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What is the best thing you can do with your money to help save the planet? Studies suggest that the most powerful tool you have sits in the value of your savings. The cumulative impact of your money over decades can be extraordinary.
Pensions may sound dull but, during your life, your pension is likely to become your largest financial asset — government statistics say they make up 42 per cent of wealth in the UK.
What does this have to do with climate? Pensions are typically invested on your behalf in a tiny slither of companies listed on the stock market — including those that produce fossil fuels.
According to research carried out by the insurer Aviva for the UK’s Make My Money Matter campaign, the average individual UK pension saver can bring about a cut in carbon emissions of 19 tonnes a year by switching to a sustainable fund — 21 times more than the combined carbon savings of using renewable energy, going veggie and not flying.
Developing good money habits early could be one of the strongest levers you have to make an impact, either by engaging with the companies you invest in to improve their climate policies or by avoiding high polluting companies altogether.
If you have a bank account, start by checking the bank’s climate policy as it will use your money to fund other activities. Some banks avoid fossil fuels and channel your savings into projects with a positive social impact.
Investing gives you more of a say in how your money is managed. First, speak to your parents as they may be investing for you, says Becky O’Connor, co-founder of personal finance website Good with Money and head of pensions and savings at the investment platform Interactive Investor.
The UK government has paid £250 into a Child Trust Fund for everyone born between 2002 and 2011, with parents often topping up the account. Once you are 16, you can control the fund and choose investments, or transfer it to a tax-free Junior Individual Savings Account (Isa) — which offers more flexibility.
At 18, you can take control of all of your own financial accounts, and perhaps also consider a Lifetime Isa, where the government will top up your contributions by 25 per cent — but various conditions apply.
Under UK government auto enrolment rules, it is likely you will start paying into your pension when you are 22 and in a full-time job. This is invested for you, but most private sector pension schemes have default funds which invest across industries, with an ethical strategy option.
If you live in the US, your parents may have set up a UGMA account for you under the Uniform Gifts to Minors Act, which will be transferred to you when you reach 18 or 21 (it varies across states). When you get your first job, you might consider paying into a Traditional or Roth Individual Retirement Account (IRA).
Nilay Gandhi, CFP, senior financial adviser at Vanguard Personal Advisor Services, says Roth IRA accounts are popular for those early in their career.
As FT journalist Alice Ross points out, in Investing to Save the Planet, investment decisions are personal and depend on when you think you will need the money and how much risk you are prepared to take.
You will most likely want to start with funds — pooled investment vehicles managed by professionals on your behalf, containing equities (shares of a company), or bonds (loans to a company), or other assets. Some funds have a manager to make investment decisions for you, known as “active” investing, while others simply track the assets in a selected field — known as “passive” investing.
“ESG”, which stands for “environmental, social and governance”, has become a catch-all description for responsible investing via a fund, but interpretations vary.
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Felix Milton, chartered financial planner at Philip J Milton and Company, says there are four main choices of fund for climate-conscious investors: those that exclude certain industries; those that tilt to “best in class” according to ESG metrics; those which have an activist approach to drive improvements; and impact funds, which invest directly for positive change.
There are apps — known as robo advisers — that will select funds for you. Holly Mackay, founder and chief executive of consumer website Boring Money, suggests looking at Clim8, an app with a mission to support environmental innovation that will manage a climate-friendly portfolio for you with a minimum deposit of £25. She also says investment platform The Big Exchange is worth considering, as it helps people save in a way which is aligned to their values.
But watch out for “greenwashing”: funds branding themselves as “ESG” without investing in a sustainable manner. And be wary of any fund that claims its ESG approach will deliver better returns than its conventional peers.
While many performed well over the pandemic, ESG funds have struggled this year as energy prices have surged and the prospect of higher interest rates has made investors less willing to pay high valuations for “growth” stocks, which are widely held by many ESG funds.
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