We were asked via Instagram to write an article on sustainable investing. Sustainability is becoming more and more of an issue, whether it's gardening in the city, organic food or fair trade. Sustainable investing is also becoming increasingly important. What does sustainability or ethics have to do with investing? Sustainable and ethical investing means investing in securities or investing in companies that are sustainable or ethical.
Sustainability and ethics - what is the link to investing?
The so-called ESG concept is crucial to responding to this question. "E" stands for "Environmental", which means investing in companies that support the protection of natural resources as well as the sustainable use of natural resources. "S" stands for "social", which in turn means that the company supports human rights, peace and good working conditions. "G" stands for "governance", which means that the company acts without corruption. In summary, it means taking out certain stocks from the portfolio or fund, namely those that trade in alcohol, tobacco, gambling, weapons, nuclear power, pornography or genetic engineering. In addition to the ESG, there is also the opportunity to invest in companies that have reduced their CO2 emissions or have less CO2 emissions compared to similar companies.
How can you invest sustainably?
Several options exist:
Buy stocks from companies that are sustainable. The advantage of this variant is that you can invest directly in sustainable investing if the company is listed on the stock exchange. The downside is that requires a lot of research and also an observation from the company, if it continues to act according to the same standards.
Buy ETFs or funds that choose companies that are rated as good on the basis of the ESG or the CO2 (also known as carbon footprint) and therefore have no companies in the fund that are involved in alcohol, tobacco, gambling, weapons, nuclear power, pornography or Genetic engineering or have many CO2 emissions. The advantage of funds and ETFs is that you don’t have to engage in a complex selection process (the companies that are part of the fund or ETF are predefined), such that you invest in a collection of sustainable companies. As the demand for sustainable ETFs increases, there are more and more providers. The disadvantage is that, in part, diversification decreases, since conventional companies that do not satisfy the sustainability criteria are excluded. Note that there are ETFs and Index funds that are based on the MSCI World and exclude certain companies. These ETFs are just labeled "ESG", "SRI", "sustainability", "low carbon", "ex tabacco" or similar. You can search for sustainable ETFs by using justetf (link: https://www.justetf.com/ch/how-to/invest-in-social-responsibility-europe.html). A good alternative for you: If you want to invest in sustainable ETFs, but you do not want to choose them yourself, create a sustainable portfolio with the help of some Robo Advisors (such as Visual Vest).
Direct investment in sustainable or ethical projects via crowdfunding platforms (e.g. Bettervest). This allows you to invest in sustainable energy projects. The advantage is that you directly invest in the project: your money will be used for the project. For shares or even funds and ETFs, the invested capital does not directly benefit the company, as there is a transaction between a buyer and seller of the respective shares or funds and ETFs. A direct investment is different, here you actively support a project. The downside is: the project may not be completed, the company that manages the project becomes insolvent or the project just does not yield anything.
What are the challenges related to sustainable investing?
On the one hand, the question of measurability, when is the company really sustainable or ethical? For example, an armaments manufacturer is not ethical by definition, but what about its supplier? This shows the lack of clarity in certain definitions. Furthermore, you are just limited by the delimitation and have compared to the rest of the investment universe less choice, which sometimes leads to insufficient diversification.
How can I manage or avoid these problems?
On the one hand, you can take a little more time, and review whether the selection of companies corresponds to your requirements. An example: You identify an ETF that invests according to the ESG principle, read the factsheet and determine if the companies included in the ETF are ok for you. In terms of diversification, ideally invest in larger indices, such as the MSCI World - this ensures that the ETF is more diversified, yet sustainable and ethical.
Are there any other disadvantages or advantages?
You will hardly encounter any other disadvantages, and often sustainable funds and ETFs have similar returns to their "normal" peer funds or ETFs. Their performance is often even higher, but this is not guaranteed. The advantage of ETFs in comparison with active funds is that the costs are lower. Purchasing an ETF costs e.g. 0.2-0.5% p.a. on the invested assets vs. 2.5-5% with active funds.
The advantage is that making money and doing good is possible at the same time.
Written by Clara Creitz
Finelles Founder. Coach and Consultant (UBS, Towers Watson).