Responsible investment is an approach to investing that aims to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long-term returns.
Generally asset managers incorporate ESG factors, as risk premia, into asset selection when purchasing assets for their funds.
To give our customers choice, Scottish Widows offers four funds with clear policies, click on the fund to see the additional information:
- Scottish Widows Environmental Fund
- Scottish Widows Ethical Fund
- Scottish Widows Threadneedle UK Social Bond Fund
- HBOS Investment Fund Managers Limited Ethical Fund.
You can find out more through the funds’ factsheets, available on our fund prices page.
Separate from our ethical funds, all Scottish Widows funds seek to exclude investment in cluster munitions and landmines companies. These activities are illegal in the UK and banned by international conventions to which the UK Government is a signatory. More information is available below.
Our approach to specific controversial issues
Cluster munitions and landmines exclusions
Doing business responsibly in Lloyds Banking Group means managing risk effectively. We must make the right decisions and do the right things for our customers, our shareholders and our colleagues.
The Group has no appetite for activities prohibited by international conventions supported by the UK Government (e.g. the Oslo Convention on Cluster Munitions or the Ottawa Treaty on Anti-Personnel Landmines). The Group will not support businesses involved in such weapons.
This absence of appetite also applies to the funds managed on behalf of our customers Group's own investment assets and to those managed on behalf of clients where the Group determine the fund investment policies.
Fracking is a process by which previously uneconomical reserves of gas and oil can be extracted by drilling horizontally into shale rocks deep underground and then using water and chemicals at high pressure to fracture the rock to release the oil and gas trapped within it.
Fracking has resulted in substantial growth in natural gas and oil production in the US. This has reduced energy costs for individuals and industry and created jobs. Cheap gas prices have also accelerated the replacement of coal fired power stations with generation fuelled by gas (which emits 50% less carbon for each unit of electricity produced). This has allowed the US to reduce its overall carbon emissions.
There are substantial shale gas reserves in the UK and other countries around the world, and plans are underway to exploit these reserves.
Fracking is proving controversial given the range of environmental concerns that have been raised about fracking.
- Water pollution. There are concerns that fracking fluids may leak out of the well and pollute groundwater, or that they may be disposed of carelessly and pollute surface water.
- Water scarcity. Fracking uses a substantial amount of water. In some arid locations this might put pressure on existing water supplies.
- Fracking causes small earthquakes.
- Fracking is an industrial activity which covers large areas of countryside with hundreds of small fracking wells. Many fracking locations are in areas where this activity is considered undesirable by the local population.
- Fracking may result in leakage, venting or flaring of methane gas. Methane has a high global warming impact, so this undermines the climate benefits of gas compared to coal.
We believe that all these environmental concerns have some validity. However, the US experience suggests that the most alarming risks (e.g. pollution of aquifers, methane leakage) may be effectively mitigated by strong regulation. Nevertheless, there are undoubted and unavoidable impacts from this industrial activity on local people.
Fracking therefore involves trade-offs between these local environmental impacts on the one hand, and wider benefits in terms of potentially lower energy costs and a faster switch away from coal power to a lower carbon combination of gas and renewables. This may be particularly important in China, now the world’s biggest carbon emitter, where coal is currently the dominant source of power generation but shale gas reserves are potentially substantial.
Fossil fuels and climate change
Scottish Widows takes climate risk very seriously, and we expect our selected fund managers to be actively aware of this issue and take steps to reflect this in their approach to investment.
For asset managers, climate change generally affects three main areas: climate policy, company engagement and integrating climate risk into investment decision-making.
- Strong climate policies from governments are crucial to addressing climate risk. Without strong climate policies it will prove very difficult to mitigate climate change. We link to asset managers who are members of the Institutional Investors Group on Climate Change, which is focused on lending investor weight to driving global policy action on climate change.
- Active Stewardship, engaging with companies to encourage progression towards the Climate Change Paris Agreement to work towards a ‘2 degrees’ future.
- Finally, we expect our fund managers to work to ensure climate risks and opportunities are taken into account in investment decision-making. On the fossil fuel side, this is leading to generally lower exposures to coal mining stocks. This is not necessarily based on ethical concerns, but more because of pessimism about the economic future for coal mining in the light of climate and air pollution policies, cheap alternative fuels, and potentially a decline in demand in Asia.
The situation is arguably different for oil and gas. Eventually, climate change will mean we have to stop burning these fuels too. But this transition is likely to be gradual. If we stop using coal soon, then the carbon budget for '2 degrees' does allow for ongoing use of oil and gas up to the 2030s and beyond. This will allow time to gear up to replace transport fleets with electric or other alternative fuel vehicles, and to allow coal power to be substituted by renewables and, for a time at least, by lower carbon gas generation.
For some time to come oil and gas will have a vitally important role to play in the global economy. On that basis these companies require investment capital and should generate returns for investors. There is however a strong need for investors to pay very close attention to the risk of potentially 'stranded assets' and to engage with companies to ensure they manage these risks effectively.