Optimistic investor: The future of sustainable investment

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Clim8, the sustainable investing platform launched in April last year, has a deceptively simple proposition. Hannah Fry, mathematician, science presenter and bestselling author, summed it up in her voice-over for the company’s advertising campaign that aired on Channel 4 in the spring. In breaks between prime-time programmes, such as Gogglebox, Grand Designs and Peep Show, viewers were treated to this succinct pitch: “When it comes to investing, you don’t have to choose between your head or your heart… between success or happiness… between your future or the planet’s future. With Clim8, you can invest with your finances and the climate in mind.”

This ringing endorsement by such a high-profile advocate of sustainability is pure marketing gold, as Duncan Grierson, founder and chief executive of Clim8, acknowledges. “We are thrilled to be working with Hannah. With her scientific background, knowledge of the climate crisis and personal passion to make a difference, she is a perfect fit for Clim8,” he says.

Clim8, described by Fry as “a force for good”, is on a mission to dispel the myth that financial benefits and climate benefits are mutually exclusive. Yet so-called ESG (environmental, social and governance) investing is big business – so don’t lots of ESG funds offer this win-win option? They offer it, says Grierson, but many of their assertions amount to “greenwashing” – a marketing tactic underpinned by no clear evidence of the benefits they claim for either the climate or the investor.

Indeed, the scale of the problem is “mind-blowing”, he maintains. “The world’s 20 largest ESG funds hold, on average, 17 fossil-fuel stocks in their portfolios. They also, by the way, hold gambling, tobacco, alcohol and weapons stocks. If you see yourself as a ‘green’ or ‘ethical’ investor, you might feel quite disturbed at the thought of that stuff being in your ESG fund.”

While “the tsunami of money” that could, ironically, pose a major threat to the planet, it is a clear opportunity for Grierson’s business. In September 2020, Clim8 research with 2,000 British consumers found 61% of respondents citing climate change as their main concern, with a similar proportion concerned about saving for the future. Yet 67% invested in savings accounts or pension funds that funded companies that damage the environment.

Grierson describes consumers as “potentially being hit by a double whammy”. Not only are they unwittingly funding the very thing they are concerned about, but they are also likely to reap increasingly poor returns as investors begin to turn to genuinely green alternatives. In fact, when asked about obstacles to investing sustainably, 59% of respondents cited lack of knowledge, and 30% confusing terminology.

The research gave Clim8 the mandate it needed. It put education, simplicity, and empowering ordinary people to make a difference through where they invest their money at the heart of its proposition. Users of the platform access it through an easy-to-use app, which, among other things, shows the carbon emissions and clean energy generated by the companies in their portfolio. Grierson explains: “We could include other metrics – such as tonnes of plastic being recycled, because we have lots of plastic recycling companies in our portfolios – but, for the moment, we’re keeping it simple. Over time, we will add in more features.”

A key differentiator between Clim8 and other funds is that Clim8 is ‘pure play’, investing only in the ‘E’ of ESG. Grierson believes the very term ESG is damaging: “Sticking them together makes no sense, because they are all trying to do different things. It is a hazy and unregulated definition.” He thinks the way forward is for each company to have a climate-impact rating, which would be administered by a third-party ratings agency.

Rather than simply screening out damaging companies, Clim8 proactively seeks out businesses whose core products and services have a positive impact on climate change and sustainability.

It focuses on six categories – or “megatrends”, as Grierson calls them: green energy, clean mobility, climate technology, sustainable food, water systems, and the circular economy. Examples of investee companies are leading wind-turbine manufacturer Vestas; Ørsted, a Danish energy company that has switched from fossil fuels to renewables; and Schneider Electric, which makes products, such as electric vehicle charge points, that are crucial to the target of net zero (ie no carbon emissions) by 2050. Also, because agriculture is responsible for around 20% of global emissions, Clim8 has invested in meat-alternative producers such as Impossible Foods and Beyond Meat.

While Clim8 eschews ‘big tech’ (“they are not doing enough for the planet to justify investing in them”, says Grierson), electric car manufacturer Tesla is part of its portfolio. Nuclear energy is also in there, albeit at a low level. “Nuclear is obviously a challenging topic, and can be controversial, but it is a low-carbon energy source, and probably needs to be part of the transition towards net zero,” he says. “Gas, on the other hand, we don’t invest in – despite the EU’s recent pronouncement that it could be labelled as ‘green’ for the purposes of the energy transition – because it is clearly a fossil fuel.”

Grierson, a lawyer turned venture capitalist, has spent the past 20 years growing and investing in businesses in the sustainability sector. “I am passionate about making a difference,” he says – and he realised in 2018 that the biggest difference he could probably make would be to communicate to ordinary people the difference they could make by investing their money in a different way.

“The idea with Clim8 is that we make it easy for anyone to invest in companies that are having a positive impact on climate change,” he says.

Grierson set up the business with £12m of venture-capital backing, including from Channel 4 Ventures and a venture capital fund backed by the British Business Bank. There are also 5,000 retail (crowdfunding) investors, and investment from a range of fintech executives. The company now numbers 41 people with backgrounds at a range of blue chips, including JP Morgan, Credit Suisse, Sky, Aviva and Amazon. Its chief marketing officer, Andrew Cocker, for example, joined from Expedia, where he was senior director of global brand and innovation.

The 60,000-strong user base is wide: investors range from people in their 20s to those in their 60s, and while the average investment is just more than £2,000, investment sums range from £25 up to £100,000. However, the average age of investors is 36, older than for many other new investment apps. Indeed, older people tend to favour longer-term investing, as do women, and Grierson is proud of the fact that around 35-40% (and growing) of Clim8 investors are female.

“According to [management consultants] McKinsey, we need to be investing $6tn a year globally into the climate transition if we are to hit net zero by 2050,” he says. “So, medium- to long-term investors are the people we are interested in, rather than day traders.”

Lots of Clim8 investors invest through monthly direct debits, making their investment affordable and helping them spread their risk as the market rises and falls. Nevertheless, Grierson acknowledges that investors have had a rocky ride over the past few months, as a result of the war in Ukraine, supply constraints (notably gas from Russia and wheat from Ukraine), and rising inflation and energy bills. The next few months – or even years – look harder still.

“It’s going to be a challenging time for a lot of people, and it seems likely we’re going into some sort of recession – though whether that will be a quick dip in and out, or something more prolonged, no one really knows,” he says.

Indeed, in terms of investor sentiment, the company has seen the best of times and the worst of times in the 18 months since the app launched. Grierson notes that the pandemic focused people’s minds on the way they wanted to live: the absence of traffic and associated fumes, being forced to curtail exercise to a short daily walk, or simply having time to sit in the garden sparked a new appreciation of nature.

Launching in this environment was serendipitous: “People started to think a lot more about sustainability and what we could all be doing to protect the environment,” he observes.

While austerity is a mounting concern, Grierson believes there has been “a permanent shift in people’s views, a big change in the zeitgeist”. As he points out, climate change and climate-change solutions are here for the foreseeable future: “They aren’t like crypto, which has had its moment and may or may not come back.”

According to Grierson, sentiment has been underpinned by structural changes – such as hybrid working, which he predicts will be permanent – and by the all-too-tangible manifestations of climate change – heatwaves and wildfires – that we witnessed in the summer and that are likely to become increasingly frequent events. “If that doesn’t wake people up, nothing will,” he says.

Investors in Clim8 can choose between three risk portfolios: ‘cautious’, ‘balanced’, and ‘adventurous’. Balanced and adventurous remain the most popular options, but since the downturn in the stock market in February and March (“you could call it a crash”, Grierson says), the number of ‘cautious’ investors has risen.

“The stock market can change,” he points out. “In a few months’ time things might be better – the war might be over and supply chains freed up, for example – but the zeitgeist at the moment is quite negative.”

While this might understandably deter investors who need their cash for essentials, he points out that, over the medium to long term, investing in climate megatrends should yield inflation-busting returns. “These six sectors are likely to be the growth drivers of the next 10, 20, 30 years as we try to drive as hard as we can towards net zero,” says Grierson.

The signs so far are good. Since Clim8’s inception in August 2020 (it traded for eight months as a private Beta company before the app launched), its ‘adventurous’ portfolio – its most popular – has consistently outperformed its benchmark, as well as indices such as Nasdaq and the S&P500, with yields in 2020 and 2021 of 15.36% and 13.10% respectively.

“Even those who deny climate change can’t deny the favourable investment performance of sustainable companies,” says Grierson. “And we only see this going one way.”

Could it be that the promise of superior financial returns does more to address climate change than behaviour-change incentives by government, or warnings by climate experts? Grierson points to research conducted by film director Richard Curtis’s ‘Make My Money Matter’ campaign, which found that ‘greening’ your pension is 21 times more powerful at cutting your carbon than giving up flying, becoming vegetarian and switching energy provider put together. Around £2.6tn is invested in UK pensions alone, rising to £34tn globally.

“This is not the only research that indicates the impact you can have with your pension,” says Grierson. “If people move their money at scale, huge change can happen – but we need a concerted approach. We all need to be doing things such as eating less meat, flying less, cycling more, and buying clean energy.”

The government should also be doing more. “There is a whole range of things they should do, including incentivising clean energy and creating jobs around sustainable businesses. They may think they have other priorities, such as rising energy and food costs, but they have to look into the medium and long term, not just the short term.”

There are sins of commission as well as omission: “Solar and wind power is now cheaper in most parts of the world than burning fossil fuel, but we are still building more coal-burning plants. It seems bonkers,” Grierson states. “We need to get our regulations and incentives in the right place.”

Clim8 has just completed a new funding round. The company is trying to raise several million pounds to launch a junior ISA and a self-invested personal pension (SIPP).

The company also wants to “amplify the message”, according to Grierson. That means more advertising – a second Channel 4 ad with Hannah Fry as part of a media-for-equity deal struck with Channel 4 Ventures. There are also plans to expand its press advertising from The Times and Sunday Times (Clim8 won £200,000 of free publicity in an advertising funds competition). In addition to this long-term brand building, there will be a referrals campaign, aimed at increasing word-of-mouth recommendations.

There will also be more partnerships of the kind it already has with whale and dolphin charity Orca. Grierson elaborates: “If you open an account with us and then refer a friend, we pay £20 to the charity: whales sequester around 4,000-5,000 times as much carbon as a tree, so whales are carbon-capture machines, as well as being incredibly beautiful.”

The company’s mission will be helped by the growing number of individuals and organisations holding greenwashing companies to account. Governments are stepping up their investigations into firms’ ESG performance, and, affirms Grierson, “we will see increasing numbers of asset managers having their claims scrutinised over coming months and years”.

He believes we can reach net zero by 2050. “I am generally a very optimistic person – you have to be around climate change – and we have lots of levers to pull: but we are running out of time.”

This article was first published in the October 2022 issue of Impact.