Is orange the new green? For investors, not yet

Andrew Spaxman
Financial Planning
two people shaking hands

High-profile protests by Just Stop Oil activists are making the headlines – but are they influencing investors, asks Andrew Spaxman of Lovewell Blake Financial Planning.

two people shaking hands

Orange seems to be the new green this year, at least for headline writers.  With orange powder spread on the hallowed turf at Lords and on the green baize at the Crucible, and with orange confetti chucked over former Chancellor George Osborne at his recent wedding, by those who want to see a rapid end to our reliance on fossil fuels, it has been difficult to avoid reading about Just Stop Oil related activities in recent weeks.

They may be gaining column inches, but is that undoubted success in raising their profile actually translating into action when it comes to making important investment decisions?  Or has the noise failed to convince people to change their ways?

When it comes to investing, ethical consideration has been playing a larger role for some time.  Ethical investing is already becoming more favoured, with fund managers and investment companies changing their focus to be more ESG (Environmental, Social and Governance) compliant.

This includes the incorporation of ESG investment options within workplace saving solutions, available on a large scale to all through auto-enrolment schemes.

There is already evidence that for some, ethical considerations are starting to rank alongside security and performance as factors to be taken into account when building a portfolio.              

This is nothing new, with the concept of ethical investments having existed for a long time.  Initially it was a distinctly minority interest, and although there is a growing awareness of ESG considerations when it comes to building a portfolio, it is probably fair to say that full-on ethical investment is still in the minority.

It is commonplace for investors to request that they avoid certain sectors such as arms manufacturers, tobacco producers, gambling firms and companies which use animal testing, but is the avoidance of fossil fuels corporations being added to that list and is the general consensus shifting for investors to be more conscious of this?  The answer is no, not in any significant way.

Large oil and gas companies have performed pretty well over recent years, and this has been a factor in both fund managers and investors retaining them in their portfolios.  Another important consideration is that these very companies are often the ones who are investing most in creating new, green energies, alongside their legacy fossil fuel businesses.  As with so much in life, it’s not a black and white situation, despite what protestors might claim.

Does that mean that investors prioritising performance over other considerations will avoid investing in the kind of green fuel technology which groups like Just Stop Oil want to replace fossil fuels? 

Absolutely not, and for two very good reasons: even those for whom ethical considerations are not the top priority, there is an awareness of ethical factors in choosing their portfolio; and given that green energy is going to be the future (albeit nowhere near as soon as the activists would like), there are sound financial reasons to invest in this sector, too.

Even if new licences are granted for oil and gas exploration, the chances are that fossil fuels will face increased taxation, alongside growing government subsidies and incentives for green energy initiatives.  Moving away from fossil fuels may be a long-term prospect, but the focus on longer-term change to deliver returns through more ethically adhered companies could show to be more profitable for investors.

It could well be that what may be perceived as an ‘ethical penalty’ in investment performance during periods where markets are faltering could in time evolve into an ‘ethical premium’, as with a longer-term growth strategy, ethical investing can provide both a return on investment and the capital to companies to create a better world.

It is that creation of a better world through an ESG focus which is expected to prove more durable in the long-term, and ultimately help sustain the profits of these companies as well as provide the return to investors.

These changes won’t make quite so many headlines as disrupting sporting events and blocking roads; but in the long-term, the end result may very well be the same and with less direct implications to the general public, to encourage positivity around ESG and give rise to increased numbers of ethical investors.

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