Sustainability issues have been dominating headlines for years now.
From documentaries highlighting just how fragile the natural world is, to growing awareness of how companies operate, environmental and social concerns have steadily moved to the forefront of the public consciousness.
One area where this shift has been especially noticeable is in investing.
According to Ethical Consumer, as many as 81% of UK adults would like their investments to do some good for the world, as well as provide a financial return.
As such, many investors have been searching for ways to align their portfolios with their values. One approach you may not have considered is “transition financing”, which is designed to support industries as they move towards a greener economy.
Continue reading to discover exactly what transition financing involves, and how it compares to environmental, social, and governance (ESG) investing.
Transition financing involves supporting businesses moving towards greener operations
Transition financing essentially refers to money used to help carbon-intensive industries, such as energy, transport, and manufacturing, move towards more sustainable operations.
Rather than only rewarding companies that are already considered “green”, transition financing instead supports those that are actively taking steps to decarbonise.
For instance, it could provide funds for an oil and gas company to expand its renewable energy capabilities, or for a steel manufacturer to upgrade its production methods to lower carbon emissions.
It might also help a utility provider move away from coal towards hydrogen or other low-carbon energy sources.
This approach recognises that large industries can’t transform overnight. Sectors such as heavy manufacturing and power generation remain vital to our day-to-day lives, yet their environmental footprints are still considerable.
Transition financing helps to bridge this gap, enabling these companies to make progress towards sustainability without significantly disrupting their operations.
You can typically invest in transition financing through “transition bonds”.
These function much like traditional corporate bonds, where you lend money to a company for a set period of time and receive regular interest payments and your initial investment when the bond matures.
However, in transition financing, companies use the funds raised from these bonds for projects that allow them to transition to greener operations.
For example, Mitsubishi issued its first transition bond in September 2022 to raise funds for investment in hydrogen gas turbines and carbon capture technology, both of which are vital in reducing industrial emissions.
Supporting initiatives like these enable you to contribute to meaningful progress in sectors that are still attempting to become greener, all while pursuing growth.
ESG investing allows you to align your portfolio with your values
While transition financing supports companies that are moving towards sustainability, ESG investing focuses on those that already demonstrate strong performance in three specific criteria. These include:
- Environmental – Identifies how a company’s operations affect the environment and the measures it takes to reduce its impact, such as managing carbon emissions.
- Social – Focuses on a company’s relationship with its employees and any measures it takes to improve working conditions and support the wider community.
- Governance – Refers to how ethically a company is run, such as its corporate structure or tax strategies.
Investing in companies with strong ESG credentials essentially allows you to align your wealth with your values.
You may find that ESG investing provides a sense of purpose aside from the returns, offering a way to contribute to a more sustainable economy.
However, it’s vital to note that ESG investing isn’t entirely without its challenges.
One of the most significant risks is “greenwashing”. This is when a company exaggerates its ethical credentials to mislead investors.
A notorious example of this is the 2015 Volkswagen scandal, where the company promoted its diesel vehicles as “low emission”.
In reality, it had fitted so-called “defeat devices” on its vehicles – the BBC reported that the engines released nitrogen oxide pollutants up to 40 times above allowable levels in the US.
A financial planner could help you figure out how to invest your wealth sustainably
As awareness of sustainability grows, ethical investing is becoming increasingly complex.
There is a wide range of criteria companies must meet, and regulations often evolve.
Working with a financial planner could make this far more straightforward. We could help you interpret ESG scores and identify funds that match your personal values.
We can also guide you through new developments, such as the Financial Conduct Authority’s recent guidelines to combat greenwashing, so you can invest confidently in companies that are making a difference.
With our support, you could create an investment strategy that combines ESG investing with transition financing, ensuring your portfolio is adequately diversified while helping you invest in the planet’s future.
To get started, please contact us by email at info@investmentsense.co.uk or call 0115 933 8433 to find out more.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
