Investors don't have to rely on COP26

You’ve probably heard about COP26 – the meeting of global leaders in the Scottish city of Glasgow. If you’re aren’t sure what it’s all about, ‘COP’ stands for ‘Conference of the Parties’.  It’s an initiative of the United Nations, and amazingly, COPs on climate change have been taking place for nearly 30 years.

COP21, which took place in Paris in 2015, resulted in the Paris Agreement, which saw participating nations agree to limit global warming to below 2 degrees. This year marks the 26th annual summit – hence the name COP26.

The Lowy Institute confirms that six in ten Australians say ‘global warming is a serious and pressing problem’. But for anyone eager to support climate action, it can be frustrating to watch COP26 unfold as politicians and bureaucrats wrangle over what needs to be done.

The good news is that as investors we can take action by supporting sustainable investments. This can mean investing directly in companies that deliver clean energy for example. But for low-cost diversification across a wide variety of sustainable businesses it’s hard to go past exchange traded funds (ETFs).

That said, the issue of ‘greenwashing’ – making an investment sound more eco-friendly than it really is, is a growing problem. So it really pays to look under the hood of a fund to understand what your money is supporting.

As a guide to the benefits of an ETF, fund manager – Vanguard, which is one of the goliaths of the ETF market, launched an Ethically Conscious Australian Shares ETF in late 2020. It invests in around 250 listed Aussie companies – far more than most of us could hold directly, but it screens out those engaged in fossil fuels, nuclear energy and the like.  So it ticks the box for sustainability.

ETFs also tick the box for value. The Vanguard fund for instance has an annual fund fee of just 0.16%.  

The 2021 Responsible Investment Benchmark Report from the Responsible Investment Association of Australia (RIAA)  shows that investing sustainably doesn’t have to mean sacrificing strong returns. The RIAA found responsible Australian share funds notched up gains averaging 7.4% and 8.1% annually over the last five and 10 years respectively. International funds with a sustainable focus performed even better with 5- and 10-year returns of 11.4% and 10.1% respectively.

Of course, past returns are no guide for the future. But as the RIAA notes, money is jumping ship to ethical investments. In Australia, the responsible investment market has soared in popularity to  be worth $1.2 trillion in 2020. Ethical investing could be the way for you to help the planet while also helping to grow your wealth.

Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.

The Vanguard Ethically Conscious Australian Shares ETF is one of the core holdings in the newly launched InvestSMART Ethical Growth Portfolio.