Business

It pays to be a green investor

Warren Buffett's investment in Chinese carmaker BYD shows that investing in renewable technologies can pay off
Warren Buffett's investment in Chinese carmaker BYD shows that investing in renewable technologies can pay off Warren Buffett's investment in Chinese carmaker BYD shows that investing in renewable technologies can pay off

BACK in 2008, the legendary US investor Warren Buffett bought a sizeable stake in an obscure Chinese carmaker called BYD.

The move was greeted with scepticism by some, with downright disbelief by others. However, in the years since, BYD, a specialist manufacturer of electric cars, has seen a boom in its share price, and become the global market leader in environmentally friendly motoring.

Warren’s critics had to eat their hats, while he laughed all the way to the bank - but the story has an important lesson: it proved that investing in renewable technologies can pay off, and pay off handsomely.

The anecdote is relevant this week, because this is ‘Good Money Week’, a celebration of ethical and environmental fund investing led by The UK Sustainable Investment and Finance Association (UKSIF).

Ethical funds allow us access to ‘investments with conscience’ by screening and containing only companies that meet certain ethical investment criteria.

They do this by the processes of either ‘positive screening’ or ‘negative screening’.

Fund managers use positive screening to include companies that are strongly pro-environment. These include companies which manufacture environmental products, encourage biodiversity, or promote renewable energies.

With negative screening, fund managers seek to exclude companies involved in various ‘unethical’ industrial sectors, such as tobacco, alcohol, meat, nuclear power, defence, or intensive farming. Unethical activities that can be avoided include deforestation, exploitation of workers, or animal testing.

Does the idea of ethical investing sound appealing? Strangely, UKSIF tell us that over half (54 per cent) of UK savers are still unaware that ethical investments exist.

The latest hot topic in ethical investing is an issue that has been well covered in the news: ethical funds are now evolving to meet the demand by half of consumers (49 per cent) that they should not buy shares in the fracking industry.

A fund’s definition of what is ethical is sometimes problematic, however, and three main categories are used to show how ‘hardcore’ an individual fund may be: light green, medium green, and dark green.

At the light green end of the market, some funds which call themselves ethical nonetheless invest in oil and gas, believing these to be essential to produce a competitive return. However, they claim to select those energy companies which have an environmental policy in place, and are making some gestures towards respecting the environment. The phrase ‘least worst’ has been coined to describe the oil and gas companies which qualify as the most environmentally friendly in their sector.

As for the investors, a new generation is emerging that demands only funds at the dark green end of the spectrum.

According to a brand new YouGov poll for Good Money Week, over half of millennials would now prefer fossil fuel free pension investments.

The emphasis from millennials for sustainably invested funds has grown, with 57 per cent of those under 24 wanting this, compared to just 34 per cent of over 45s.

Demand for ethical and sustainable investment is on the rise, and 57 per cent of the UK public believe that investment managers should ensure that savings are managed in a way that is positive for the environment and society.

It’s all a matter of where you sit on the sliding scale. Are your own ethical preferences light, medium or dark green? No matter which, there are funds for you.

If you are attracted by the idea of investing your savings in a way that protects our shared planet, the guidance of an independent adviser, who can scrutinise the investments inside each ethical fund, is essential.

As I say, ‘green’ investment policies are far from black and white!

:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005. Further information is on the Facebook page 'Kennedy Independent Financial Advice Ltd'.