How to invest in green assets

Demand is high for environmental, social, and governance (ESG) and sustainable assets. Europeans lead the world in ESG investing. A PwC report finds, for example, that 84% of investors plan to increase holdings – greater demand than in the US at 81%.

 

Investing in sustainable or green financial products has never been more popular. Investors of all types are piling into ESG funds. Organisations can gain a good return while investing in ESG marked assets. Below, we explore the basics and give you some investment tips.

 

 

Why look at ESG assets now?

 

ESG is here to stay. The ideas of ESG align well with diversity, equality, and inclusion concepts. Charities have been quick to adopt both. Investing in ESG assets recently became safer, because of vetting from the Financial Conduct Authority (FCA).

 

The aim is to reduce ‘greenwashing’, the situation when investors are misled by overstated claims. The FCA’s Director of Environment Social and Governance, Sacha Sadan, says: “Consumers must be confident when products claim to be sustainable that they actually are. Our proposed rules will help consumers and firms build trust in this sector.”

 

In simple terms, the FCA’s rules mean charities can rely on ESG marked assets. The labels on investment products will be standardised and accompanied by detailed disclosures.

 

 

What can charities invest in?

 

Most charities are not aware, but there’s no restriction on investments from a regulatory perspective. UK Government notes that: “All charities can make financial investments. A charity’s specific powers of investment may depend on its constitutional form (for example, whether a charity is unincorporated or a company). In addition, a charity’s governing document may place some conditions or limitations on the use of any power of investment.”

 

In simple terms, UK charities can invest in assets as long as they are within the scope of governing documents. There are no other restrictions.

 

 

Things to consider when deciding to invest

 

When making an investment, the decision-making normally comes from charity trustees. They are ultimately responsible for the direction of the financial strategy.

 

Think about how much time the team has to review financial opportunities. Active investing takes patience, time, and constant monitoring. Passive investing is where investors take the back-seat and transact less.

 

Investopedia highlights the difference: “Active investing requires a hands-on approach, typically by a portfolio manager or other so-called active participant. Passive investing involves less buying and selling and often results in investors buying index funds or other mutual funds.”

 

Time poor charities will likely choose passive investing, whereas those with capacity should look at active strategies.

 

 

How to invest based on ESG principles

 

There’s no bible on how to invest in ESG assets. But, there are basic principles. The Institute of Chartered Accountants in England and Wales has guidance for the sector. They suggest that charity investment managers ‘screen’ for the right opportunity. The steps are:

• Negative screening – means charities select ‘out’ investments, which normally includes prohibitions on arms and vice
• Positive screening – charities actively looking for products that do good
• Thematic investing – strategy where managers look for investments that align with the charity’s mission
• Engagement in assets – charities can be active investors

 

The other issue to bear in mind when investing is risk and reward. Financial markets and products fluctuate and investments can result in real losses.

 

CAF summarises this point directly: “Capacity for loss refers to your charity’s ability to absorb falls in the value of your investment. If any loss of capital would affect the operation of your charity, this should be taken into account when assessing the risk you’re able to take.”

 

It’s up to each charity to decide the risk and reward balance when making an ESG investment.

 

 

Charities – both investors and investees

 

Most investing is done on online platforms, where financial managers offer funds and index-linked instruments.

 

The crowdfunding space offers opportunities for charities to be both investors and investees. Ethex is a digital crowdfunding platform that invests in good. Charities can find ESG investments from other organisations and from within the sector. As an example, Energy Garden is a community benefit society that is currently listing shares.

 

Institutional investment managers are convenient and save time. They offer pre-packaged funds for charity finance managers.

 

Exploring what’s out there, Cazenove Capital’s offering may be part of a passive investing approach. They offer Charity Authorised Investment Funds, where charities with £10,000 or more can buy slices of their funds. Each fund delivers different aims. These include mission alignment, total return on investment, and pure equity.

 

Other institutional managers like M&G have a similar offering. Funds aimed at charities include those focused on climate change, health, and sustainability.