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Ethical Investing

Ethical investing: Does socially responsible investing pay off?

Last Updated on August 26, 2020 by Mr. FightToFIRE

ESG and SRI are two acronyms used for ethical investing. Thanks to the recent surge in ethical investing the Belgian bank NewB found enough investors to get all the funds to receive a banking license. This makes them the first bank focusing mainly on ethical investing and banking. What started as an idea in the aftermath of the financial crisis to change banking forever, much as the crisis did, is now a bank with a license. Ethical investing is taking off!

But it’s not only banks that are trying to become more “ethical”, the range of trackers that receive the label ‘ethical’ or ‘sustainable’ is increasing, but the difference with normal trackers is not always large. It is these trackers that I want to tackle as it’s what most of us trying to achieve FIRE, look at. An overview.

NewB bank
NewB is a Belgian cooperative bank in the making for ethical and sustainable banking.

What is 'ethical' investing?

As global warming becomes more and more obvious, the interest in green, sustainable, ethical investments is increasing. But what is ethical investing?

It is investing in a sustainable, ethical, or green approach and looking for double profit: financial for the investor and progress for society. By investing in companies or projects that pay attention to the environment, social policy, and good governance, these companies are rewarded and encouraged to continue in that direction.

That’s the theory, but in practice, a single definition is difficult to provide. What one considers ethical, might not be for the other. This is not helped by the lack of clear rules and regulations in this area. Marketers make smart use of terms such as ‘responsible’, ‘ethical’, ‘ESG’ (Environmental, Social and Governance), ‘impact’.
Usually, they are used as buzz words to draw your attention away from the facts. It’s important to check the investment policy of a particular fund before you buy it to make sure they are genuine. Don’t just rely on the name of the tracker/fund. Besides, traditional funds are also become more ethical, for example, by excluding gun producers.

Ethical vs. 'ethical'

Your conscience may be soothed if your bank adviser tells you that your money does not flow to weapons, hookers, or gambling. But have you ever considered the question which fund your adviser offers to the next customer? Perhaps an investment product in which the sustainability criteria do not count at all. What is the impact of your individual choice? Where do you draw the line?

Some, like Geert Noels, founder of Econopolis (Cleeren, 2018), argue that you should only work with true ethical banks (think NewB) and that banks should make their complete offering ethical and sustainable. Only if you go full force into sustainable investments can you create a lever with which you can have an impact.

Others are less strict for one simple reason. The largest providers of sustainable socially responsible investing (SRI) products in Belgium are precisely the large banks, which offer “regular investments” as well as “regular investments”. If investors dropped out there, 80 percent of the sustainable investment in our country would disappear. (Cleeren, 2018)

What is considered ethical investing
Source image: https://www.junoinvesting.co.nz/personal-finance/2016/9/14/ethical-investing

How can you invest ethically?

The most traditional way of sustainable investment is to exclude harmful or unwanted activities (fossil fuels, child labor …). The more modern approach to sustainable investing happens through the screening of companies on their environmental impact, their social behavior, and whether they manage well and transparently (the ‘ESG’ criteria, see the clarification below). funds and banks screen funds per sector on these criteria, which also makes it possible to invest in companies that do their best with difficult activities such as chemicals or industry. This “best in class” approach has the advantage that a large diversification of the portfolio remains possible.

The number of funds and ETFs (Exchange Traded Funds) or trackers investing in sustainable indexes is increasing, over 253 at the time of writing. The market share is still small though. At the end of September, the total amount was 47.3 billion USD worldwide. The total market for ETFs is 5,780 billion, which means a market share of 0.8%. With traditional investment funds, sustainable investing is becoming more established. In Belgium, the market share was already above 10% last year.

Next to that, you have corporate bonds of sustainably run companies, and there is also the gigantic market for government bonds and loans that are issued for specific projects. The latter category includes green bonds for environmental projects.

Those looking for sustainable trackers can invest in two ways:

  1. Through large (world or region) indexes, such as MSCI Europe, EMU, Japan or USA or the MSCI World
  2. or by opting for certain themes (clean energy, low emissions.climate change)

Ethical investing principals

There are two types of large indexes. These work according to the ESG principle (environmental, social and governance) or according to the SRI principle (socially responsible investment).

In the highlight below, you can learn the difference. In the name of the tracker, you can see the principle on which the listed investment fund works, SRI or ESG.

It is also important to confirm the company’s commitment to ethical practices. What they say and what they do can be two different things. you should be carefully when looking into which investments you want to avoid and which are interesting. Your own due dilligence is essential to determine whether an investment matches with your own ethics; Especially when investing in an index or tracker. This will determine if you are really ethical investing or just being a played along.

Being ethical pays off

Whether you take a tracker on the MSCI Europe or the Stoxx Europe 600, it doesn’t matter. Both evolve at the same time in the long term. The MSCI Europe SRI, on the other hand, has been doing much better since the creation in 2007. The increasing interest in ethical and sustainable issues could be an explanation.

Ethical and profit doesn't have to be a choice
You don’t necessarily have to sacrifice profits invest ethically.

After all, there are increasing money flows to this type of company and therefore also to these indexes. a positive effect that should continue in the coming years. Ethical investing literally pays off.

ESG vs. SRI

Sustainable trackers can often be recognized in the name by the abbreviations ESC or SRI:

  • ESG stands for Environmental, Social and Governance. When talking about SG a choice is made for companies that score highly on these various criteria and that may have a positive impact on the returns of these companies. Environmental relates to, for example, energy consumption, pollution, climate change. While ‘social’ relates to human rights, child labor,.health and safety. Finally, governance concerns the quality of management, conflicts of interest. the independence of the Board of Directors, etc …
  • SRI stands for Socially Responsible Investing. This goes one step further than ESG. Companies are excluded or selected according to certain ethical rules. For example, alcohol is on the black list, but also tobacco, gambling, arms producers, violating human rights are out as well.

Trackers

Interesting to note: both the tracker from Amundi and iShares (which are listed below), at first sight, have the same index as the benchmark. the MSCI Europe SRI index. But looks can be deceiving. Amundi works with the 5% capped index. that is, a percentage may have a higher weight than 5%. With iShares has changed its benchmark since last week to MSCI Europe SRI Select Reduced Fossil Fuel index. Companies active in oil sands and oil and gas, for example, will probably see their weight decrease in the future.

Interestingly enough, with the American index of MSCI there is virtually no difference in performance between the MSCI USA and the MSCI USA SRI indexes. The difference is also small between the MSCI World and MSCI World SRI. The difference between the MSCI World and MSCI World SRI is also rather small.

Whether this is because the theme plays less of a role in the US, or are there other explanations? Perhaps a large part of the explanation lies with the technology companies. Since these companies are also sustainable, they can be found in both indexes. For the MSCI Emerging Markets, on the other hand, there is sometimes a clear out-performance for a sustainable index.

Sustainable trackers

Just like there are trackers on large indexes, there are also trackers that respond to a specific theme within ESG or SRI. In the list below I give you examples of ETFs that invest ethical, either ESG or SRI:

  • Amundi Index Equity Global Low Carbon ETF (LWCR; LU1602144229; Accumulation; 0.65%) is a tracker that follows the MSCI World Low Carbon Index and consists of medium-sized and large companies from developed countries, to select companies that together have C02 emissions that are 50% lower than the level of the MSCI World index. Of course, many American technology companies are in the top positions. The tracker, therefore, leans close to trackers of MSCI World.
  • iShares Clean Energy (IQQH; IE00B1XNHC34; distributing; 0.25%) is a tracker mirroring the S&P Global CleanEnergy Index. An index of around 30 of the largest listed companies in the global clean energy sector (both production and equipment and clean energy technology). Well-known companies such as Vestas Wind and SiemensGamesa Renewable Energy hold the largest positions.
  • iShares MSCI EMU ESG Screened UCITS ETF EUR (SLMA;IE00BFNM3B99;Accumulating; 0.12%) Screened index tracks companies that are part of the European Economic and Monetary Union. The index excludes companies that are involved in businesses related to thermal coal, controversial weapons, tobacco, and other controversial industries. The fund replicates the performance of the underlying index by buying a selection of the most relevant index constituents (sampling technique). It’s a large ETF with 835m Euro assets under management. The ETF is older than 1 year and is domiciled in Ireland.

Source:

Adriaen, D. (2020). NewB heeft banklicentie binnen. [online] De Tijd. Available at: https://www.tijd.be/nieuws/archief/newb-heeft-banklicentie-binnen/10205057 [Accessed 6 Mar. 2020].

Adriaen, D. (2019). Jaar van de waarheid voor ethisch bankproject NewB. [online] De Tijd. Retrieved from https://www.tijd.be/nieuws/archief/Jaar-van-de-waarheid-voor-ethisch-bankproject-NewB/10092396 [Accessed 6 Mar. 2020].

Cleeren, E. (2018). Duurzaam beleggen in 6 stappen. [online] De Tijd. Retrieved from https://www.tijd.be/netto/dossier/duurzaamlevengids/duurzaam-beleggen-in-6-stappen/10004458.html [Accessed 6 Mar. 2020].

For the moment I don’t do anything specific when it comes to ethical investing. My portfolio is mainly focussed on sector and regional speficic trackers.

What about you? do you take ethics into account when selecting a tracker, fund or individual stock?

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Mr. FightToFIRE

I'm the owner and the main writer of FightToFIRE, a personal finance blog focussing on Financial Independence and Retiring Early. During the regular working hours, I'm a developer for a major financial institution in Belgium. During my off-hours, I write. do some weight lifting and other stuff to keep me healthy and fit.

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