With major corporates aiming to build on the legacy of COP26 in Glasgow, reducing the environmental impact of both personal and commercial activity remains high on the agenda.
Although measures such as cutting back on flying or adopting a vegetarian diet are seen as the most obvious quick wins, analysis suggests focusing on where an individual’s savings are invested can have a far greater impact than lifestyle changes.
Research estimates that moving an average sized pension pot of £30,000 to more sustainable investment funds could save 19 tonnes of carbon a year.
According to Natalie Jackson, executive manager at the Edinburgh-based Global Ethical Finance Initiative (GEFI), which works with financial institutions to achieve sustainable development goals, the figures highlight the huge role that ethical investment can play in changing the world for the better.
A recent survey showed Scots had some £600bn invested in their pension pots, although only 15% actively choose how their money is invested.
“Many people don’t realise that they actually are investors in the financial markets through their pensions - they want to take action to support more sustainable investment but they don’t necessarily know how to do that,” says Jackson.
Jackson and her colleagues at GEFI are focused on closing that gap through initiatives including a Net Zero Pension campaign, which is working with local authority schemes in Scotland to help them use their huge financial firepower play a much more active role in tackling climate change.
“A growing number of organisations are already aligning their pensions with their values, many understand that disclosing how the money invested is supporting the planet works for the pension providers, employers and their members,” she says.
While progress is being made, Jackson argues there is scope for much more action.
“Without decisive action from the finance sector, the goals of the Paris Agreement and COP26 will not be achieved and we may have missed our last opportunity to address the existential threat of climate change,” she warns.
Although the climate crisis has brought renewed focus on the potential role of ethical finance, its roots can be traced back centuries to when the Quakers and Methodists began taking an active interest in how money is invested.
It was the founder of the trustee savings bank movement, the Rev. Henry Duncan, Minister of Ruthwell - one of Scotland’s first campaigners to abolish slavery - and Scots-born Adam Smith, who highlighted the importance of responsible finance to support a healthy society.
In recent years, ethical finance has moved from niche to mainstream - and while it encompasses a huge range of issues from tobacco to gambling and deforestation - it broadly aims to combine profit with better outcomes for people and the planet.
The impact of the pandemic and the focus on a green recovery has fuelling an acceleration in interest in investments which aim to align with environmental, social and governance (ESG) themes.
Such funds are on track to exceed $53trn by 2025, representing more than a third of the $140trn in projected total assets under management.
Scottish fund managers such as Baillie Gifford have been able to demonstrate how responsible investment needn’t be at the expense of returns.
Its Positive Change Fund, for example, which aims to use investors’ money to back companies which are helping create a more sustainable and inclusive world, has returned more than 300% in the past five years.
Stuart Dunbar, partner at Baillie Gifford, argues that ESG investing should not just be a data and metric-driven exercise, but focus on sustainable growth.
Mining companies, for example, would automatically fail many ESG screenings, but they have an important role to play as part of the transition to a lower carbon world.
“Iron ore is crucial to producing the raw materials needed for wind turbines, so to simplistically rule out investing in a mining company may not help actually very much given its key role in helping us get to a more sustainable economy,” he explains.
Materials, such as steel and concrete, will still be required for many years to come, but conventional ESG investment approaches could see the industries which produce them deprived of the investment they need to explore much less environmentally damaging approaches to production.
“Wouldn’t it make more sense to invest in these industries, rather than simply excluding companies which deprives them of the capital they need to create a cleaner environment?” he says.
The COP26 summit in Glasgow shone a spotlight on the scale of the potential for the finance sector to help enable the transition to a lower carbon world, through initiatives such as the industry-led, UN-convened, Net-Zero Banking Alliance, whose members are committed to aligning their lending and investment portfolios to the goal by 2050.
Although the banking sector has come under attack from campaign groups such as Extinction Rebellion over their existing lending to fossil-fuel companies, Peter Alderdice, director of banking and finance for Shepherd and Wedderburn, believes the sector can be centre stage in the green recovery.
He says the role the banks have played in helping stabilise the economy during the pandemic helped repair some of the reputational damage from the financial crisis and can now act as the foundation for further rehabilitation.
“Banks have acted as an important conduit for the government stimulus programmes businesses have needed to stay afloat - their response to the pandemic demonstrates how a purposeful banking industry can be a force for good,” he argues.
Alderdice says that the sector is crucial to enabling the huge shift required to decarbonise economies.
“Government funding can achieve a certain amount, but public finances can’t achieve what is needed on their own.
“As well as the patient capital that pension funds can provide, there’ll be a big role for banks and other financial institutions in providing loans and working capital to help decarbonise the economy,” he explains.
As well as the Net-Zero Banking Alliance, individual banking groups have made ambitious commitments.
Bank of Scotland parent Lloyds Banking Group, for example, has pledged to halve emissions associated with its loan book and cut operating emissions by 60% by 2030. Bank of Scotland launched its Clean Growth Finance Initiative with discounted lending for green projects.
“We want to support Scottish businesses in moving to and benefiting from a low carbon economy,” says Darren Flynn, regional head for Scotland, corporate and institutional, at Bank of Scotland.
While the sustainable finance market has predominately focused on larger corporations, SMEs are increasingly seen as having a major role to play in the transition to a low carbon economy.
Research has found that although a quarter of small businesses are keen to do more and believe a focus on environmental sustainability will grow their business, cost is a key barrier.
HSBC UK recently launched a £500m fund specifically aimed at helping SMEs invest in sustainable activities such as onsite renewable energy generation or circular economy initiatives.
Alderdice says that there will be significant opportunities ahead for those financial services providers able to demonstrate real leadership in the area.
“Consumers will increasingly look to the sector to not just provide a utility-type service but to use their money in a way that is purposeful and good, and there is huge potential around products such as green mortgages - which offer homebuyers a lower interest rate on energy-efficient properties - and sustainability-linked loans.”
He warned that those organisations which fail to take the shift seriously enough are taking major financial and business risks.
“Customers will vote with their feet, and will go to those organisations that they trust and that they think will be aligned to their values.
“Demonstrating that as a business you are embodying ESG values right across corporate culture, including areas such as board remuneration, will be increasingly important.”
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