How can the way we invest help the planet?

It can feel like there are endless ways that businesses’ or countries’ activities can harm the planet. But can our investments also make a positive difference? Can they not only avoid harm but also contribute to solutions to challenges like climate change?

Here’s what some of Schroders’ experts have to say on the different ways investments can be a force for good when it comes to protecting and enhancing the environment.

Avoiding harmful impacts on the environment

Traditionally investments have been appraised on two dimensions: risk and return. But investing in this changing world means we need to consider a third dimension: impact.

Kate Rogers, Head of Sustainability for Schroders’ wealth business, which includes Cazenove Capital, says that the impacts companies have on the planet are “increasingly being reflected in their profits, whether it be through taxation, such as carbon tax, regulation or simply through consumer preference”.

This is why, she says, over the long-term you “could expect the risk-adjusted return of more sustainable portfolios to be at least the same or better”.

But traditional environmental, social and governance (ESG) analysis is not black and white and difficult choices need to be made. Mining is a good example, she says, as it “can be very damaging to the environment – but metals are essential to creating a greener future”.

Kate concludes: “Investors are recognising that companies can’t exploit the planet without recourse through financial cost or reputational risk.

“We need to value nature, to agree a standard way for companies to measure and disclose their impact on biodiversity, and a global goal to protect and restore it.”

Investments that benefit the environment or actively contribute to solutions

It is clear that in recent years we have seen a shift away from investors focusing simply on avoiding particular sectors or products based on values, to fund managers actively seeking investments that are managed in a responsible and sustainable way.

This is a move away from “negative screening” of so-called “sin stocks” such as alcohol or tobacco.

The rise of thematic investing has also meant an increase in funds seeking to contribute to solutions to specific global challenges, such as climate change or water scarcity.

Many investors use the United Nations’ Sustainable Development Goals (SDGs) as a framework. “As investors, the SDGs provide a framework to help us deploy capital and to ensure the capital we deploy is aligned,” Andrew Howard, Schroders’ Global Head of Sustainable Investment, says.

For impact investors, a fundamental element of the investment approach is the social or environmental contribution holdings make.

“The contribution of impact investments must be intentional and material, while providing the investor with a financial return,” Lyn Tomlinson, Cazenove Capital’s Head of Impact and Philanthropy, explains.

According to Maria Teresa Zappia, Chief Impact and Blended Finance Officer, and deputy CEO of BlueOrchard, which is part of the Schroders Group: “As a growing asset class, impact investing unlocks the potential to solve today’s most difficult environmental challenges.”

Jonathan Fletcher, Emerging Market Fund Manager and Head of EM Sustainability Research, for example, says that as an emerging markets impact investor he sees “plenty of opportunities to invest in companies which can positively impact the environment and which also see strong and consistent forecast demand growth.”

Measuring the impacts investments have on the planet

To understand the impact that our investments have, our award-winning impact measurement tool, SustainEx, allows us to quantify the costs that companies would face if their negative impacts were priced, or the boost if benefits were recognised financially.

Andrew Howard says that this powerful tool “gives fund managers and analysts a framework to measure and manage the impact of their investments, and helps our clients to invest in a way that aligns with their priorities”.

According to analysis by Schroders’ Sustainable Investment team using SustainEx, the US$4.9 trillion earnings that listed companies generate for shareholders would fall by 41% to US$2.9 trillion if all of the social and environmental impacts identified crystallised financially. One third of companies would become loss-making. 

The environmental externalities of listed companies analysed include avoided emissions (emissions reductions as a result of a product’s use) as a benefit and emissions, fertiliser and water usage as costs, among over 40 metrics in total.

For sovereign fixed income investors, countries’ environmental externalities include clean energy as a benefit and carbon emissions and biodiversity loss as costs, among a similarly long list.

Active management driving environmental progress

Schroders is taking a further step forward in sustainability leadership by introducing engagement objectives for fund managers and analysts. This will apply across the equities and fixed income desks and will form part of fund managers’ and analysts’ personal performance goals.

“Engagement is one of the important tools we can use to influence the companies in which we invest,” says Andrew Howard.

Kimberley Lewis, Head of Active Ownership, says that as a global active asset manager, “we are able to influence corporate behaviour through constructive and committed engagement with the companies and assets we invest in”.

“By encouraging management teams to adapt to changes, we are able to strengthen the long-term value of those assets, enhancing outcomes for clients, and to accelerate positive change towards a fairer and sustainable global economy,” she adds. “The launch of our Engagement Blueprint sets out what active ownership means at Schroders, how we engage with the companies in which we invest and what our clients can expect from us.”

Climate change and natural capital and biodiversity have been identified as core themes for active engagement.

Private markets and the planet

Schroders’ commitment to a positive impact on the environment goes beyond the traditional asset classes.

To give an example, real estate is responsible for 40% of global carbon emissions, according to the International Energy Agency. Last year Schroder Real Estate published its pathway to achieving net zero carbon across its assets under management – from commercial to hotels and residential assets – by 2050.

Mark Callender, Head of Real Estate Research, says: “One of the advantages of private real estate is that investors have control over their assets. We have committed to using renewable electricity in all our buildings, for example.”

Charlotte Jacques, Head of Sustainability and Impact Investment, Schroder Real Estate, says: “Our activities range across the building lifecycle. We seek to continually improve the sustainability credentials of our investments through the active management of our assets, and have been working to reduce the energy consumption and greenhouse gas emissions of our landlord-controlled operations for over five years.”

Meanwhile Nils Rode, Chief Investment Officer at Schroders Capital, says that while far less information is published by private companies, the thorough and lengthy due diligence that private equity investors can conduct allows for a truly deep dive into companies’ environmental practices. He says: “Private equity can play a more active role in controlling ESG-related risks as a result of the depth of the engagement.