Sustainability, climate change and greenwashing – Navigating the landscape of climate-conscious investing
First Sentinel Wealth
Independent Financial Advice and Wealth Management Services
Green energy investing has been struggling over the last years, especially in the aftermath of the Ukraine-Russia War and the last government’s apathy towards net-zero targets. This could start to change soon though. Green energy might be becoming trendy again, as the new government has pledged to expand the sector, to make Britain carbon-neutral by 2030. As such, this article will consider what green investing is, why it has been struggling over the last few years, and why it might be time to invest in it again.
What is climate conscious investing
Climate-conscious or green investing refers to investing in stocks or funds in a way that seeks to have a positive environmental impact. This most commonly relates to funds aligned with the conservation of natural resources or environmentally friendly business practices. Fundamentally, this means investing with an ulterior motive, i.e. not simply looking to maximise profit, but also to maximise the environmental impact of your money.
This fight between sustainability and profitability has become ever greater over the last few years with the rise of ESG (environmental, social and governance) investing. Many businesses have been seeking to improve their business practices in a climate-conscious manner, yet it is debatable what impact this has had. Most are still conscious about the short-term impact that significant green reform will have on profits. The unfortunate na?veté with this approach is the damning effect that a lack of action will have on long-term profits. Thus, while some companies may be making good profits now, a lack of action will decimate that profitability in the coming decades, as the climate crisis worsens. Lindsay Hooper, interim CEO of the University of Cambridge Institute for Sustainability Leadership put it clearly, saying ‘the business case for sustainability is clear: companies cannot thrive on a planet suffering from cascading crises and unmanageable risks’.
Investing climate consciously is also beneficial from a generational investment perspective. It is a common trend that many save to secure the future of the children and grandchildren. This can include investing in their education, hobbies and major life events, or even simply putting together an inheritance that they can profit from once you have passed. Considering sustainability in generational investing provides an added motivation here. It means not simply seeking to aid in the financial security of your descendants, but in the cleanliness and prosperity of their surroundings.
Thus, how does climate conscious investing actually work? There are various strategies can be employed here, including investing in ESG-aligned funds and equities, or in green energy and technology funds. Speaking with a financial adviser is a useful way of engaging in this, to understand the funds that best align with your climate goals, as well as being able to avoid greenwashing as far as possible. This can help ensure your portfolio returns profits while also maximising the positive impact on the climate crisis.
What is greenwashing?
An important term to understand around green investing is greenwashing. In an investment context, this relates to companies and funds inflating or exaggerating their environmental impact in order to better take advantage of the hype around environmental investing.
Unfortunately this practice is much more commonplace than one would think, with a 2022 survey finding that out of 1,500 global executives, a staggering 58% admitted their companies were guilty of greenwashing. It comes out of a consumer drive towards sustainability, with this becoming a key factor in many consumer decisions. Nevertheless, often companies find it more profitable to greenwash, saying they are acting sustainably to incentivise that demand and then dealing with the fallout, rather than actually putting in place measures to address their impact on the climate crisis.
Naturally this isn’t always the case, and there are numerous examples that show where corporations prioritising profits over sustainability by greenwashing can act to the detriment of the companies involved. A notable case is the Volkswagen emissions scandal in 2015. Here Volkswagen installed software into their diesel-powered cars, in order to subvert EPA (Environmental Protection Agency) mandated emissions tests. In reality the Nitrogen Oxide emissions of the cars were up to 40 times greater than permitted US standards. The ensuing scandal surrounding this was detrimental to Volkswagen leading to billions of pounds in fines, a severe reputational blow, the resignation of the CEO and a fight for the brand’s survival.
Fundamentally, avoiding greenwashing is tricky. Some steps have been taken in recent years to try and reduce its impact, however. For instance, in May 2024, the Financial Conduct Authority implemented a new set of anti-greenwashing regulations. These require firms to ensure any reference to sustainability in their product or service descriptions is:
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This seeks to prevent any inflationary or exaggerated language that could mislead consumers around the sustainability of products and services. Similar provisions have started cropping up around other parts of the world in order to try and fight greenwashing globally. It is hoped that these regulations will promote trust and transparency around green issues. Nevertheless, the full impact of these measures remains to be seen.
Our Financial Planning Director, Toby, recently sat down with the Financial Times to discuss green investing. He emphasised the importance of having conversations about clients around sustainability. It is crucial to mention the topic in conversation in order to assess what is most fitting and beneficial to the client. Nevertheless, he additionally touched on the notion that ESG shouldn’t be pushed on clients. It is important to remember that ESG investing won’t be fitting to every client and clients should be made to feel obligated to invest in such a way. The full podcast is worth a listen, and can be found here.
What is changing
Under the Sunak government, climate change-related legislation slipped from the limelight, following significant strides having been made under the previous Johnson and May administrations. Chris Stark, former head of the Climate Change Committee explained that Sunak had ‘set us back’, by not prioritising climate-related policy. This was exacerbated during the fallout of the Russo-Ukraine War, where soaring oil and gas prices led to huge gains for fossil fuel companies. This helped temporarily push renewables out of government priorities, while European countries scrambled to find new energy pipelines to reduce their dependency on Russian gas.
The government’s approach may be changing lanes now with the recent Labour victory. The Labour manifesto portrayed a much greater commitment to achieving green targets than its predecessor, seeking to reestablish the UK as a global leader in the field once again, looking to boost low-carbon investments, and hit net-zero goals. As such, this could be a call for action to invest in green industry once again.
The net-zero industry lagged under Sunak, with his government being one of the least green in recent years. Budgets lacked substantial investment in the industry, despite it being one of the fastest growing sectors, and key net-zero targets were pushed back.
The Starmer government has recommitted itself in trying to achieve the necessary net-zero targets by 2030. It plans to create Great British Energy, a new state-run energy company focussed on expanding the renewable energy sector. This aims to reduce dependency on foreign fossil fuels, decarbonise the electricity grid and help to cut energy bills. Further, Labour also plans to establish a National Wealth Fund, part of which will be utilised to invest in green projects. The importance of this information for investors is that it presents an opportunity. The private sector will play a key part in funding and moving this energy transition, and the net-zero industry is one of the fastest-growing sectors at the moment.
GB Energy is the crucial jewel in the planned Labour energy crown, with this set to stimulate job growth and sit at the centre of the energy transition. It will gain ￡8.3 billion of funding. Part of this money will be used to invest in local authorities, helping with solar panel installations and the building of shared-ownership wind farms. Otherwise it plans to invest further in various renewable energy sources. This includes mature sources such solar and wind energy, as well as more novel, less mature sources such as floating offshore wind and hydrogen.
As mentioned, it is planned to engage strongly with the private sector on these projects, which should have a positive market impact on the net-zero industry. Thus, this may be an attractive investment opportunity. If this is of interest to you, it may be worth speaking to your financial advisor.
Conclusion
Thus to conclude, investing climate-consciously can be tricky. You need to weave around the pitfalls of greenwashing while trying to ensure that you still make a sufficient profit. The latter factor has been especially difficult over the last few years, with ESG investing lagging behind other sectors. Nevertheless, there is a clear sense that renewable energy and climate investment might be back on the agenda, as a new government takes the reins in 10 Downing Street. This could be an investment opportunity, especially since significant private sector engagement is expected. Thus, maybe investing climate consciously could be the new investment opportunity you were looking for.