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Can sustainable investing help fight climate change?

November 2023

With the world facing a climate emergency, we think the more we can do to support companies in reducing their carbon footprint, the better. One way we do this is by offering climate-friendly investing.

If you’re a OneFamily customer, you’ve probably heard us talk about “climate-friendly investing”. We’re pretty proud of it.

But when we say that we have climate-friendly funds, what are we actually claiming?

Well, before we get into how climate-friendly investing funds are different to non-climate-friendly funds, first we need to explain how investing in a fund works.

So, what is an investment fund?

When a customer puts money into their stocks and shares product, it’s placed in a fund alongside lots of other investors’ money.

Your fund manager

Every fund has a “fund manager”. This is usually a team of people who decide how best to invest the money in the fund.

We trust a company called State Street Global Advisers (SSGA), one of the largest asset managers in the world, to manage our funds. SSGA currently manages $3.8 trillion US dollars, so we're confident the team knows what they’re doing when it comes to investing!

Buying assets

The fund manager uses the money in the fund to buy various “assets”. These could be all sorts of things, but most commonly will be things like bonds (a loan to a company or government), company shares (literally a share of a company) and property (such as homes and offices).

Most funds will buy lots of different assets in many different markets. This is called “diversifying” and it means that if one asset loses money, the fund doesn’t lose all its value. Diversifying therefore reduces the risk of losing money.

Making, and losing, money

When you invest in a fund, you’re assigned a number of units. These units are worth the amount of money that you paid in at the time you made the payment.

If the value of the assets the fund invests in then goes up, the value of your units goes up. At this point, they’d be worth more than you bought them for.

But, if the value goes down, your units will be worth less than you bought them for.

It’s easy to see this as “making” and “losing” money, but this way of thinking can be misleading.

The value of your units only matters when you withdraw money. So, if you take your money out when the value is lower than the amount you put in, you’ll lose money. But if the value has gone up then you’ll make money.

What makes a fund “climate friendly”?

There is currently no set definition of a climate-friendly fund, although that is likely to change soon.

Generally speaking though, the fund manager of this type of fund will choose to invest in assets that cause less damage to the environment than their competitors do. This incentivises companies to do more to fight climate change.

But different funds use different selection criteria to do this. So, we’re going to talk specifically about our 100% climate-friendly fund, OneFamily Global Equity Fund, which our Stocks and Shares ISA and Lifetime ISA customers can choose to invest in.

OneFamily’s Global Equity Fund criteria

This fund invests only in company shares. An SSGA algorithm assesses all the companies in the MSCI World Index (around 1,600 companies) and selects which companies to buy shares in and how much of the fund to allocate to each.

The fund manager does this by doing two things every three months:

1) It checks how each company is making its money. Companies that are involved in controversial activities, such as producing certain types of high-carbon fuel or manufacturing particular types of weapons, don’t get the fund’s investment.

2) Then an SSGA algorithm scores the remaining companies from the MSCI World Index based on how climate-friendly they are. It looks at things like how much damage each company does to the environment and how much it’s doing to reduce its negative impact.

This scoring helps the algorithm decide how much of the fund should be allocated to each company.

To diversify the fund, the manager will buy shares in companies from many industries. But within each industry, it will choose to buy more shares in the companies that:

  • make more money from doing things that benefit the environment, like generating renewable energy (green revenues)
  • are better prepared for climate change or have work underway to prepare (adaption score)
  • produce less carbon emissions for every £1 million the company makes, compared to other companies in its sector (carbon intensity)
  • are less reliant on brown revenues, things like fracking, to make money
  • are less reliant on fossil fuel reserves to make money

How effective is this climate-friendly selection criteria?

As of 30 September 2023, we can see that the companies the Global Equity Fund is investing in are less damaging to the environment than the average for all the companies on the MSCI World Index.

The table below shows the climate characteristics of the Global Equity Fund and the MSCI World Index, as well as the percentage difference for each characteristic. We compare against the MSCI World Index to get an idea of how the fund's climate credentials would look if the climate-friendly criteria wasn't applied.

Global Equity Fund MSCI World Index Difference
Carbon Intensity (tonnes CO2e/USD mn) 72.73 177.14 -59%
Fossil Fuel Reserves (million tonnes) 14.22 155.35 -91%
Brown Revenue (%) 0.27 2.66 -90%
Green Revenue (%) 14.05 3.49 +302%
Adaptation Z-Score 0.25 0 +0.25

Sources: FactSet, GICS®. Characteristics are as of 30 September 2023 and are subject to change.

Carbon intensity: down 59%

For every USD$1 million that the companies made, on average 59% less CO2 was emitted by those on the Global Equity Fund list, than those on the MSCI World Index list.

Fossil fuels reserves: 91% less

Yep, you read that right. Companies that the fund invests in have 91% less fossil fuel reserves than that rest of the MSCI World Index. That’s a lot less reliance on non-renewable energy.

Brown revenue: down 90%

Brown revenue is money made from activities that are particularly damaging to the environment, such as certain techniques for extracting fossil fuels.

While 2.66% of the money made by all the companies on the MSCI World Index is reliant on this type of activity, only 0.27% of the money made by the companies that the Global Equity Fund invests in is.

That’s 90% less!

Green revenue: up 302%

Green revenue, on the other hand, is money made from activities that benefit the environment, such as technology designed to fight climate change.

The companies that make up our fund portfolio make a whopping 302% more money through green revenue activities than companies on the MSCI World Index do.

Adaptation Z-score: up 0.25

This might not look huge, but it’s one of the most important factors.

Adaption Z-score refers to how ready companies are for climate change. Companies that have plans in place are more future-proof and we’re more willing to invest in them.

Climate-friendly investing continues to have an impact

As companies are reassessed by the SSGA algorithm every three months, companies have good reason to start, or continue, taking action against climate change.

They can increase how much funds like ours invest in them by cleaning up their act. On the other hand, if they start to show worrying behaviour, they might find that climate-friendly funds are less likely to buy their shares.

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