An Apolitical, Data-driven Guide To Sustainable Investing.
PART 1 - INTRODUCTION
This guide to sustainable investing is Bankeronwheels.com’s exclusive deep dive into Sustainable Investing.
Sustainable Investing is trendy. But let’s face it, hardly anyone understands the topic.
The vast majority of institutional investors and even some academics don’t understand the nuances either.
Unsurprisingly, you probably haven’t found any comprehensive guide on this topic that didn’t create even greater confusion.
So here is where we step in.
Our readers kept asking, so we went on a few-month journey to understand what was happening behind the scenes.
We also bust two myths around ESG. What may surprise you is that:
- ESG Ratings in most Equity ETFs are not designed to protect the planet
- On a Risk-adjusted basis, ESG ETFs will, in the long run, inevitably underperform
How to use this guide
Why is our guide Different?
To our knowledge, this is a unique guide on the web that addresses Sustainable Investing taking into account the financial nature of ESG Ratings, that today is absent from the ESG debate.
Understanding ESG Ratings’ flaws significantly impacts investment decisions.
- This guide takes the political aspect of ESG out of the analysis.
- It focuses only on the investment and planet impact aspects.
- We went through hundreds of academic papers to remove the noise and only provide you with the signals.
Target Audience
This guide can benefit Bankeronwheels.com’s three core audiences.
We highlight what sections you may find particularly helpful, depending on your profile:
- The Golden Retriever, aka Wise Passive Investor – A hands-off Investor, typically using a single ETF, may benefit from understanding what it means to have a World ETF with ESG characteristics and whether it’s worth it. Perhaps our insights about the ways to make the planet a better place can help, too.
- The Cyclist, aka Semi-Passive DIY Investor – A DIY Investor willing to customise her portfolio can probably benefit the most from our SRI & ESG Investing Sections. Understanding how to incorporate ethical value screens while avoiding ESG traps and what’s really inside an ESG ETF may provide a great starting point. We also cover the price for excluding sin stocks from a portfolio.
- The Banker, aka Evidence-Based Investor – For Advanced Investors, the future of Sustainable Ratings can also provide an introduction to materiality maps, the landscape of financial, impact and double-materiality scores or taxonomy resources to leverage for all asset classes, including private debt.
The Golden Retriever, aka Wise Passive Investor – A hands-off Investor, typically using a single ETF, may benefit from understanding what it means to have a World ETF with ESG characteristics and whether it’s worth it. Our insights about the ways to make the planet a better place can help, too.
The Cyclist, aka Semi-Passive DIY Investor – A DIY Investor willing to customize her portfolio can probably benefit the most from our SRI Investing Sections. Understanding how to incorporate ethical value screens while avoiding ESG traps and what’s really inside popular Sustainable ETFs may provide a great starting point. We also cover the price for excluding sin stocks from a portfolio.
The Banker, aka Evidence-Based Investor – For Advanced Investors, the future of Sustainable Ratings can also provide an introduction to materiality maps, the landscape of financial, impact and double-materiality scores or taxonomy resources to leverage for all asset classes, including private debt.
FROM Bankeronwheels.com
Beat Most Investors with FREE ETF Master Guides
- Get Rich, Slowly but Surely – We designed Equity ETF selection frameworks and then picked the best funds in each category, so you don’t have to.
- Become a Passive Investing Ninja – Have no mercy for Financial Institutions. Cut TERs, Taxes, FX Fees and Invisible Costs.
- Licence to Yield – Which Bond ETFs for your goals? How do price change? Should you hedge currencies?
- Don’t get fooled by Wall Street – ESG Ratings are not designed to protect the planet. Adjusted for risk, ESG ETFs will also inevitably underperform. So how can you invest Sustainably?
From Bankeronwheels.com
Beat Most Investors with FREE ETF Master Guides
- Get Rich, Slowly but Surely – We designed Equity ETF selection frameworks and then picked the best funds in each category, so you don’t have to.
- Become a Passive Investing Ninja – Have no mercy for Financial Institutions. Cut TERs, Taxes, FX Fees and Invisible Costs.
- Licence to Yield – Which Bond ETFs for your goals? How do prices change? Should you hedge currencies?
- Don’t get fooled by Wall Street – ESG Ratings are not designed to protect the planet. Adjusted for risk, ESG ETFs will also inevitably underperform. So how can you invest Sustainably?
What's in thIS Guide?
Table of Content (Click on the Title Below)
You are reading this introduction.
This article is golden-retriever (beginner) friendly.
We start the guide with the most shocking truth. ESG Ratings in most Equity ETFs are almost the exact opposite of what you think they are.
This article is golden-retriever (beginner) friendly. It is one of the 3 highlights of the series.
When investors mention Sustainable Investing, confusion and relativism reign. That’s because hardly anyone uses a consistent framework of thinking about this topic. We created our own, inspired by the most authoritative academic research.
Here is how to apply our B.S. Meter to ETF Selection. Pure SRI Funds are the most intuitive choice for an Investor willing to exclude investments based on moral grounds. Filtering out ESG Ratings from your portfolio can avoid giving undue influence to index providers.
We look at what investments you will be exposed to when investing in a Sustainable ETF. Funds based on ESG Ratings are composed of companies you wouldn’t suspect. SRI is more intuitive. But when buying an ETF, you need to pay special attention because ETF providers want you to be confused about the funds’ names, too.
Over the past few years, Sustainable investments have, sometimes significantly, outperformed. But this outperformance won’t last. On a risk-adjusted basis, ESG is guaranteed to underperform due to taste for sustainability that has inflated valuations and reduced expected returns.
This article is one of the 3 highlights of the series.
Despite the expected underperformance, some investors may still want to express their Sustainability views in their portfolios. How can you have an impact on the planet? We look at three ways to invest sustainably.
This article is golden-retriever-friendly. It is one of the 3 highlights of the series.
8. Light at the end of the Tunnel? The Future of Sustainable Ratings [Coming SOON]
For Private Investors, MSCI or Morningstar’s Sustainalytics Ratings matter the most. But Professional Investors have other tools at their disposal. We look at what’s available and what the future may bring.
This article is only for advanced investors.
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We Help You Avoid Costly Investing Mistakes.
Most coaching participants come from the EU or the UK.
But we have consistent demand from all around the world. We provided coaching sessions to individual investors stretching from Argentina to New Zealand, or Guatemala to Japan.
A significant part of our clients are professionals in the Tech sector, Lawyers or Doctors that want to avoid costly mistakes when investing.
We also coach 25-30 year old young professionals that want to maximise assets for early retirement. We also have a large group of entrepreneurs that e.g. receive large lump sums after selling their company and want to invest it in financial markets. We speak to Crypto millionaires that want to reduce their risks.
Finally, some of our coaching clients are in their 40s or 50s and want to set up customised, income-producing portfolios or create Bond ladders for their retirement.
Most of the coached investors are in the 25–60 year old range.
Yes, some of our coaching clients have shared reviews on Google.
Some considerations are included below. For more details, consult your regulator’s website.
A financial coach is:
- Trained but not regulated
- Skilled at reviewing your overall financial situation and goals
- Able to help you develop a financial plan to achieve those goals
- Happy to discuss the pros and cons of various financial products but can’t recommend a specific one for you
- Comfortable working with anyone, whatever their situation
- Going to charge for their time
A financial adviser is:
- Regulated and authorised by the regulator to recommend specific products to clients or is independent and able to offer ‘whole of market’ solutions
- Often, going to charge an annual management fee, typically 1-2% of their client’s assets with initial fees on top.
We are proud to say that our coaching service has empowered a number of clients to reconsider their financial advisers’ offerings. From our clients’ feedback, in a number of cases, clients were overcharged, and offered unsuitable products, often due to conflicts of interest. However, this is not a rule. The best choice between a financial coach and adviser depends on an individual’s unique circumstances, including their financial literacy, time availability, comfort with managing their finances, and complexity of their financial situation.
Beginners often ask us:
- How do I reach my goals – What investments do I need to take into consideration for e.g. Taking a Sabbatical, buying a House or saving for Early Retirement?
- When should I invest – I fear that investing a lump sum in this market may have a negative impact on my returns. How can timing of buying ETFs affect my performance?
- How do I Invest – What are the pro and cons of investing with a Bank? Why should I diversify brokers?
- What should I consider investing in – What are some risks of portfolio diversifiers like Gold or Crypto?
- Avoiding Extra Costs – I have shortlisted a few ETFs, can you help me to compare them before I decide which one to buy?
- Benchmarking – What are educated investors doing in a similar situation to mine?
We are flexible. For example, answering some of these questions could help you avoid very costly mistakes:
- Challenging My Portfolio – Here is my portfolio – what am I missing? What could derail my strategy?
- Accelerating My Understanding – What are inflation linked Bonds? How are they different to Nominal Bond ETFs? What makes them outperform? Why do some investors add small cap value stocks to their portfolios? I want to exclude Tobacco companies from my portfolio – what are my options? What is Factor Investing?
- Simplifying Portfolio Maintenance – How can I diversify my investments? What is historically highly correlated so that I can consider removing it to keep my portfolio simple? How do I perform rebalancing? Does frequency matter?
- Reducing Risks – I want to understand the risks of investments – what are the different measures and how does it impact me? What are the risks of different types of brokerage accounts?
- Understanding the Impact of Recent Events – How do recent events impact my portfolio? What can I do to protect my savings from shocks?
- Investing Goals – I am investing for a specific goal e.g. Early Retirement, what is the research saying about e.g. the amount I need to have accumulated, how much can I withdraw annually? What are some calculators available and how to run them? What are the assumptions/shortcomings of these models?
- Comparing Equivalent ETFs – I have certain constraints in my tax-wrapper and can only select certain funds (e.g. I live in France and limited to specific synthetic ETFs). Which ETF characteristics should I pay attention to?
From Bankeronwheels.com
Get personal help To Set up your portfolio
We Help You Avoid Costly Investing Mistakes.
Sometimes individual sessions are very helpful to get past your investing concerns. Our readers asked us to create coaching sessions. And we’re proud to say, that some of them even ditched their Financial Advisors, after experiencing the value we provide.
Most coaching participants come from the EU or the UK.
But we have consistent demand from all around the world. We provided coaching sessions to individual investors stretching from Argentina to New Zealand, or Guatemala to Japan.
A significant part of our clients are professionals in the Tech sector, Lawyers or Doctors that want to avoid costly mistakes when investing.
We also coach 25-30 year old young professionals that want to maximise assets for early retirement. We also have a large group of entrepreneurs that e.g. receive large lump sums after selling their company and want to invest it in financial markets. We speak to Crypto millionaires that want to reduce their risks.
Finally, some of our coaching clients are in their 40s or 50s and want to set up customised, income-producing portfolios or create Bond ladders for their retirement.
Most of the coached investors are in the 25–60 year old range.
Yes, some of our coaching clients have shared reviews on Google.
Some considerations are included below. For more details, consult your regulator’s website.
A financial coach is:
- Trained but not regulated
- Skilled at reviewing your overall financial situation and goals
- Able to help you develop a financial plan to achieve those goals
- Happy to discuss the pros and cons of various financial products but can’t recommend a specific one for you
- Comfortable working with anyone, whatever their situation
- Going to charge for their time
A financial adviser is:
- Regulated and authorised by the regulator to recommend specific products to clients or is independent and able to offer ‘whole of market’ solutions
- Often, going to charge an annual management fee, typically 1-2% of their client’s assets with initial fees on top.
We are proud to say that our coaching service has empowered a number of clients to reconsider their financial advisers’ offerings. From our clients’ feedback, in a number of cases, clients were overcharged, and offered unsuitable products, often due to conflicts of interest. However, this is not a rule. The best choice between a financial coach and adviser depends on an individual’s unique circumstances, including their financial literacy, time availability, comfort with managing their finances, and complexity of their financial situation.
Beginners often ask us:
- How do I reach my goals – What investments do I need to take into consideration for e.g. Taking a Sabbatical, buying a House or saving for Early Retirement?
- When should I invest – I fear that investing a lump sum in this market may have a negative impact on my returns. How can timing of buying ETFs affect my performance?
- How do I Invest – What are the pro and cons of investing with a Bank? Why should I diversify brokers?
- What should I consider investing in – What are some risks of portfolio diversifiers like Gold or Crypto?
- Avoiding Extra Costs – I have shortlisted a few ETFs, can you help me to compare them before I decide which one to buy?
- Benchmarking – What are educated investors doing in a similar situation to mine?
We are flexible. For example, answering some of these questions could help you avoid very costly mistakes:
- Challenging My Portfolio – Here is my portfolio – what am I missing? What could derail my strategy?
- Accelerating My Understanding – What are inflation linked Bonds? How are they different to Nominal Bond ETFs? What makes them outperform? Why do some investors add small cap value stocks to their portfolios? I want to exclude Tobacco companies from my portfolio – what are my options? What is Factor Investing?
- Simplifying Portfolio Maintenance – How can I diversify my investments? What is historically highly correlated so that I can consider removing it to keep my portfolio simple? How do I perform rebalancing? Does frequency matter?
- Reducing Risks – I want to understand the risks of investments – what are the different measures and how does it impact me? What are the risks of different types of brokerage accounts?
- Understanding the Impact of Recent Events – How do recent events impact my portfolio? What can I do to protect my savings from shocks?
- Investing Goals – I am investing for a specific goal e.g. Early Retirement, what is the research saying about e.g. the amount I need to have accumulated, how much can I withdraw annually? What are some calculators available and how to run them? What are the assumptions/shortcomings of these models?
- Comparing Equivalent ETFs – I have certain constraints in my tax-wrapper and can only select certain funds (e.g. I live in France and limited to specific synthetic ETFs). Which ETF characteristics should I pay attention to?
Sources and limitations
Academica and Our Professional Experience
We relied on two sources:
- Our Professional experience – is related to how Institutional Investors approach Sustainable Investing. In particular, our investigation into rating materialities.
- Academic research – helped shed light on the performance of ESG Funds. We have reviewed dozens of academic papers. Part 6 of our guide uses some references from Larry Swedroe and Samuel Adams that compiled academic papers in their book – Your Essential Guide to Sustainable Investing: How to live your values and achieve your financial goals with ESG, SRI, and Impact Investing.
Why BlackRock and Vanguard
For our benchmark and ETF selection articles, we have prioritised the largest managers:
- BlackRock – given (i) its declared strategic focus on Sustainability and (ii) the fact that it manages 6 out of 10 of the largest Sustainable ETFs.
- Vanguard – given that it’s a popular choice amongst individual investors.
Vanguard
- What is Vanguard ESG Global All Cap UCITS ETF?
- What is Vanguard ESG International Stock ETF? [Coming Shortly]
- What is Vanguard ESG US Stock ETF? [Coming Shortly]
iShares
- What is iShares MSCI World ESG Enhanced UCITS ETF?
- What is iShares MSCI USA SRI UCITS ETF?
- What is iShares MSCI USA ESG Enhanced UCITS ETF? [Coming Shortly]
- What is iShares MSCI Europe SRI UCITS ETF? [Coming Shortly]
- What is iShares MSCI USA ESG Screened UCITS ETF? [Coming Shortly]
- What is iShares MSCI EM SRI UCITS ETF? [Coming Shortly]
- What is iShares MSCI EM IMI ESG Screened UCITS ETF? [Coming Shortly]
- What is iShares ESG MSCI USA Leaders ETF? [Coming Shortly]
- iShares ESG Aware MSCI USA ETF [Coming Shortly]
- What is iShares Global Clean Energy ETF? [Coming Shortly]
- What is iShares ESG Advanced MSCI USA ETF? [Coming Shortly]
- What is iShares ESG Advanced MSCI EAFE ETF? [Coming Shortly]
- What is iShares ESG Advanced MSCI EM ETF? [Coming Shortly]
Other Providers
- What is Xtrackers MSCI USA ESG UCITS ETF? [Coming Shortly]
- What is AMUNDI S&P 500 ESG UCITS ETF? [Coming Shortly]
- What is Invesco Water Resources ETF? [Coming Shortly]
But remember, our framework of thinking and conclusions can be applied to any sustainable fund.
Good Luck and Keep’em* Rolling!
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