Three Sustainable Investing Strategies That Work

Three Sustainable Investing Strategies That Work

Raph Antoine
Share:
Raph Antoine
Share:

THE DEFINITIVE GUIDE TO SUSTAINABLE INVESTING - PART 7

This article is part of Bankeronwheels.com exclusive guide to Sustainable Investing. 

Despite the expected Sustainable Investing underperformance, some investors may want to express their Sustainability views in their portfolios.  How can you invest and impact the planet?  Let’s look at how an investor can impact through three approaches, depending on your portfolio complexity.

KEY TAKEAWAYS

  • There are at least three proven sustainable investing strategies. 
  • To keep it simple, you may hold a non-screened portfolio and, given the expected outperformance vs Sustainable Funds, use the incremental profits for philanthropy. 
  • If you want to avoid investing in certain types of industries, e.g. Tobacco companies, you may select cost-efficient and well-diversified SRI Funds. 
  • The most active sustainable strategy is Impact Investing. It is easier to implement for Institutional Investors through Private Equity or Private Debt markets.
  • Individual investors can choose Thematic ETFs to address specific social or environmental issues.

Here is the full analysis

From Bankeronwheels.com
Get Wise The Most Relevant Independent Weekly Insights For Individual Investors In Europe & the UK

Liked the quality of our guides? There is more. Every week we release new guides, tools and compile the best insights from all corners of the web related to investing, early retirement & lifestyle along with exclusive articles, and way more. 

Probably the best newsletter for Individual Investors in Europe and the UK. Try it. Feel free to unsubscribe at any time.

HOW CAN I HAVE AN IMPACT?

What are the most neutral positions?

Let’s take an individual Investor like Kumiko. She would like to avoid investing in Tobacco companies and ideally impact the planet positively.  What are her options?

  • Average market returns – are represented by the horizontal axis, e.g. Vanguard FTSE All-World ETF.
  • Neutral Planet Impact – are represented by the vertical axis. If Kumiko’s position is on this axis, she won’t be invested in Tobacco but is not doing anything proactive for the planet either.

Your Personal Returns vs Impact Matrix

What Are the Four Quadrants?

  • Low Planet Impact & High Returns – If Kumiko were here, she wouldn’t sleep well because this may represent, e.g. a diversified Sin Stock portfolio. 
  • Low Planet Impact & Low Returns – This quadrant is the worst. The Extreme case is a dart-throwing monkey, aka a sin stock-picker (negative impact and low returns).
  • High Planet Impact & High Returns – Kumiko thought that Sustainable Investors were all in this quadrant before this guide showed her the truth.
  • High Planet Impact & Low Returns – Kumiko now understands that impacting the planet positively means trade-offs and most investors end up somewhere in this quadrant. The Extreme case of this is charity (no returns). 

Your Personal Returns vs Impact Matrix

So what can she realistically achieve?  Let’s look at three strategies.

From Bankeronwheels.com
Today's prices are not coming back!

In 2024, we will be increasing coaching service prices.

Sometimes individual sessions are very helpful to get past your investing concerns. Our readers asked us to create a coaching service. And we’re proud to say, that some of them even ditched their Financial Advisors, after experiencing the value we provide. Some of the topics we recently discussed include:

  • How much money do I need to retire with higher inflation?
  • Medium Term or Long Term Bonds with today’s yields?
  • Risks and Returns of Money Market Funds
  • Asset Allocation for 10-15 year goals with narrowing returns between Equities &Bonds
  • Merits of UK Trusts that invest in unlisted companies
  • Traps with choosing brokers – PFOF & Risks of moving to another country
  • International Situations – Choosing ETFs when leaving Europe
Learn About Coaching
From Bankeronwheels.com
Today's prices are not coming back!

In 2024, we Will be increasing coaching service prices.

Sometimes individual sessions are very helpful to get past your investing concerns. Our readers asked us to create a coaching service. And we’re proud to say, that some of them even ditched their Financial Advisors, after experiencing the value we provide. Some of the topics we recently discussed include:

  • How much money do I need to retire with higher inflation? 
  • Medium Term or Long Term Bonds with today’s yields?
  • Risks and Returns of Money Market Funds  
  • Asset Allocation for 10-15 year goals with narrowing returns between Equities & Bonds
  • Merits of UK Trusts that invest in unlisted companies
  • Traps with choosing brokers – PFOF & Risks of moving to another country
  • International Situations – Choosing ETFs when leaving Europe 
Learn More About Our Coaching Service

THREE STRATEGIES

STRATEGY 1: Philanthropy (GOLDEN RETRIEVER STYLE)

How to implement?

A Golden Retriever-style solution involves two steps:

  • Starting point: Kumiko will still hold a typical passive index portfolio (average market returns, some negative impact as also holding Tobacco companies).
  • Actions: She will donate the difference in fees or outperformance. She will support charitable projects e.g. support local community or financing research to fight a disease.

This strategy moves her position from market returns & some negative planet impact to slightly below-average returns (as funding a charity) & positive planet impact. 

Overall Financial & Planet Impact Profile of this strategy

Kumiko’s core portfolio remains passive. The downside of this solution is that she remains invested in some sin stocks. 

If Kumiko were in the US, she may use certain ETFs, e.g.  Engine No.1 S&P 500 ETF, to also align how the Fund votes with her values. With that respect, blockchain and direct voting can become even more interesting in the future.

Pro & Cons

  • Simple and cost-efficient Portfolio
  • Easy to implement
  • Philanthropy Reflects your values
  • You choose how much to give away
  • ETFs may have investments misaligned with your values

STRATEGY 2: SRI EXCLUSIONS (CYCLIST STYLE)

How to implement?

A Cyclist-style solution involves:

  • Starting point:  Before taking any actions, the investor has a typical passive index portfolio.
  • Actions: Replacing typical ETFs with SRI ETFs that exclude harmful companies (e.g. Tobacco). This involves marginal underperformance, but removes negative impact (net neutral – Kumiko won’t be financing the Tobacco Industry).
  • Additional Step: Can add philanthropy projects to have a net positive impact.

The outcomes range from neutral impact and slightly below market returns (as SRI tends to underperform marginally) to positive impact when considering additional philanthropy.  

Overall Financial & Planet Impact Profile of this strategy

This strategy requires reading our guide to keep ESG rating-related screening on portfolio companies low. 

Pro & Cons

  • Relatively Simple and efficient Portfolio
  • Neutral Portfolio - Does no harm
  • One stop solution
  • May add Philanthropy For Positive Impact
  • Involves more research
  • May be a bit more expensive
  • May have marginal impact on returns

Strategy 3: Impact Investing (BANKER STYLE)

How to implement?

A Banker-style solution involves:

Actions: Selecting active investments (Equity or Debt) like specialized healthcare or renewable energy projects that can transform the planet and society.

On average, these single investments will tend to underperform given idiosyncratic risks, but the range of outcomes is large. Impact investments must be considered in the context of the overall portfolio.

Overall Financial & Planet Impact Profile of this strategy

While the base case is that most of the start-ups underperform, there could be some substantial gains if you bet on the right technology. A Sustainable Venture Capital Fund is a good way of diversifying risks. 

Pro & Cons

  • Potential for truly transformative planet impact
  • Reflects your beliefs
  • Low Probability of high pay-off Investments
  • Most Strategies are only Available to Institutional Investors
  • Substantial risk of underperformance (Start-ups)
  • Requires more extensive research (Active Investing)

IMPACT OF PASSIVE STRATEGIES

Before selecting your strategy, spend some time understanding the impact of passive strategies.

The Good - IT PenalizeS Sin Stocks

SRI Investing has some positive effects :

  • More debate and voting against harmful projects – The most important one, in my eyes, is that there is more debate around the topic.  Keeping sin companies in a portfolio, if one can cast votes like mentioned in the case of Strategy #1, can put pressure on management.
  • Increasing financing costs of new projects for Sin companies – SRI investing (Strategy #2) puts pressure on management to avoid harmful project as they become more costly.

The Bad - Can't Stop THEm

Sin Companies may still go private, finding capital in Private Equity markets with less public scrutiny. That said, even if sin companies do go private, it comes at a higher capital cost for them.

From Bankeronwheels.com
Get Wise The Most Relevant Independent Weekly Insights For Individual Investors In Europe & the UK

Liked the quality of our guides? There is more. Every week we release new guides, tools and compile the best insights from all corners of the web related to investing, early retirement & lifestyle along with exclusive articles, and way more. 

Probably the best newsletter for Individual Investors in Europe and the UK. Try it. Feel free to unsubscribe at any time.

IMPACT OF ACTIVE STRATEGIES

What is Impact Investing?

Impact Investors invest in businesses that solve a particular environmental or social issue. For example, the impact investor might contribute capital to start a farm, rather than donating food.

The food from the farm would feed the local community. Any profits would be reinvested to expand the business, thus feeding more people, creating more jobs, and increasing the community’s resiliency. In some cases, for-profit investment models are more sustainable and can be more impactful than philanthropic ones.

What are the Types of Impact Investing?

Here are some ways of impact investing:

  • Environment – Agriculture, Water, Energy or Forestry
  • Minority and Women – Funds Firms run by minorities or women
  • Poverty – funds firms in impoverished areas
  • Social Infrastructure – e.g. microfinance, healthcare schools and housing
  • SME Funding – in undercapitalized markets
  • Focused Regional  Development – job creation and development in a specific region

How Can I Find Investment Opportunities?

Unfortunately, Impact strategies can be difficult to invest in, as most are available only to institutions through Private Equity and Private Debt markets. Some options for individual investors include:

  • Stocks – Thematic ETFs, including those focusing on 17 United Nations Sustainable Development Goals. But target specific niches (e.g. renewable energies or specialized healthcare) to complement your diversified portfolio, not SDG Index Funds that often include ESG Ratings. Be very critical about those.
  • Bonds – Some ETFs may have a tilt towards Green Bonds that target, e.g. renewable energy projects. For Fixed Income, the EU Taxonomy is becoming the reference framework.

What Returns do Impact Investments Generate?

Similar to expected ESG and SRI underperformance, Impact Investing involves a cost.

A 2015 Impact Investing research paper covering 24,000 investments in over 4,500 Venture Capital and Growth Equity Funds concluded the following:

  • After the full investment period, impact investments ended up generating a 4.7% lower return than traditional funds. 
  • For context, the starting point here are traditional Venture Capital Investments that tend to generate, on average, total returns over 20% but are characterized by very high dispersion as a significant part of investments tend to fail.
From Bankeronwheels.com
From Bankeronwheels.com

Passionate About Investing? Join Our Team

We’re a group of passionate millennials revolutionising the realm of honest and transparent global investing. We’re currently looking for an intern to join us, on a remote and part-time basis. Here is what we offer:

  • Be part of a small, passionate team that values intellectual honesty, financial freedom and adventure.
  • Contribute to a unique finance website with a global reach.
  • We will teach you how things are done on Wall Street, and how portfolio managers think about markets.
  • Embrace a flexible contract position that allows you to work remotely and on your schedule.
Learn more, send us a message and join the team.

CONCLUSION

Fortunately, there are still some ways to have a positive impact, but as we’ve seen, it is far from what investors typically believe. In the last article of the series, we will see how the Financial Industry is trying to clean up the mess it created over the past decade and whether there is any hope for better sustainable scores, and related ETFs, in the future.

PART 6 - SUSTAINABLE INVESTING VS. SIN STOCKS PERFORMANCE – THE SHOWDOWN
PART 7 - THREE SUSTAINABLE INVESTING STRATEGIES THAT ACTUALLY WORK
Thank you for reading.
Good Luck and Keep’em* Rolling!

(* Wheels & Dividends)

LATEST ARTICLES

HELP US

🙋 Wondering why finding honest Investing Guidance is so difficult? That’s because running an independent website like ours is very hard work. If You Found Value In Our Content And Wish To Support Our Mission To Help Others, Consider:

DISCLAIMER

All information found here, including any ideas, opinions, views, predictions expressed or implied herein, are for informational, entertainment or educational purposes only and do not constitute financial advice. Consider the appropriateness of the information having regard to your objectives, financial situation and needs, and seek professional advice where appropriate. Read our full terms and conditions.