Finding a genuine climate change ISA can be challenging. You obviously want to find the best ESG fund to invest in for positive returns and impact on the world. Our goal as ESG investments is to buy stocks and shares that reduce global emissions and improve sustainability. So how do we do that and what are the pitfalls to watch out for?
In theory, we can build an climate change investment strategy ethical businesses. Which are required meet criteria around environmental, social and governance practices. You ESG invest by making investments into companies deemed ESG. You can also restrict your portfolio that focus on reducing their environmental impact (e.g. Fossil Fuel emissions).
Whilst being an ESG investor is often great news for the environment, unfortunately many funds aren’t genuine ESG funds. So, how do we find a credible climate change ISA? Do the trends say we should ESG invest or is it all just greenwashing and we should avoid it altogether?
Disclaimer: This is not financial advice and you are responsible for your own investment decisions. When investing capital is at risk. This article may contain affiliate links.
What Is Greenwashing And How Does It Happen?
Greenwashing doesn’t appear particularly hard to get away with. It’s not a criminal offence but it is morally dubious at best. Greenwashing happens when fund management team claims to be conducting extra, non-financial, ESG analysis of prospective investee companies. It then does very little to maintain a portfolio to exclude or weight-out companies outside of the ESG scope.
Secondly, it may invest in companies that claim they have a positive impact, but don’t in reality. Lastly, the fund manager may just have a different definition of what constitutes an ESG investment. For example, many ESG funds include Amazon despite how their workers claim to be treated. This highlights a lack of the G – Governance.
Therefore, understanding your own criteria for ESG and finding a fund that aligns with that is key. Picking out funds that are greenwashing and usually woolly information to attract the ESG investor target audience is critical. You will often find that funds with genuinely strong sustainability credentials will often provide evidence of the ESG measures they take. There will be strategy documents or updates listed with the fund.
How Do We Start Investing In A Time Of Climate Change?
How do we start investing in a time of climate change. What are the best climate change investment funds. This is both in terms of performance and environmental impact. In fact, climate change may also present investment opportunities.
Based on my research into the different funds to ESG invest in. I believe there are a number of issues:
- Identifying funds that are credible when it comes to ESG
- Understanding the fund definition of ESG.
- Knowing which aspects of ESG the fund tackles
- Translation this ESG focus into an tangible impact.
- Finding a fund that aligns with my ESG definition and investment goals.
So, how do you find a climate change ISA? What are the ESG funds to Invest in? How do you know what you’re investing in and avoid being greenwashed.
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Review The Investment Funds Benchmark
It can be a struggle to find the best ESG fund to invest in. You might find broad ‘ESG’ funds to invest in. The Vanguard SustainableLife active funds are one example of this. This fund states it is sustainable because it “incorporates sustainability criteria, including a net zero commitment, helping to build a long-term competitive advantage that delivers sustainable returns.”.
When reading in further detail the fund page explains that “the managers have set a 2050 net zero target aligned to the Paris Agreement”. Therefore, you could be waiting another 30 years for this fund to maintain a portfolio of net zero greenhouse gas emissions.
The SustainableLife 80-90% Equity Fund – GBP Acc benchmarks against a the Composite Index. Composite Index comprised of: 85% FTSE Developed Net Tax Index; 12% Bloomberg Global Aggregate Credit Index; 1.5% Bloomberg Global Aggregate Treasury Index; and 1.5% Bloomberg Global Aggregate Securitized Index. This fails to translate into any meaningful ESG criterial.
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Virgin Money Climate Change Fund | Stocks & Shares ISA
Funds such as the Virgin Climate Change Fund is a Stocks and Shares ISAs. Virgin Money are clear on their ESG definition but do not have an ESG benchmark. For example, the fund states, it “won’t invest in companies with material revenues from tobacco, fossil fuels, or controversial weapons”. On the other hand the benchmark index is the MSCI All Countries World Index – NOT an ESG index. The fund also makes claims that
- At least 60% of the fund is invested in what we call ‘solution providers’ – companies that provide products or services that enable businesses and society to reduce carbon emissions and address other environmental challenges such as resource usage and waste reduction.
- The remainder will be invested in companies we regard as ‘leaders’ – companies which lead the way in their particular industry in terms of reducing their environmental footprint.
The problem here is that no further documentation is provided to allow this claim to be substantiated. Invests cannot review the process by which the portfolio is constructed.
Climate Change ISAs: What Fund’s Do Genuinely Benchmark?
A fund such as Legal & General Future World Climate Change Equity Factors Index Fund I Accumulation has a specific benchmark index; the FTSE All-World ex CW Climate Balanced Factor Index. Similarly, the iShares Global Clean Energy UCITS ETF USD (Dist) (INRG) reflects the return of the S&P Global Clean Energy Index. These are clear benchmarks that the fund itself and other funds can align to. This is what creates transparency and alignment in the ESG world.
Third-party ratings like MSCI and Sustainalytics can also provide a useful tool for identify a solid ESG benchmark. For example, I invest one of my pensions into the Fidelity Blackrock World ESG Equity Tracker Fund. This tracks the MSCI World ESG Focus Low Carbon Screened Index. Funds that use an MSCI ESG Index would be considered validated ESG funds.
This is because this MSCI ESG Indexes are designed to maximize its exposure to positive environmental, social and governance (ESG) factors while minimizing the carbon exposure and targeting risk and return characteristics similar to those of the MSCI World Index. There is a clearly stated methodology for the construction and evaluation of the index such as the “MSCI ESG CarbonMetrics”.
Why Are MSCI ESG Benchmarks Important?
Many institutions have slapped an ESG sticker on their funds overnight to attract ethical investors. These funds will say have investment objectives such as the fund will invest in companies “whose products or behaviour make a positive impact on society and/or the environment in the investment manager’s opinion.”.
Opinion, unfortunately does not constitute a standardised or regulated approach to ESG investing or against climate change. By contrast, you can see that the MSCI ESG benchmarking process is well structured and measurable. It has a methodology and is scientific in it’s approach. The MSCI have also been developing it’s ESG principles over 30 years.
Funds that track the MSCI Benchmarks such as BlackRock ESG Multi-Asset Moderate Portfolio UCITS ETF Acc tend to display their ESG metrics. Particularly those relating to climate change. If you visit this fund page you will see statistics relating to the funds MSCI benchmark coverage and figures relating to climate change impact. You can also review the fund specific methodology. Blackrock’s funds tend to be listed as iShares.
- MSCI ESG Fund Rating
- MSCI ESG % Coverage
- MSCI ESG Quality Score (0-10)
- MSCI Weighted Average Carbon Intensity (Tons CO2E/$M SALES)
- MSCI Implied Temperature Rise (0-3.0+ °C)
- MSCI Weighted Average Carbon Intensity % Coverage
- MSCI Implied Temperature Rise % Coverage
The MSCI ESG Indexes are designed to provide institutional investors with effective and transparent tools to integrate ESG or Climate considerations in their investment process and portfolios. They are structured to support investors seeking to align their benchmarks with their objective.
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Get To Know Your ESG Investment Criteria
You may also find funds that are too specific to certain issues. So knowing which is the best climate change investment fund can be challenging. For example, the Fidelity Sustainable investment finder already has 461 ESG funds to invest in. One of these is the Fidelity Funds – Sustainable Water & Waste Fund W Inc GBP
The positive aspect of this investment finder is the Sustainability definition filter. These filters include:
- Sustainability focused
- Environmentally focused
- Socially focused
- Ethically focused
- ESG weighted
- Limited exclusions
- Faith based
If you want a climate change ISA that focuses solely on reducing our reliance on fossil fuels, then you can filter by environmentally focused. You might then invest in the Schroder Global Energy Transition Fund Class Z GBP Accumulation. “This Fund will only invest in companies that generate at least 50% of their revenue from activities contributing to the transition, or those which play critical roles in the transition and are increasing their exposure to such activities”.
The MSCI website is a great place to start with understanding what type of ESG metric would want to benchmark against. This can then lead you to a number of ESG funds or a more specific climate change ISA.
What Are The Best Climate Change ISAs?
When it comes to selecting a climate change ISA you want to know what you are investing in. You want your investment to reduce the impact of climate change. Personally I don’t want to have to select 1 of 461 specific funds. As I’ve mentioned before I selected an ESG World Fund that has clear investment objectives and benchmark. On the other hand, you may choose to be very specific about the ESG issue you may want to help solve.
The iShares MSCI World ESG Screened UCITS ETF (benchmark MSCI World ESG Screened Index) screens out companies associated with controversial weapons, nuclear weapons, tobacco, thermal coal, oil sands, civilian firearms and those violating United Nations Global Compact principles. Therefore it is weapons and not carbon focused in it’s approach.
Whilst you may not want to be ultra-specific and still maintain an global index based approach, these funds allow you to screen out certain companies. You can find a list of MSCI ESG Index Benchmarks here.
Where Can You Find Climate Change ISAs?
There are a number of broad passive index based ESG funds that could constitute a Climate Change ISA. This is because as ESG funds they screen out companies that do not fit ESG criteria. One of these criterion is environment. As discussed earlier in the article, these all use the standardised MSCI ESG benchmarks. Below are a list of ESG and Climate Change ISAs you can invest in with Fidelity:
- iShares MSCI USA ESG Screened UCITS ETF USD (Acc)
- iShares MSCI Europe ESG Screened UCITS ETF EUR (Acc)
- iShares MSCI EM SRI UCITS ETF (ACC)
- iShares MSCI World ESG Enhanced UCITS ETF (Acc) (H&L)
- L&G MSCI World Socially Responsible Investment SRI Index
Still want a more specific climate change ISA? Then there are a number of more specific ESG focused funds to invest in:
- iShares Global Clean Energy UCITS ETF | Benchmark: S&P Global Clean Energy NR USD
- L&G Future World Climate Change Equity Factors Index | Benchmark: FTSE All-World ex CW Climate Balanced Factor Index
ESG Invest With A Freetrade Climate Change ISA
There is an even greater selection of ESG funds to invest on the Freetrade investing app. This means you could have a climate change ISA set up within minutes. These ESG investment funds include the below.
- iShares MSCI USA ESG Screened UCITS ETF USD (Acc).
- iShares MSCI Europe ESG Screened UCITS ETF EUR (Acc) (SAEU) .
- iShares MSCI EM SRI UCITS ETF (ACC.) (ESG Screened Companies).
- iShares MSCI World ESG Enhanced UCITS ETF (Accd. ESG Screening).
- BlackRock ESG Multi-Asset Moderate Portfolio UCITS ETF Acc.
- iShares Dow Jones Global Sustainability Screened UCITS ETF Acc.
- iShares Global Clean Energy UCITS ETF INRG
With Freetrade you can open and stocks and shares ISA and invest in one of these ESG funds. When you sign up with Freetrade using my link, you can also get a £10 Freetrade Free Share. All you need to to is download the app and top up with £50. Why not get a Freetrade Free share on your way to investing in a climate change ISA?
Just be quick, I only get 10 Free Shares to give away each month!
