Updated: Apr 15
In 2020, The Australia Institute found that 74% of Australians believed governments should plan to phase out coal mining and transition to other industries. This trend is not new - in 2016, the Lowy Institute found that 88% of Australians believed that there was a global decline in the use of fossil fuels and that Australia should turn its attention and investments to alternative energy before they are left behind.
Australians are increasingly connecting the dots between their finances and the fossil fuel industry, and calling financial institutions to align with the global shift to a greener economy.
As a result, sustainable finance and investing are on the rise, and many Australians are switching their superannuation to fossil-fuel-free alternatives such as Future Super or Verve Super. The appeal is three-fold: earning sustainable returns, being protected from the progressive decline of the oil sector, and making a positive impact on society and the environment.
In fact, switching to clean money providers turns out to be one of the easiest ways to reduce one’s carbon footprint.
As shown by Future Super’s 2019 Impact report, investing across projects with zero fossil fuels, social impacts, renewable energy, and projects that target climate change solutions (Renewables Plus and Balanced Impact) account for a great deal more in carbon reduction than every day, individual actions.
Putting our finances where our beliefs are is a proven accelerant for change. The next question is how?
How might we align our investments with our values?
A first approach is to perform ‘negative screening’ - i.e eliminating investments that have exposure to industries you do not feel comfortable supporting such as gambling, weapons, or tobacco.
But for people particularly concerned about doing their bit to address climate change, negative screening is far from enough. A more ambitious approach exists for investors seeking to actively contribute to building a greener future: Climate Impact Investing.
Climate Impact Investing, or green investing, is investments made into companies, organisations, funds, or any other investment vehicle to generate a positive environmental impact alongside a financial return. This can include investing money in companies actively solving climate change, renewable energy projects, and keeping your savings in a bank that is sustainable and doesn’t lend money to the fossil fuel industry.
Not only does climate impact investing create a demand for responsible production, but it can also give investors a financial return. The graph on the right is an example of a Green Investing trend using Deloitte Australia CleanTech (DACT), an index tracking the performance of 89 Australian cleantech stocks listed in Australia on a quarterly basis. The remarkable thing about it is that it has outperformed the wider market for 7 years in a row.
The five-year performance of the DACT boasts a 73.3% gain, compared to a 23.1% gain for the ASX200
You can read more about Impact Investing in our other blog post: Climate Impact Investing: How does it work? - Find out how your money can help stop climate change.
Climate Impact Investing can mean different things to different people depending on what their criteria are. This will guide how individuals view companies, where they purchase goods and services, and most importantly where they invest their money. But through the best science available, you can design your own framework for deciding where you should invest your money next.
How to build your Climate Impact framework
When you begin to build your impact investing portfolio, you might be wondering:
What does it look like to make a positive impact?
How do you choose the right company to invest in?
How do you know what’s actually important for change?
Building your Climate Impact framework is critical to know how you want to invest and who you should invest in. But to do this, you need to understand what impact goals are necessary for businesses to meet for effective and positive change.
A strong place to start is the Paris Agreement. The Paris Agreement directs countries around the globe to limit activities that damage the environment (GHG emissions, deforestation, material wastage, etc) in order to keep global warming from reaching an increase of 2, preferably 1.5, degrees Celsius. This is an ambitious but attainable goal, one that two climate-science advisory organisations, ClimateWorks and Project Drawdown, have investigated to create better guidelines for success.
Through the best science available, Climateworks and Project Drawdown have created guides that outline key areas of investment. These guides are perfect for building your climate impact framework as they reveal what positive impact can look like, which industries will make the biggest difference, and what is necessary to reach net-zero emissions. Let’s investigate these further.
What are the frameworks of ClimateWorks?
ClimateWorks’ guides how Australia, Southeast Asia, and the Pacific can reduce emissions to meet the Paris Agreement. In order to reach net-zero emissions, ClimateWorks designs practical solutions for specific sectors, organisations, and the economy alongside field experts. Which is where your investment comes in.
As outlined by ClimateWorks, there are 7 key investment areas that your finances can make a difference to for Australia’s emissions. They are:
Renewable Energy Generation
Electrification and Smart City
Each of these investment areas can be broken down further into the following industries.
From this list, you can discern the industries worth investing in for positive impact, creating a strong starting point for your framework.
What are the frameworks from Project Drawdown?
Project Drawdown goes beyond the southern hemisphere with a goal to direct the world to a future where greenhouse gases stop to rise and start to steadily decline. Their research has simplified the climate solution to these three actions:
Reduce Sources – bring emissions to zero
Support Sinks – uplifting nature’s carbon cycle
Improve Society – fostering equality for all
Carbon sinks are a strong, natural way to pull greenhouse gases from the atmosphere back into plants, the soil, or even the sea. It cannot collect all the greenhouse gases emitted but a significant portion can be reclaimed by these natural reservoirs.
As shown by the above illustration, there are more greenhouse gases emitted than what the natural sinks can absorb. But by reducing sources and supporting these natural sinks, a balance can be found, followed by a steady decline in emissions remaining in the atmosphere.
The following illustrations show the most effective areas in battling climate change and the potential emission reductions between 2020 and 2050.
Improving our electricity sector (orange) leads the way as the most effective solution for climate change. Positive changes can be found in shifting production towards renewable energy while also improving its efficiency. Which leads to the next criteria for your framework: how effective will your next investment be?
By comparing your next investment with Project Drawdown’s framework for climate solutions, you’ll be on the way to creating a big impact with your finances.
How do you know if a company is acting ethically with regard to its social and environmental impact?
Currently, there is very little regulation around what a business must disclose with regards to their social and environmental impact*. There are companies that have taken it upon themselves to measure these impacts, but when you find this, how do you know if the data is considered good?
This requires considering an organisation’s ESG (environmental, social, and governance) which includes factors such as the organisation’s response to climate change, their water management, as well as their treatment of workers. We recommend this Forbes article to learn more about the rise of ESG investing here.
The lack of regulation in these areas does make it difficult to discern whether or not a company has ethical processes. Professional investment firms use sophisticated services that rate companies, such as MSCI and Sustainalytics. However, the cost of subscription to these services is beyond an individual’s capabilities.
So what can you, as an individual, do to analyse a company’s ethics? The following are some tools you can use.
The CDP is an environmental disclosure system that supports the measurement and management of climate change, water security, and deforestation for companies, cities, states, and regions. The use of its annual reporting process to score companies and locations incentivises positive environmental change. There are over 9,600 companies reported through CDP making their database a great place to learn about what good your potential investment company is doing.
Another tool you can use is the B Corporation.
The B Corporation has created rigorous social and environmental performance, public transparency, and legal accountability criteria for companies to meet. B Corp’s certification is the only one of its kind and measures the entire social and environmental performance of participating companies. Only after meeting these criteria will the company be allowed to use the B Corp certification.
So, while looking into potential investment opportunities, keep an eye out for B Corp’s seal of approval.
Although designed as a tool for organisation’s to create transparent and clear climate-related disclosures, the Task Force on Climate-Related Financial Disclosures (TCFD) also assists investors in understanding the climate-related risks in financial systems. TCFD structures its framework around core elements behind organisations' operations which include governance, strategy, risk management, and metrics and data. Companies that apply TCFD to their practices are able to better map their impact and progress towards greener practices, which in turn provides you with a better understanding of the company’s climate impact.
The TCFD framework helps you with your own framework when analysing which companies to invest in. Finding a company’s TCFD can be as simple as emailing an organisation’s investor relations and asking for information on their TCFD reporting. General information on climate impact can also be found in the annual report, or in their sustainability report. Read on to learn more about a company’s annual report.
Be the Sleuth
Public companies listed on the ASX have financial reporting obligations, and these must be audited and lodged with the ASIC within four months of the financial year-end. These financial regulations have also created an opportunity for businesses to disclose their social and environmental performances. Companies won’t always include these measurements in their quarterly or yearly reports, but the ones that do give a great indication as to whether or not their processes are ethical.
In order to find these reports for any company listed on the ASX, you can follow these steps. Let’s use one of Bloom’s stock picks of the week, Mercury (ASX: MCY), as an example.
After following the above link to Mercury (or landing on your chosen potential investment’s home page), look at the top menu. There you will find the link “Investors”. As with many companies listed on the ASX, you can also find the company’s “Investors” link at the bottom of the home page.
The Investors page will often give you different options. For Mercury, the Investor Centre will provide you with current share price details, links to results, dividends, news, and leaderships, and then beneath all of these is their Annual Report. This is public information presented to update shareholders on the company’s projects, governance, and ESG.
Once you have found the company’s most recent annual report you’ll be able to have a greater insight into their direction. Not all annual reports will have disclosures on a company’s ESG, but the ones that do will give you a better understanding of their ethics. Mercury, for example, provides their report as a presentation. Jumping to the 35th slide will show you their generation sites’ GHG emissions and their involvement in reforestation. Other companies may choose to disclose their information in PDF form which gives you the options for searching the document for specific terms. Some terms you can apply to your search include: GRI, ESG, sustainability, carbon, emissions, GHG, greenhouse gas, and offset.
Aside from a company’s environmental impact, you can also look into their social impact and how they treat their employees and those involved in their supply chain. These aspects are a large part of ethical business practices, but even with these steps, the information can be difficult to find or even non-existent.
Research is key to any form of investment and Bloom has executed rigorous research into each of the companies that will be included in our investment app. With Bloom, you can rest assured that the app investment options are acting ethically with regular industry stories and C02 tracking tools right at your fingertips. To be one of the first to hear about when we launch our app, join the waitlist here!
But what are the actual things that you can invest in?
A wide range of investment vehicles exists to focus on climate impact. These include:
Listed companies and stocks
Infrastructure (such as solar farms, or wind farms)
Green term deposit or lending
Equity or Crowdfunding
Your bank, super, and energy retailer (while energy isn’t strictly speaking an investment - switching to a renewable energy retailer for your electricity is a fantastic way to use your money for climate impact!)
According to Bloom’s research as of March 2021, there are approximately 71 cleantech companies listed on the ASX. Investing in listed companies and stocks on the ASX is a common option for all retail investors but picking the right companies can be time-consuming. Some examples of these ‘green stocks’ are Infigen Energy (ASX: IFN), New Energy Solar (ASX: NEW), and Genex Power (ASX: GNX).
A green bond must be certified by the Climate Bonds Initiative (CBI) to be labelled as “green”. These green bonds are fixed-income investments and must send at least 95% of proceeds towards financing climate-friendly projects. Projects that prevent or reduce pollution, improve the sustainable use of natural resources, or help the transition towards clean energy are just some examples of what the proceeds would go to. Some green bonds are accessible via simple ETFs such as GBND (BetaShares Sustainability Leaders Diversified Bond ETF - Currency Hedged) or GRNB (VanEck Vectors Green Bond ETF (US)).
Like green bonds, green term deposit or lending is also certified by CBI, meaning that it will meet CBI standards and contribute to fighting climate change. As of March 2021 in Australia, UBank offers a green term deposit.
Clean energy infrastructure is complex and often requires long lock-in periods and high minimum investments. But you can get exposure to it via companies or, in some cases, your super.
A green fund involves pulling together money from different investors and into one fund that is managed by a professional investment manager. These funds actively seek to have a positive impact by purchasing investments that do not significantly harm the environment or society.
Similar to investment funds are ETFs. However, unlike funds, ETFS can be traded on the stock market as you would buy and sell one individual stock. ETFs typically hold a collection of Australian and global company stocks, and sometimes other assets such as cash, bonds, or property.
A more recent form of impact investing is through equity or crowd-funding. Although at times considered risky, these investments are put into early-stage businesses that share your values and have great business potential. Investors who provide funds to these companies are called ‘angel investors’ and own a share of the company in exchange for their investment. You can have a look for yourself and find early-stage companies to support on platforms such as StartSomeGood, Birchal or KickStarter.
But being a Climate Impact Investor is not exclusively about investing. One of the simplest ways to have a positive impact with your money is through what bank, super, and energy retailer you chose.
Many fantastic options are now available (non-exhaustive-list, just a few examples):
Consider where your bank and super are investing your money and check what your energy provider is doing in the transition to cleaner energy.
Let’s look at your Climate Impact framework
Now that you know the criteria necessary to create a radical impact on carbon emissions, your climate impact framework might look something like this:
What areas of impact investing interest me?
What type of investments are right for me (ETFs, bonds, fund…) (this is where a financial advisor can come in handy)
Does this organisation fall within one of the seven key investment areas from Climateworks?
How much of an impact will come from investing in this organisation as shown by Project Drawdown’s framework for climate solutions?
Is the company registered with CDP or B Corp? OR Can I find ethical actions through their annual report?
Where should you start?
Now that you have your Climate Impact framework, there are some trends you should start keeping an eye on. Clean technologies (Cleantech) is an amazing and fast-growing sector that includes technology from renewable energies to smart cars.
Here are some current trends that you need to watch:
The shift to the Cloud, smart homes, and smart off-grid systems
Minerals like Neodymium, Copper, Lithium, and Cobalt
Corporate actions like PPAs and Energy Efficiency
e-Mobility Electrification with electric vehicles, charging stations, and battery storage
Agriculture movements like plant-based protein and agtech
But as with any investment options, always make sure to look towards the future! Here are some near-future trends that you can also monitor:
Long duration energy storage
Carbon Capture Storage (CCS), C02 compression, and transport
Green Steel and Aluminium
Soil carbon measurement.
If you want to stay on top of trends like these, here are some newsletters you should subscribe to:
CEFC newsletters: https://www.cefc.com.au/market-insights/
Bloomberg green: https://www.bloomberg.com/green
The economist, the climate issue: https://www.economist.com/leaders/2019/09/19/the-climate-issue
There’s a lot to take in when you begin your journey into impact investing. It takes understanding what we need to achieve, the best ways to achieve this, and what we as individuals can do. Our app will take the guesswork out of a lot of these questions by making it easier to know which companies are ESG friendly and helping you make a real difference to our planet’s future.
Be sure to save your new Climate Impact framework and the cleantech trends you need to follow as you start your Climate Impact investing journey. But, most importantly, remember to sign up to Bloom’s app waitlist to be the first to know when our app launches.
*An Introduction to Accounting – Craig Deegan