In a nutshell, sustainable investing is an investment style that has returned in the spotlight, especially in certain quality criteria of companies, Exchange Traded Funds (ETF), or the managers investing in.
As an easy definition sustainable investing is an investment style that has not only return and risk in his spotlight but also certain quality criteria of the companies, ETF or managers you invest in.
You may have heard of some terms associated with Sustainable Investment, namely: SRI (Social responsible Investment), ESG (Ecological, Social, Governmental), Ethical or Impact investing. Each of these has its own specific area of focus. Regardless, the key is to invest in a company that treats the planet and the individuals involved in the company respectfully in a holistic manner.
Through Sustainable Investment, these issues may be addressed:
- Ecological: low CO2-emissions, use of eco-friendly company resources, sustainability of products, easy repair and recycling practices, etc.
- Social: child-labor free zone, recognition of work unions, respect toward inclusion and diversity (gender, religion, race, women equality, etc.)
- Governmental: observance of policy and regulations, avoidance from investigations, punishment, or fines from the authorities, etc.
While the idea is plausible, the challenge is how each person may have a different interpretation of what “ethical” or “ecological” means. Consider this scenario. The idea of selling weapons may not be positive, but would you feel a sense of security if the local police would not have any guns, bullet-proof vests, or any other weapons? Further, atomic energy is generally considered to be a harmful and dangerous way of producing energy. However, it can also help reduce the CO2 emission and possibly help in mitigating the global warming problem.
The truth is there is no definite right or wrong answer in the context of sustainable investment. Each individual may have his or her opinion leading to more grey areas that need to be discussed.
The challenge is that each person has a different meaning what ethical or ecological is. Here some examples. To sell weapons is a bad thing. But would you feel more save in your town, when the local police would not have any guns or bullet proved wests? Atomic energy is a bad and dangerous way to produce energy. But it would save the problem of global warming and reduce the CO2 emission. If you talk about sustainable investing there is no right or wrong. There a lot of grey zones and each investor has its own opinion.
The role of the United Nations
To boost the sustainable investment process globally, it is important to have a set of common standards for countries and regions. Such is advocated by the United Nations (UN), which is a key player in this field. The UN has provided a comprehensive framework through the PRI (Principles of Responsible Investing) where they have enumerated the United Nations Sustainable Development Goals (UN-SDG).
As a result, all companies in the financial industry who agreed and signed the UN-SDG document commit themselves
- to understand the investment implications of environmental, social and governance (ESG) factors; and
- to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions.
Currently, 4,201 companies in the financial industry worldwide have signed these principles:
Such makes the UN PRI as the strongest promoter of sustainable finance worldwide.
Opportunities as an Investor
As an investor you have the choice of three different investment styles:
- Investment managers that follow no sustainable restrictions (still standard by most banks)
- Investment with managers signed the UN PRI
- Investments in special labeled sustainable investment products that follow more strict investment guidelines as defined in the UN PRI
Some critics say that the goals set by UN PRI are too general and may not result in any evident changes. For instance, the fact that the CEO of a big bank like UBS AG signs that document does not mean that the bank only offers sustainable products.
This exactly is the main issue with the UN PRI goals as they can be vague and may be open to various interpretations. . It is currently discussed if the UN could also refuse or kick members out that obviously do not follow the guidelines.
In Marmot Finance, our focus is on the second and third goals, excluding the investment managers, which have not still included sustainability in their investment process.
The UN PRI are by purpose defined very open and vague. It is currently discussed if the UN could also refuse or kick members out that obviously does not follow the guidelines.
In Marmot finance we focus just on the second and third and exclude the investment managers that (unfortunately) still does not include sustainability in their investment process.
Products that follow strict sustainability rules
Those products you can easily recognize by their name. You always find expressions like SRI, ESG or Sustainable in their name. But what does that mean?
All these products exclude investments in the following industries:
- Drugs (including wine, beer and tobacco)
- Atomic Industry
- Stem cell research
Mostly investment or product managers exclude a company if the revenue is higher than 5% in one of the above mentioned industries.
Within the field of sustainable investing you have the choice of an absolute or relative sustainable approach. The second one is the majority with about 90% market share.
Absolute sustainable approach:
These managers exclude additional industries as oil explorers or car makers (regardless if it is BMW or Tesla). The investment universe shrinks substantially and with that the risk compared to the benchmark roses strongly. That is then also the reason most investors don’t follow that approach.
Relative sustainable approach:
Within that approach the investors is choosing the most sustainable company in each sector or country. So as an example they would buy Tesla and not BMW.
The reasoning behind that approach is that it is unrealistic to think that in some day in the near future there will be no cars on this world anymore. But the success of Tesla forced traditional car makers more and more to focus on electric cars. Actually the biggest impact Tesla had on the climate was not with its product range, it was to establish a new trend and force other car producers to also add electric cars to their product range.
Good conscience or sin – who wins the game?
With investing in sustainability you can sleep well and always know that you do not co-finance the injustice of this world and take profit from the exploitation of others.
But how does it look from the return side? Does a sustainable investor earns less? This is a wide spread prejudice. But that is totally wrong. The opposite of sustainable investing would be sin investing. In the US you have a mutual fund that is doing exactly that, the US Mutual Vice Global Fund. The fund exclusively invests in the weapons, casino, tobacco and beverage industry.
In the chart you see the performance over 10 years of sustainability (MSCI World Global ESG Leaders) compared with the US Mutual Vice Fund (represents sin) and the MSCI All Countries World (representing the whole market).
From 2001 up to 2018 sin wins the game. But then the world started to change. Sin lost ground and strongly underperformed the overall market. Whereas sustainable companies could slightly outperform the market over the last 10 years.
So, be the winner and invest sustainable.