What do we mean by ‘green’?

Definitions of ‘green investing’ vary significantly from one investor to another and there is no single right answer. Most would associate being green with reducing emissions but there are many contributors to achieving a ‘greener’ future and economy.

Water efficiency and biodiversity are also critical to achieving net-zero for example. With growing expectations around measures to tackle emissions and climate change, it seems like an opportune time to ask what role investors and companies have to play in helping to address climate change and what we mean when we refer to green investing.

Challenges across asset classes

The degree of green investing between different asset classes varies greatly. At one extreme, when investing in companies – both debt and equity – one can engage with company management (and, in the case of equity, vote as well). At the other extreme, it is tough to be a green investor in alternatives such as commodities or hedge funds where you are not necessarily investing directly into companies.

It is harder to effect change when investing in government bonds but dialogue can still be had and, of course, countries need to be able to come back to the bond market time and time again to raise capital. We are starting to see governments launch initiatives to help finance projects aimed at reducing emissions.

The UK government recently issued its first ever green bond raising £10bn. This inaugural bond forms part of the government’s Green Financing Framework to support the development of renewable energy capacity, energy storage, decarbonising housing, and increasing energy efficiency as examples of a few areas. This shows the importance that finance will play in facilitating the transition to a net-zero carbon economy not just in the UK, but globally¹.

What are funds doing?

From a regulatory perspective, there are a great deal of considerations for retail funds to adhere to – both within the UK and within the EU. With regards to the EU, funds now explicitly have to state to what extent they embed and promote their green credentials. This regulation is known as SFDR where funds are categorised as article 6, 8 or 9 – its easiest to think of the three decreed categories as light green, dark green, and impact.

Alongside this, funds will soon need to precisely state to what extent the firms they hold contribute to a variety of environmental activities.

The second perspective is that of society – what does society, manifesting itself in this instance as the clients of Barclays Wealth, expect our green credentials to be? The investing team at Barclays ensure that all the external fund managers that we employ on our clients’ behalf are embedding ESG (Environmental, Social and Governance) considerations into their processes, businesses, and teams. In fact, we rate them on their success of those endeavours.

What are companies doing?

We have seen a significant increase in the number of companies making commitments to be net-zero. Countries and companies globally need to be doing more to achieve net zero targets (see figures 1 and 2). Perhaps more important than this is the need for collaboration between companies. Microsoft and Alphabet are amongst the world’s largest companies.

Microsoft has pledged to be carbon negative by 2030 and to have removed all of the carbon since the company was founded by 2050. They are also launching initiatives to use their technology to help customers reduce their carbon footprints and a $1bn innovation fund to help develop reduction, capture, and removal technologies².

Figure 1: Global greenhouse gas emissions Gt CO2 eq/year

Source: Climate Action Tracker

Figure 2: Country shares in projected global C02 emissions 2030

Source: IMF

View the accessible versions of our table.

Alphabet (Google) is already carbon neutral and plans to be carbon-free by 2030. They are starting reforestation efforts in North America, Spain, and Australia to help remove carbon from the atmosphere. They also have Environmental Insights Explorer which uses data and modelling capabilities to help cities measure emissions and identify strategies to reduce them. The aim of this initiative is to help over 500 cities create over one gigaton (Gt) of emissions savings every year from 2030. This is the equivalent of taking 200 million cars off the road each year³.

You wouldn’t necessarily think of these companies as green but through collaboration and in leveraging their capabilities, they are helping facilitate efficiencies in other companies, cities, and their buildings across the globe.

Engagement is key

Another element of being a green investor is ensuring that we engage with companies we invest in within our clients’ portfolios and exercise our vote on all company resolutions. In fact, we at Barclays, are A-rated by the United Nations against their Principles of Responsible Investing because of how green our investment approach is.

Being a green investor doesn’t mean that one has to exclude a raft of companies, nor does it mean applying the same approach across all asset classes. By way of an example of the former, it is possible to hold an energy company.

Divesting of all energy holdings does not always support the transition to a cleaner planet. Some energy companies are actually leading the shift to renewable energy whilst, like it or not, the world will be reliant on some level of fossil fuels for some years to come. 80% of UK homes use natural gas for heating for example⁴.

Shell is an example of a company that you could argue is on the road to becoming greener. Their programmes include looking at carbon capture storage technology, hydrogen, alternative fuels, investing in offshore wind and solar power generation, and investing in electric vehicle charging infrastructure.

These are to name but a few of their projects with the aim of being net-zero by 2050 across their own operations and the customers they serve⁴. A key driver of these initiatives at Shell and other companies which are large greenhouse gas emitters was the Climate Action 100+ group. An investor initiative focusing on companies critical to the net-zero emissions transition driving positive change through engagement⁵.

By engaging with the managements of such firms and voting accordingly, investors might see their funds becoming greener over time. If all investors exited these types of companies, then their value could fall and they may even exit the stock market (resulting in far less visibility of their operations and ‘greenness’ of their activities).

Conclusion

There is no singular view on what green means. It can mean several things depending on the perspective you take. It is also important to recognise the role engagement has in bringing about change. It is undoubtedly a complex area to navigate. One where having dedicated expertise is of value to investors who want to incorporate ESG or green credentials into their investments.

View the accessible version of our charts

Things to consider

None of the funds or companies mentioned in this article constitutes an investment recommendation. Past performance is not a guide to future performance.

All investments can still fall in value as well as rise and you might get back less than you invest. We don’t offer personal investment advice so if you’re unsure you should seek that independently. Funds are designed for the long term so you should only consider them if you can stay invested for at least five years. These are our current opinions but the future, as ever, is uncertain and outcomes may differ.