The Challenges of Sustainable Investing
Socially Responsible Investing (SRI), Environmental, Social and Governance (ESG) Criteria, (Social) Impact Investing, Green/Eco investing, Sustainable Investing (SI), Ethical Investing are all different ways of referring to sustainable ways of investing.
Personally, I have been on quite a journey when it comes to this subject. I have been wanting to invest some small amounts and am keen on putting my money where my mouth is. So I went out looking for ways how and where I could smartly and responsibly invest my money in line with my values.
I can assure you, it was not smooth sailing by any means! Therefore I want to share some of the things I found out along the way.
The first place I went was the stock exchange to figure out if there are some sustainable funds out there that would meet my needs.
As an inexperienced investor, I am not ready nor willing to really “play” the markets simply because I don’t have the time, nor the knowledge to do so. And one of the lessons I learned from my dad was that whatever you’re investing in stock markets, you need to be willing to lose and I am not ready or willing to take that risk.
So I was pleasantly surprised to find a lot of funds that are supposedly sustainable, or that is at least how they are referred to buy the institutions selling them.
Let me share some examples with you:
1. Parnassus Endeavor Fund: (best performing sustainable mutual fund with sustainable mandate according to Barron’s)
4. NN (L) Patrimonial Balanced European Sustainable (an ING fund)
When I dove in a bit deeper I discovered that the actual companies that these funds are comprised of, don’t really fit my idea of sustainable businesses. I don't know about you but Mattel (you know, the Barbie company:-)), Proctor&Gamble, PepsiCo, Pfizer or Deutsche Telekom aren't really my idea of sustainable companies.
Of course, as an investor you want to get some return on your money, however, my main goal was to do that while making the “right” choices for me.
It wasn’t all bad though. “Green” banks like Triodos bank (originated in the Netherlands) offers a very nice portfolio of sustainable funds however I was not able to open an account with them because I don’t live in the Netherlands L even though I have a Dutch passport! (so much for the freedom within the EU right!) companies within their funds are involved in waste water treatment, renewable energy, waste management etc.
It did get me thinking though; clearly the terminology the financial institutions are referring to as “sustainable” did not match mine.
My idea of sustainability is mainly directed towards environmental, social and ethical good practices working on things like CO2 emissions, water usage, renewable energy, waste management, fair wages for workers wherever in the world, implementing innovative business models like circularity, reclycling, giving back to the local community and beyond,…
In order to figure out where this disconnect came from I had to do some more digging.
ESG stands for Environmental, Social and Governance Criteria: it is a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria look at how a company performs as a steward of the natural environment. Social criteria examine how a company manages relationships with its employees, suppliers, customers and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights.
ESG is the basis for the sustainability assessments. Now that we know this, let’s see how it is used in practice.
During my research, I came across RobecoSAM and the Dow Jones Sustainability Index (DJSI) where I learned more about the concept of materiality.
“The Dow Jones Sustainability™ World Index comprises global sustainability leaders as identified by RobecoSAM. It represents the top 10% of the largest 2,500 companies in the S&P Global BMI based on long-term economic, environmental and social criteria.”
The DJSI is basically an investment solution for investors who measure their performance against a standard benchmark but wish to direct their portfolios towards sustainable companies while minimising risks.
There are different sets of indices primarily based on geographical regions and wanted to share 2 of them with you so you can see what companies made the top 10 cut.
Quite interesting right… that’s what I thought anyway. I wouldn't consider Amazon, Exxon mobil, Shell, Apple or Microsoft necessary sustainable in the traditional sense of the word.
RobecoSAM is the company that performs the analysis and decides which companies make the DJSI based on their sustainability assessment model.
And at the centre of this is a concept called “Materiality”. What does this mean? (this might become a bit technical but bear with me please)
The concept of materiality is central to sustainability reporting, and it factors into investors’ evaluations of the companies in which they invest.
One of the key aspects, in order to be able to make evaluations, is correct reporting of the different aspects within the business. The General Reporting Initiative standards (GRI) help companies with guidelines on how to do that.
Simply put, the GRI materiality process guides companies in how to identify their major sustainability impacts, and then enter into a dialogue with key stakeholders – which they define themselves. Each company designs its unique process as a reflection of its needs and in the context of its business model and sustainability strategy.
RobecoSAM represents one specific stakeholder, the investor, who is interested in topics that are considered financially material. This is reflected in RobecoSAM’s definition of the materiality of sustainability factors: “Any factor which might have a present or future impact on companies’ value drivers, competitive position, and thus on long-term shareholder value creation.”
In considering the impact on a company’s value drivers and competitive position, RobecoSAM takes into account:
1. Revenue opportunities and risks arising from changes in market growth, market share and competitive position;
2. Cost implications arising from expenses related to regulatory compliance, maintenance of social license to operate, environmental management, safety and human resources management;
3. Capital efficiency trends reflecting additional investments required to meet regulatory and other stakeholder requirements, environmental management, trends in the cost of installed capacity and trends in the operational life of assets;
4. Risk exposure arising from governance, regulatory, business conduct, environmental and social connection to non-investor stakeholders.
Because different issues are material in different sectors, RobecoSAM has done separate materiality analyses for each of the 59 sectors classified according to the Global Industry Classification Standard (GICS). Relevant issues are identified for each sector and prioritised based on the magnitude and the likelihood of impact on business value drivers.
RobecoSAM looks at a company’s economic, environmental and social impacts in terms of the likely impacts on the company itself and, consequently, what implications this will have for the value of an investment in the company.
Let me share a few concrete examples so you can understand this a bit better.
The most important factors RobecoSAM takes into account for their assessments are the ones in the top right corner and you can see how that distorts the concept of sustainability.
To summarise this from my point of view: The only sustainability aspects that matter in the end are the ones that bring (financial) opportunity to the business and the investors and not necessarily the ones that make a difference to planet and people. This might be perfectly fine for a lot of investors out there, but it's not enough for me!
Even though I haven’t found the perfect solution to my challenge yet, I still keep my eyes open to alternative ways of investing. And maybe the conclusion is also that the stock markets are just not the right place to go when it comes to sustainable investing according to my values. There are a lot of smaller companies and start-ups that are doing great work and it would be great to find a way to get involved with them, I just haven't figured out how yet.
An option is I have discovered is Crowdfunding. Here are a few options for you to investigate:
1. Greencrowd (Netherlands): Greencrowd is founded to accelerate the realisation of sustainable energy projects.
2. Oneplanetcrowd (Netherlands): Founded in 2012, Oneplanetcrowd funds projects with a focus on sustainability in the form of loans or subordinated convertible loans. Project vary from renewable energy to consumer items (Fairphone) and food.
3. Bettervest (Germany): Bettervest, the leading German crowdfunding debt platform for energy projects across the globe, enables you to invest your money profitably while actively shaping the climate-friendly energy transition.
Some of the more known crowdfunding platform also have dedicated areas for sustainable businesses.
I had found a few US and an Australian based platform although they are now offline, so sadly it seems they did not survive.
Another option is property. You don’t need a fortune to do that, you can also invest in property through partial participation in property projects.
I hope this offers you a bit more insight, and there will be more to come for sure!
Please get in touch if you want to discover more on this subject or if you have any feedback or suggestions!
Note: I am not an investment specialist, so please do your own due diligence and depending on your risk profile, it is paramount that you seek specialist advice!