The world faces many problems: from climate change and pollution to social injustice around the globe.

As an investor, you might wonder if you’re actually helping to solve these problems (or maybe the opposite).

By investing in companies (equity investing), we become co-owners. So with that, I’d say we should also assume “co-responsibility” for how these companies impact the planet and its people.

So, let’s look at sustainability and investing and the interplay between the two.

Disclaimer

As always, the information I provide is sourced from both reputable sources and my own experiences. I intend to inform you about the financial world and help you make better decisions, but none of the information in this email should be taken as financial advice or advice to purchase certain financial products. Investing involves risk of loss. See our full disclaimer here.

To keep this episode manageable, we’ll mainly focus on equity investing for now.

Sustainability options in Equity Investing

1. Voting & Engagement - trying to make companies "do better"

When you invest in a company, you become one (of the many) shareholders.

This means you can vote at shareholder meetings, where some critical decisions are made.

Of course, it’s impossible for millions of individual shareholders to all vote physically, so your broker or asset manager often does the voting.

You, as an individual, probably own quite an insignificant part of the shares, so your vote doesn’t change that much.

But this is where asset managers come into play. Because they manage the money of many people and institutions, all of those combined shares actually add up.

In many companies, asset managers have a relatively large seat at the table.

This means they can vote in favour or against company plans and potentially help companies do better.

Furthermore, they do something they call “engagement”, basically talking to companies in the hope of persuading them to do better in terms of sustainability.

And if they don’t listen?

Well, asset managers could always exclude them.

2. Exclusion - not buying a certain company's stocks

What’s the effect of simply not buying a company’s stock?

Not much, you might think.

However, many stocks get bought just because they are part of some index.

Suppose all asset managers (and thus many investors) would suddenly stop buying a stock. And start selling it, had they previously bought it.

In that case, this could result in a (large)price drop.

Management and the board usually own quite some stocks of their own company, so this would hurt them.

Some funds exclude based on some international standards like “United Nations Global Compact” or the “United Nations Principles of Responsible Investing”.

Of course, you can also exclude based on ethical considerations or as an act of demonstration.

Further usual suspects for inclusion are things like: controversial weapons, child labour, tobacco, gambling, pornography and nuclear power.

This depends on the asset manager and the fund you invest in.

Quite often, exclusion doesn’t mean complete exclusion.

Most portfolios that exclude specific behaviour tolerate 5-15% of company revenue from such activities. Yet, some are much more lenient, sometimes allowing up to 50% or more of company revenues to come from the “excluded” activities.

There are many shades of green, indeed.

3. ESG - judge based on broad sustainability metrics

With the number of companies in the world, how do you make decisions on their sustainability?

With investing, many often talk about the term “ESG”.

ESG stands for Environment, Social and Governance.

Three main factors are being looked at, often in a quantitative way.

Asset managers and specialised external agencies give companies a rating based on these factors.

One problem with ESG scores is that they are often “business model agnostic”, meaning that, for example, a tobacco manufacturer can get a high ESG score even if its product might have a negative impact on society.

Again, companies can be excluded based on a low ESG score. But asset managers can also “tilt” the portfolio, lowering their exposure to low-scoring companies and increasing that of the high-scoring ones.

It also matters if the investment fund goes for the top 50% or only the top 10% regarding ESG.

Does it make a difference?

Some of you might (rightfully) think, “does all of this actually make a difference?”.

And it’s a good question. It’s great not to be invested in companies that violate our principles, kick out the “dirtiest” ones and engage & vote to get them to do better.

But does it have an impact?

Do companies care if you own the shares or sell them to another investor who doesn’t care about sustainability instead?

Does it matter who owns the shares?

For the company, it might all be the same (unless their stock price takes a massive hit or they face a significant backlash from society).

So, let’s talk about making some impact.

4. Creating real impact with investing

This is more a league of its own and more of a “dark green” regarding sustainability.

Impact investing means targeting positive environmental and social outcomes in the world while still achieving financial returns.

There are different ways to do this, but for equities, it might entail having a closer look at a company’s revenue.

You might think a supermarket provides food for people and therefore do “good”.

Look at the exact revenue of a supermarket, however. You might see that a large percentage of its money comes from selling stuff that’s not so good for people.

Supermarkets also sell cigarettes, alcohol, and unhealthy food that don’t exactly help the obesity our society faces.

Of course, they also sell veggies, fruits and healthy products.

But you could argue that a ‘biological supermarket’ might be better for the planet than your generic, large supermarket chain.

So to make a good comparison, you can look at companies’ revenue streams.

The example above is just one way to look at impact investing. We will dive into more detail later.

As always, there are many definitions and ways to do it.

The GIIN (Global Impact Investing Network) has useful definitions and information for those who want to read more.

What motivates you?

You might be investing to simply grow your money for later.

Or you might actively want to create a better world with your money.

Or maybe, both?

Next week we’ll look at the interplay of doing good and doing well for yourself.

Can making money and sustainability go hand in? Or do you always have to sacrifice one for the other?