5 ways your money can turn the world green

One of the most striking financial trends of recent years has been the rise in responsible or sustainable investing. Also known as the abbreviation ‘ESG’, which stands for Environmental, Social and Governance, this investment philosophy recognizes that the long-term stability of both financial markets and society relies on stable, socially responsible, and well-governed companies that respect our world’s environmental boundaries.

In a remarkably brief time, ESG has grown from a niche investment category to a multi-trillion-dollar market sector. In fact, according to analysis by Bloomberg, global ESG assets are “on track to exceed USD 53 trillion by 2025, representing more than a third of the USD 140.5 trillion in projected total assets under management.”

Within responsible investment, which covers a variety of different investment styles, there is a growing focus on climate change. As usual in financial markets, you will find products that tackle the issue from a perspective of managing risks – or protecting your savings from the growing effects of climate change. And others that focus on opportunities – or will help you and your investments finance solutions that support the transition to a climate neutral economy. This article will introduce different styles of climate-savvy investments before considering how individuals spend money in their day-to-day lives also make a difference.

As Johanna Köb, Head of Responsible Investment at Zurich Insurance Group, says: “It is important to consider the climate impact of all our financial decisions – from choosing a pension to switching energy supplier – because every dollar or euro spent in a more sustainable way does, ultimately, make a difference.”

1. Climate-smart investing

For many individual investors, the most typical financial products to choose from are mutual funds or exchange-traded-funds (ETFs). We use them to save and grow our money. Most of these funds will invest into shares of large, listed companies (making you one of the owners) or mix in some bonds: money lent to companies or governments that is paid back with a specific interest rate over a specific time period. Choosing such products in a climate-smart way requires you to think along two dimensions: risk and opportunities.

You will want to protect your investments from climate change risks. For example, excluding fossil fuel companies that run the risk of stranding if they fail to adapt, lowering the number of companies in your portfolio that emit high amounts of CO2 as they may get hit by future carbon taxes, and reducing exposure to companies that are part of the climate problem.

To increase the climate opportunities in your portfolios, you will want to own more companies that are part of the solution. These might include companies that manufacture electric vehicles or are leading technical innovation in fields such as recycling and pollution control. Your asset manager or insurance partner should be able to help you make these decisions.

For instance, this year Zurich became the first insurer to offer a carbon-neutral equity fund to its life insurance customers. It only invests in low-emission companies and leaders in clean technology. The estimated financed emissions in the fund are just 9 tons of CO2 equivalent per million dollars invested, compared with 68 tons for a traditional fund. Any remaining emissions are offset using carbon credits to achieve climate neutrality.

2. Financing solutions

An opportunity to become even more climate active is to directly fund environmental solutions. Or in other words, become an impact investor.

Impact investors look for opportunities that will generate a measurable positive environmental impact alongside their financial return. These investments allow you to see how much emissions were avoided or removed in the real world; how much forest was protected or grown; or how much clean electricity was produced thanks to your investment.

We need a lot of new infrastructure and technology to transition the global economy to net-zero, and investors can fund these directly. For example, by investing into new renewable energy projects and energy efficient transport networks. By investing into green buildings or financing the renovation of old ones, or by investing into clean-tech private equity funds.

You can also lend money to companies that will use it for environmental projects through green bonds or sustainability bonds, which mix environmental and social projects. These allow investors to support a portfolio of different eco-friendly projects with a single investment and their growth in recent years reflects the rise in green investment as a whole. In fact, the green bonds market passed the USD 1 trillion milestone in cumulative issuance in December 2020 after being opened in 2007.

Impact investments can be made across many asset classes and are popular with a wide range of investors, from fund managers, financial institutions and pension funds, to NGOs, religious institutions and private individuals. For example, Zurich has an annual impact investment target to help avoid 5 million metric tons of CO2-equivalent emissions and improve the lives of 5 million people – regardless of the amount it needs to invest to reach these goals. Zurich has already deployed more than USD 6 billion to impact investments. Last year, the impact investment portfolio helped to avoid 2.9 million metric tons of CO2-equivalent emissions and benefited 3.7 million people.

3. Choosing your financial services partners

You don’t have to be a major player on Wall Street to invest in a sustainable way. Remember, your own high street bank, insurance, mortgage, and pension providers all make significant financial investments on your behalf.

Did you know that most of us hold the largest part of our investment portfolio in our pension account? If you have life insurance or pay any type of insurance premium – such as motor insurance – then these are invested on your behalf to pay out claims should this become necessary. And the money you keep in your savings or current account is used by the banks to make loans to companies.

In most cases, you can have a look at all these companies – from your pension fund to your bank – and pick those that have the best responsible investment policy. If you are not sure or cannot choose, ask them about their sustainable finance targets, their climate action, and green investments. You can even ask how they behave on a day-to-day basis and if they are committed to lowering their operational (or financed) emissions to net-zero.

Banks are coming under increasing pressure to invest their customers’ money sustainably, with a recent report revealing that the world’s 60 largest banks have invested USD 3.8 trillion into fossil fuels since 2016. But many now offer specific opportunities for environmentally conscious investors, including green current accounts, loans, and credit cards. Free online comparison websites, such as Bank.green, review and rate the green credentials of major banks so you can switch if you are dissatisfied with their track record.

Insurance companies are also in on the act. Zurich has been a leading responsible investor for many years. In 2019, it was the first insurer to sign the UN business pledge for 1.5°C and to commit to become a net-zero company, a net-zero investor, and net-zero insurer by 2050. Zurich also co-founded the Net Zero Asset Owner Alliance and Net Zero Insurance Alliance, where insurers work together to decarbonize their industry.

4. Green transport

Of course, it would be hypocritical to lobby your bank or pension provider to take a more active stance on climate change without doing the same thing yourself at home. When asked, which individual action to counter climate change is most meaningful, 41 percent of people believe switching to an electric car is most effective, 21 percent think dropping a long distance flight, and 17 percent feel not having a car is the best climate measure.

In fact, of all the ways to spend your personal money and time to help the planet, changing the way you travel is probably the most important. According to the International Energy Agency (IEA), transport is responsible for 24 percent of direct CO2 emissions from fuel combustion. Not having a car, but investing in a bicycle or an annual public transport ticket is one of the most climate-effective things an individual can do. Switching from a car with an internal combustion engine to an electric or hybrid model will also significantly reduce your personal carbon footprint. You will not be alone: there are already more than 10 million electric cars on the world’s roads, with almost a third of those newly registered in 2020.

5. Going green at home

Across a calendar year, most households spend a significant proportion of their income on electricity, water, and other utilities. Reducing energy use in your house and for your appliances is an important way to decarbonize your lifestyle. Some people – whose roofs are blessed with regular sunshine – can take matters into their own hands by installing solar panels. But it is also possible to buy-in renewable energy from mainstream providers through green energy deals that only supply electricity generated by wind or solar power. This is a growing trend: in the UK, for example, renewable energy sources now provide more electricity to homes and businesses than fossil fuels. Every small change to your domestic set-up can make a difference, from installing smart meters to opting for paperless billing.

As many activists and lobby groups are keen to highlight, large investors, banks, and other global financial institutions have a pivotal role to play in setting a good example on green investment. But it also true that individuals can make a measurable difference too, by ensuring that every financial product or service they buy is chosen with sustainability in mind.