This article is sponsored by climate-focused investing app Clim8.
If your money isn’t directly funding the climate transition, it’s contributing to dangerous climate change. Clim8’s approach to investing creates a greener home for your money.
It’s easy today to find investment funds that are ‘green’, ‘climate aligned’ or ‘Paris aligned’. As an investor, you would rightly expect that by putting your money into them, you automatically become part of the climate solution. That’s how these funds are designed to make you feel. But are they as green as they seem? Research from pioneering climate investment app Clim8, which used data from analytics firm Carbon4 Finance (C4F), suggests otherwise.
It may not be a surprise to learn that funds with no specific climate focus and the most AUM (assets under management) are way out of line with climate targets. The investing strategies of these top AUM funds, which manage trillions of dollars, are condemning the world to a catastrophic warming of nearly 4.5C*.
However, the top ‘climate’ funds are not much better. They were found to be aligned with over 3C of warming*, which has serious, irreversible consequences. These would include droughts lasting most of the year and sea level rising by over seven metres, putting millions of lives at risk.
Why is this? The core reason is simple. Hitting the 2015 Paris Agreement’s 1.5C warming target requires a wholesale transformation of every sector of the economy to a new, carbon-neutral model. So if a fund is not making significant investments in this transition, it is still fuelling damaging climate change.
Calculating climate impact
To arrive at its warming estimates for different funds, Clim8 looked at what would happen if the emissions intensity of funds’ strategies was extrapolated to all of global GDP. They did this by modelling the temperature outcomes of the equities (shares in companies) that funds hold. They applied the same approach to top AUM funds, top climate-focused funds and Clim8’s own portfolios.
C4F’s algorithm calculated how the funds’ equity exposures translate into warming outcomes, by scoring companies against their past, present and future emissions trajectories. Because of the huge difference in the size of investment funds, Clim8 did the calculations based on funds’ investing strategies rather than absolute amounts invested, so they could make meaningful comparisons.
Most of your money is doing the wrong thing
Here’s what it means to you as an investor. In a top AUM fund, only 13 per cent of investments are green aligned. So for every £1,000 you invest, just £130 goes towards activities that are enabling the climate transition*. The rest of your money is part of the problem, tracking major indices like the S&P 500, which includes fossil stocks and other harmful activities.
For top climate funds, the picture is better, but not by much. Here, on average, £270 of your £1,000 actively contributes to green activities*. Even though the remainder won’t be going into carbon-intensive investments like oil and gas, it’s invested in ‘low-carbon’ stocks like big tech firms and healthcare that are still not funding the climate transition.
In a Clim8 fund, £620 of your £1,000 goes towards the climate transition*. It’s not 100 per cent because some of the funds and stocks it invests in get some of their revenues from activities not directly concerned with green transition. But it’s still more than 2x more climate-effective than the average green fund.
It’s all about investment strategy. The vast majority of Clim8’s portfolios are invested ‘positively’, in companies that offer real climate solutions and can scale them fast. Clim8 does this by investing in six megatrends that all power a more sustainable future: green energy, circular economy, climate tech, clean mobility, sustainable food and water systems.
Analysis shows that if it’s applied at scale, this strategy has much better outcomes for the planet. Clim8 is working hard to balance reaching the 1.5°C alignment, while at the same time achieving good returns for its investors.
If you want to take action on climate change, climate-positive investing is the single most impactful thing you can do to make a difference. In fact, where you put your money can have over 20x more impact than other lifestyle changes like eating less meat and flying less often.
Easy to get started
For anyone wanting to take a first step into climate-positive investing, Clim8 has made the process as easy as possible. You can sign up through their smartphone app, choose between a General Investment Account or a tax-efficient ISA and they are launching a Junior ISA over the next few weeks (join the waitlist now HERE) **. What’s different about Clim8 is that you can watch both your money and your climate impact grow at the same time.
Our in-house investment team takes a bottom-up approach, using the latest data and research to design portfolios that are as fully aligned as possible with global climate goals. And because our portfolios are designed to generate competitive returns**, our approach is challenging the widely held view that there always needs to be a trade-off between investing for ethical and financial reasons.”
To find out more about how to invest with Clim8, visit Clim8.com
All calculations are based on research conducted by Clim8 using data from Carbon4 Finance
Capital at Risk: With investing, your capital is at risk. Past performance is not a reliable indicator of future returns. Tax treatment depends on individual circumstances and is subject to change.