You Just Got Ripped Off. Again

Your kids are in your year, blaming you for destroying the planet. You want to do your part for the planet. You’ve watched Craig Reucassel’s War on Waste Documentary, and you want to reward companies doing the right thing. You’re now far more conscious of environmental, social, and governance factors when thinking about your investments.

You’re in luck. A new Australian Sustainable Share Fund has been launched. And it’s raised over half a billion dollars within months. Not only is your money working for you, but you can now tell your 21 year old that you’re doing your bit for the planet. Here’s where your fairy tale comes to an end. The fund you just invested in has two filters, 1) the exclusion of tobacco, and 2) the exclusion of controversial weapons. Can you tell me how many companies on the Australian stock market are involved in tobacco or in controversial weapons? You just got ripped off, again. Sustainable investing is far more than that.

There’s more to than just dumping your money into a so called ‘sustainable fund’ and feeling like you’ve done your bit. We have a choice not only as investors, but as consumers and citizens.

UBS surveyed 5,300 people in 10 markets around the world, and they found that 65% of people say they want to create a better planet, yet only 39% say they have sustainable investments.

Sure, it’s confusing. The jargon, the marketing, how do even judge the impact you’re making, and do they even perform well? Let’s take a look.

What is ESG?

The “E” – Here are some things to consider

The “S” –┬áHere are some things to consider

The “G” – Here are some things to consider

How do they perform?

Applying the right ESG filters to your investing and portfolio does not mean you must give up good returns. Here’s market returns versus the market excluding specific sectors (US) since 1975. We’ve used the US because of it’s long data history. The numbers are very similar to other markets around the world. As you can see from the table below, the returns are very similar to each other.

Some common questions:

Should I exclude all miners?

When it comes to any type of investing, you need to maintain a level of diversification so that you don’t take anymore risk than you need to. In any case, not all miners have bad environmental records. Especially as we transition from fossil fuels, you want to encourage and reward the good ones.

Why shouldn’t I just throw out the bad ones and buy all the good ones?

Choice is an investors friend. You need to maximise your investment universe so you have more choice. Some so called “good” companies aren’t that good, and so called “bad” companies, aren’t so bad. Reward the companies that are moving in the right direction, even if they’re in a “bad” industry.

What are the costs of pursuing a sustainable investment strategy?

The more of something you do (trade, filter), the more it will cost you and the less diversification you will gain. Having said this, it is not significant, and in fact, the returns ad diversification are very similar to what you would otherwise receive.

Here’s how you may want to approach sustainable investing

As investors, you can feel satisfied that your investments match your personal values. You can make an impact on social and environment issues. You can target higher expected returns. And you can reach your financial goals without taking on more risk than is necessary. Just don’t get caught up in the marketing of all of this. You deserve better.

And please don’t feel as though your impact is limited by your investment choices. The decisions you make every day as a human being has an impact. From what you buy, where you buy it from, how you commute, to what you eat, make’s a difference.

This is my first time at Davos and I find it quite a bewildering experience to be honest, I mean, 1,500 private jets flown in to hear David Attenborough speak about how we’re wrecking the planet.

– Rutger Bregman (Dutch historian)

Source: ABC, Dimensional Fund Advisers