Saving Planet Earth? What role should retail investors play in addressing climate change

by Mark Twigg, Executive Director

The UK Prime Minister Boris Johnson has opened the UN’s COP-26 Conference in Glasgow (1 November) arguing that it is no longer up to politicians and big businesses to direct the world’s climate fate. He believes that it is already the case that ‘punters’ (also known as citizens) are now in the driving seat. 

However, new research shows that citizen-led direct action is limited when it comes to how punters direct their household savings and investments. Cicero/amo and Architas surveyed over 11,000 people in Europe and Asia to benchmark their views on ESG investing. When choosing when to invest, the common denominators consist of investment growth potential, past performance, and investment fees. ESG is still on the fringes of people’s mindsets with only a quarter of Asian investors (25 percent) citing sustainability as an investment factor. This falls to just 16 percent among Europeans. 

This is problematic on many fronts. The world will not reach even the half-hearted efforts to transition towards net zero without fully engaging capital markets. Over $100 trillion of finance is needed to meet the UN’s Social Development Goals. Governments cannot achieve that target alone. That means retail and institutional investors directing their capital towards sustainable investments. To make green capital markets a reality, there is still much work to do. Clearly, retail investors still don’t really ‘get’ what ESG investing means. Yet several steps – involving fund managers and regulators working together – could help promote the faster take up of green retail funds.

1 – The investment industry uses too many terms to describe the same thing: sustainable, green, social, community, impact. Investors are confused and this confusion can lead people to procrastinate: As many of the commentators at Glasgow point out, Planet Earth doesn’t have time to put-off important changes in behaviour.

2 – We need better climate disclosures on investment products. Generally, around 80% of our respondents supported the need for greater information around what ESG objectives are being met, what ESG KPIs and indicators are being used, and how ESG screeners work.

3 – We need to address the fear of greenwashing and potential mis-selling of green investments, a concern among over half of women and older investors.  This fear will also put off potential investors.

4 – We also need to beef up the role of financial advisors. As many as 1-in-5 investors said that they had not discussed ESG investing with their advisor but would have valued such a conversation. What are financial advisors waiting for?

Defining what is green goes to the heart of all the points above. For example, our findings showed 38% of Asian investors would screen the oil and gas sector out of their portfolios on ESG grounds, but this fell to around 5% if the oil company used those funds to invest in renewable energy. Understanding such complex ESG investment trade-offs during the transition phase to net zero is not a simple binary choice between green on one side and brown on the other. Mobilising capital markets to go green will involve a shift over time, not a one-off event. Even more reason to pick up the pace of change now.  

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Mark Twigg

Executive Director