Passive investing losses from climate change

Peter McGahan

LAST week’s column on passive investing struck a few chords. It’s a subject we could write about for months. The problem with a lopsided view, is that it’s lopsided, and as such, unreliable.

The financial services industry has its share of those that ‘sell’ products. The difficulty is, they can be sold by people who do not also understand their risks.

In approaching any research or analysis with any financial solution, I have this Rumi poem firmly in my mind:

‘Out beyond ideas of wrongdoing and right doing there is a field. I’ll meet you there.’

Taking emotions out of financial analysis is essential for every independent financial adviser to ensure their customers have the financial security they need. Emotional confirmation bias has seen historic catastrophes, which need not have happened if the adviser/bank/customer were better informed.

Take the ‘ultra-low risk’ zero dividend preference shares fiasco that hit the lowest risk customers the most.

Investment risk can often be measured mathematically alone (flawed) and one such method is standard deviation. Standard deviation basically calculates the average return of a pension, or ISA fund, and then how much that fund deviates away from its average on its journey. So, in basic words, it’s the pain for the gain, the white water raft for the thrill, or the canal cruise for the security.

Investors in zero dividend preference shares had the volatility of a private swimming pool at midnight, that was until the following morning, with the plug pulled out, when those with six figure investments had valuations coming through their doors in pence.

Yes, in pence.

The correct approach to understanding which investments to invest into is to use the numbers (quantitative analysis) and the knowledge and practical experience (qualitative analysis) together.

Passive investments are nothing like active investments as we have said before and it’s unwise to compare.

Rugby and football are both football. Switch the players around for some interesting entertainment.

When you invest into a passive, you can be inadvertently swelling an investment you shouldn’t be in. Since the Paris Agreement, evidence has shown that the world’s 15 largest asset managers increased their holdings in thermal coal by a staggering 20 per cent heavily over-inflating the share price of those organisations. The UN’s 17 sustainable development goals (SDGs) have to be reached by 2030.

Google them. Please do. Tell me how coal shares won’t find themselves down the swimming pool plughole.

In the meantime, the dirty (I loved typing that) fossil fuel companies have spent an extraordinary $1bn (sounds a lot when you write it down) lobbying against climate action since the Paris Agreement was signed in 2016. This, of course has come from profits and from an increased share price, a share price artificially inflated by the passive investments, which indiscriminately buy any share in the index they are invested into.

Before the death of Mr Bogle, who was the father of index funds, he warned that it wouldn’t be long before index funds owned half of US stocks and that would not serve national interests at all, ‘creating some of the major issues for the coming era’. He is right. Today almost two thirds of a moderate US equity exposure are in passives.

Holding dirty stocks is inevitable, as you have no control of what you buy in an index. As we move to the UN SDG’s fulfilment by every country in 2030, active investors, ESG and sustainable investors will long since have dumped these stocks and so passive investors are the holders of last resort as the share price plummets before being dumped out of an index. Those who are unaware or ill-advised will face those losses, and they are invariably the apathetic or non-advised such as the pensioner, retiree and small saver.

There is a place, as I said last week, for passives. But it is where they are advised.

Attracted by low cost and performance based on a momentum market, a cynic knows the cost of everything and the value of nothing.

Rugby is not football and vice versa. Look after your money and security.

:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a complimentary review of your investments, call Darren McKeever on 028 6863 2692, email or visit

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