For years, I have been drawn to the idea that it might be possible to maximise investment returns and maintain an acceptable level of risk and still invest in companies that share my environmental and social values.
From day one, I had been interested in finding a way for my company to have a positive impact on the world, beyond the work it does for our individual clients. Developing portfolios that support companies that operate sustainably was an attractive idea.
While I was seldom directly asked if I could match a portfolio to a client’s values, when I raised the subject, I was surprised by how many clients cared as much about values as returns. I always felt there would be increased demand for sustainable investments as we all became increasingly concerned about social and environmental issues.
The problem was: I was never comfortable with the underlying risk within the ‘ethically managed’ funds available at the time. The high degree of variation between the performance of ‘ethically managed’ funds and the market worried me. I just wasn’t prepared to sacrifice my clients’ ability to achieve their financial objectives in order to possibly meet their ethical values. The trade-off simply wasn’t worth it at the time.
The problem was: I was never comfortable with the underlying risk within the ‘ethically managed’ funds available at the time.
In fact, the label of ‘ethically managed’ fund allowed actively traded funds with limited stocks and unacceptable levels of portfolio risk to drift along. One of the ethical funds I researched was comprised of only 20 stocks.
I had trouble finding sustainable funds that met my own investment principles: high levels of diversification, academically proven and reliable methods for stock selection.
I didn’t just sit around waiting for sustainable funds to magically appear. I contacted those investment managers whose portfolio construction methods matched my philosophy in the hope they were planning to develop a sustainable solution.
There seemed to be plenty of interest, but they also seemed to be waiting for investor demand.
Now, with purpose-focused investors driving an increasing demand for sustainable funds, there are much better options.
Now, with purpose-focused investors driving an increasing demand for sustainable funds, there are much better options.
There are now Exchange Traded Funds (ETFs) that don’t simply omit companies with poor practices, but seek companies who are leaders in sustainable industries, such as renewable energy and recycling.
While this type of fund is too narrow in its focus to make up the core of your investment strategy, the one I describe below is much broader and has a significant sustainability impact.
A leading fund manager has developed a sustainable global equity fund with a portfolio of companies that produces 73.2% less green house gas emissions than those in the MSCI World ex Australia Index (and a 98.9% reduction in potential emissions from fossil fuel reserves). This gives us a lever to change the world; if we invest in these funds, in theory, companies will change their practices to attract more capital.
This fund filters out companies with poor practices in other environmental areas, such as land use, toxic spills, waste and water management. They apply social filters to omit or reduce investment in companies with exposure to practices such as factory farming, use of child labour and production of weapons.
Importantly, with some systematic screening, this fund manager has been able to produce meaningful sustainable impact, while retaining a portfolio with over 1,340 stocks spread across 22 developed countries around the world. This sustainable portfolio has only 200 less stocks than the index and very similar weightings across industry sectors.
Importantly, with some systematic screening, this fund manager has been able to produce meaningful sustainable impact, while retaining a portfolio with over 1,340 stocks spread across 22 developed countries around the world.
Fundamentally, the above portfolio should perform similarly to the general market. And it is – with investment returns slightly above the index for the 2 years since it started. So, I can help my clients make money, while helping to improve the world we live in.
And, there are more sustainable funds being released over the next few months, in various asset classes and, importantly, with investment processes grounded in academic research.
What does this mean for you?
You can now invest in a way that matches your own values, while still ensuring your own investment objectives are achieved.
You can now invest in a way that matches your own values, while still ensuring your own investment objectives are achieved.
It’s no longer necessary to risk sacrificing your own dreams in order to invest sustainably.
Most of us make conscious choices everyday by spending our money in a way that avoids or supports companies based on their social and environmental practices. Now we can make the same choice with how we invest our money. We no longer have to choose between profit and purpose.
