Sustainable investing Sustainable investing Sustainable investing

Sustainable investing

Investment Theme
Hans Oudshoorn

Summary:  The economic and social debate on sustainability is more current than ever, including within the investment world.

Level: Any experience

US President Joe Biden signed the Inflation Reduction Act of 2022 on 16 August. The name suggests that it is purely about fighting inflation, but the plan goes beyond reducing costs for American families. The agreement will make prescription drugs cheaper and reduce the cost of health insurance for 13 million Americans covered by the Affordable Care Act by an average of USD 800. In addition, Biden wants to improve energy security and, above all, tackle the climate crisis by providing tax credits and investments for energy projects. According to Biden, this will create thousands of new jobs and help lower energy costs in the future.

Incidentally, this is the first time that America has committed to climate and sustainability in this way. This is good news, because after China, the US is the world's largest emitter of CO2. The potential positive impact of the plan is therefore considerable. Obviously, the agreement has a price tag: especially large companies will be required to pay their fair share of taxes (read: pay more taxes), without any tax increase for families earning less than USD 400,000 per year.

The economic and social debate around sustainability is more current than ever, and also applies to the investment world. You can contribute to a better world with solar panels on your roof, but you can also invest your money in a company that makes them. In other words, you can choose sustainable investments.

What does sustainable (investing) mean?

Whether it is the energy you use, the bananas you eat or the clothes you wear, almost everything can be done sustainably these days. This means you can also choose to invest your money in a sustainable company. But what does sustainable mean? In short: able to prevent problems from being shifted to future generations or to nature and/or population groups.

Investing in more sustainable companies can therefore not only provide a financial return, but also social and ecological returns—two important reasons for investors to invest in this sector. Besides profits for shareholders, these are the two areas sustainable companies pay attention to on the basis of the three Ps.

The three Ps: people, planet, profit

The question now arises: what does it mean when companies build their operations and business model according to these three pillars? First of all, it means that a company involves the local population (people) when it sets up shop in a country. People have more opportunities to work for the organization under better working conditions. The company also provides facilities that are beneficial for the location, from schools to drinking water facilities, depending on the needs of the area.

Companies follow the second pillar by thinking about what is best for the planet. For example, does the company use biodegradable packaging? Do employees take the train or is there a bicycle plan for the staff? Optimising the distribution channel to consume less energy also plays a part in this, as does using alternative energy sources or automatic light switches. In short, everything that contributes to a liveable planet, now and in the future, is taken into account.

The last pillar, profit, is not only expressed in bottom-line euros, but also, for example, in clean air, a fair salary for the banana grower or financial resources for the coffee farmer to expand his/her business.

The higher a company scores on the three Ps, the more sustainable it is.

ESG criteria

In line with the three Ps, the investment world often speaks of ESG instead of sustainability. This abbreviation stands for Environmental, Social and Governance. Companies that operate according to these criteria stand for respectful treatment of the planet, animals and fellow human beings, and for good corporate governance. From lower CO2 emissions to the elimination of child labour, all aspects of doing business responsibly are taken into account by ESG-conscious companies.

There are various indices, including the STOXX® Global ESG Leaders, in which well-scoring companies from an ESG perspective are compiled. There is also a ranking of countries based on ESG criteria. Both of these can be helpful resources for making informed investment decisions.

Sustainable investing: lower profits?

The sustainable ideology is nice, but of course it must yield something to appear inviting to investors. Unfortunately, sustainable investing has a somewhat dull image. In fact, many investors think that they will have lower profits with this investment category than with non-sustainable companies.

This is incorrect. A Harvard study shows that sustainable investing actually yields more than non-sustainable investing. Between 1993 and 2011, the university examined 180 companies. Their conclusion: the financial results and investment returns were significantly better for companies that had implemented sustainability in their corporate strategy and culture. The annual difference was 4.8% over unsustainable companies.

So, sustainable investing not only makes for a sustainable world, it also simply makes money. Of course, it must be said that this does not always have to be the case. After all, the value of investments can fluctuate, and results achieved in the past are therefore no guarantee for the future.

A fast-growing market

In recent years, more and more attention has been paid to this fast-growing market, and rightly so. While the total sustainable invested capital in the Netherlands in 1995 was only 117.5 million euros, in 2015 it was already 15.1 billion euros according to a study by the Dutch Association of Investors for Sustainable Development (VBDO).

And the trend continues: in only the first half of 2019, European investors had already almost put as much money into sustainable investments as they had put into all of 2018 (EUR 38 billion), according to Morningstar. Globally, investments via ESG mandates are also growing significantly. Mandates are large amounts of money from, for example, insurers or pension funds that are entrusted to asset managers.

Build up sustainable capital

Of course, you could buy shares in companies like Arcadis, Beyond Meat or Fastned. Investing in individual shares, however, is generally riskier than spreading your investment by means of, for instance, an investment fund. Sustainable investing and building up sustainable capital in the long run can be done relatively easily with widely spread solutions.

There are many options these days, but I have come across two relatively new yet efficient building blocks in my search to invest with a clear conscience: the Amundi Index MSCI World SRI UCITS ETF DR (ISIN: LU1861134382) and the Xtrackers ESG MSCI World UCITS ETF 1C (ISIN: IE00BZ02LR44).

Both ETFs invest globally in mid- and large-cap stocks that score highly on corporate sustainability and have smaller CO2 footprints than their sector peers. In short, both ETFs contain companies that score well on the ESG criteria discussed earlier. Overall, both ETFs receive five globes: the maximum score for the Morningstar Sustainability Rating™.

The Amundi ETF invests physically in 392 companies spread over 23 countries, is quoted in euros, costs 0.18% gross per year and is tradable via Euronext Paris. The Xtrackers ETF invests physically in 642 companies spread over 24 countries, is quoted in dollars, costs 0.20% gross per year and is tradable on the German stock exchange market (Xetra). Some well-known names that both ETFs invest in are Microsoft, Home Depot and Tesla.

The goal of both ETFs is not to beat their benchmark (the MSCI World ESG Leaders Low Carbon ex Tobacco Involvement 5% Index), but to follow it. The dividend, about 2% a year for both ETFs, is automatically reinvested.

There is, of course, a market risk. If financial markets are under pressure you will definitely be aware of this. In addition, there is a currency risk. Amundi's index tracker is listed in euros, but there are many foreign companies in it. The same applies to the Xtrackers ETF in dollars. In a nutshell, the ETFs are interesting for long-term investors who are able and willing to bear equity risk and who want to make room in their portfolios for companies with an above-average focus on sustainability.

Would you like to know more? Read about the Amundi ETF or the Xtrackers ETF.

Investing carries risks. Your investment may depreciate.


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