform by integrating environmental, social, and governance factors into investment decision making.

Encouraging more Integration is a good thing. It means that more investors will be taking advantage of, and reinforcing, the natural long term alignment between shareholder value and ESG factors, as described so powerfully by Alex Edmans in his book Grow the Pie: How Great Companies Deliver both Purpose and Profit. As a result, more capital should be deployed supporting companies that produce benefits for both shareholders and society. Ben Yeoh of RBC Global Asset Management describes in this video the different ways in which ESG can be integrated into the investment process.

However, investors need to be aware that in an Integration strategy, everything has its price. Even the dirtiest oil or coal company can one day be cheap enough for the prospective returns to be worth it, even with all climate-related risks accounted for. Integration just means that the risks of stranded assets, future regulation and so on, have to be fully priced in. This of itself is useful as it ensures that issues like stranded assets in oil companies will be fully reflected in valuations and ensures market efficiency. If companies on a rapid transition pathway are indeed taking the most financially sustainable approach, this should be reflected in price signals. But it may not help investors who want to drive climate change action quicker than pure financial market forces dictate, even if that comes at a cost.

In practice, Integration strategies may be combined with one of the other strategies referred to above, such as Engagement, Tilting, or screening out certain sectors. Integration strategies often invest with a theme in mind, but with an aim of using this to maximise returns. While any of the previous four strategies can be adopted by index or active fund managers, integration only makes sense in an active context, as only active managers have choices over which companies to buy or sell.

Investing in funds that follow an Integration strategy increases the efficiency with which ESG factors are priced into the market. This encourages firms to follow ESG strategies where they lead to long term shareholder value. However, this strategy does not enable investors to drive change faster than financial market forces dictate, unless combined with another strategy.

So where does this leave us?

Having spent a long time looking at all of these issues and reading the academic evidence, I frequently go through periods of feeling that I’m none the wiser for the effort. This is a hugely complex area, and I’m well aware that I may have missed some important points in my analysis. This is why I’ve “showed my workings”, to enable others to critique and judge for themselves. I also reserve the right to change my mind as my understanding develops.

But I would cautiously form the following conclusions, for ordinary retail investors, for the five approaches I’ve assessed.

Divestment and Impact investing are two ends of the same spectrum. They seek to increase (decrease) cost of capital and constrain (release) access to finance for bad (good) companies. These two approaches seem to have the flimsiest evidence base when implemented in equity markets (for debt financing the evidence is more promising). The empirical connection between Divestment or Impact investing and sustainable changes to cost of equity and real investment levels just seems to be quite weak. These approaches still send a political signal and may make us feel better. But the economic impacts are unclear.

Tilting does have a sound evidence base that can create incentives for firms to transition faster to a lower carbon world. Depending on how the tilts are defined, it also enables investors to assert their preferences, even if these go beyond shareholder value. Importantly, unlike divestment, tilting can be operated across all sectors of an investor’s portfolio.

Engagement also has a sound evidence base and has the benefit that it can be overlaid on any other strategy. Engagement enables a strong focus on the relatively small number of listed firms that can create the greatest impact on climate objectives. This may include the largest emitters themselves, or the banks that finance them and the insurers that insure them. Engagement is producing an increasing number of victories in the climate arena as investors become more assertive. Engagement strategies can be used to drive change faster than may be optimal from a narrowly financial perspective for the target firm in isolation. This allows expression of investors’ non-financial preferences.

Investing in Integration strategies helps to ensure that environmental (and other ESG) factors are properly priced into the market. Given the significant alignment over the long term between ESG and shareholder value, this must be a good thing and is likely to lead to better ESG outcomes, including environmental ones. But given that Integration strategies are designed to optimise financial returns, they will not necessarily push as fast on environmental factors as the investor would like.

Bringing this all together suggests two broad categories of strategy that are likely to be most effective for the climate-conscious ordinary retail investor seeking to use their money to bring about change:

Preferred strategies for retail investors wanting to accelerate climate action

An index strategy with an investment manager that is strongly committed to robust engagement on climate issues, combined with a tilting strategy within the index.
An active strategy with an investment manager that is strongly committed to ESG integration combined with robust engagement on climate issues.

Ultimately there’s not a single clear answer. As my friend and leading sustainable investor Ben Yeoh of RBC Global Asset Management says: “There’s not one right answer, but what’s important is to pick one and then talk about why you’re doing it.” Ben’s important insight is that we’re trying to create a movement for change. Any plausible action can support the case for that change and influence the political and social context in the right direction, keeping climate high up the agenda – provided we’re public about it. So consider the issues, make your choice, and be proud! Don’t let the perfect be the enemy of the good.

Because none of this is terribly clear cut, we should also probably be modest about what our personal investment choices can achieve on climate change. The incentives for capital to flow to the economically most attractive opportunities are very strong. Affecting climate change through investment choices is a bit like pushing on a bit of string. More important will be getting governments to set the right policies to create effective economic incentives for change and using our own consumer behaviour to drive that change as well.

So we shouldn’t get diverted into taking excessive risk or sacrificing large amounts of potential return for uncertain benefit. I’ll return to this in a separate article where I’ll talk about how this thinking has influenced my own investment approach. But this doesn’t mean we should do nothing. Our actions – whether it’s where we buy or where we invest – send signals. And these signals add to the growing volume of opinion that we need companies and governments to act to avert climate catastrophe.

And act now.

After writing this article my attention was drawn to some very good work from University of Zurich on the same topic, which reached similar conclusions. You can find it here.