Reframe Finance #11

Sustainable investing, greenwashing and green solutions

Dear friend,

Here is your weekly dose of financial wisdom. This edition is dedicated to sustainable investing: aligning money with the higher purpose of improving the world.

The New Normal

With a wide range of global sustainability challenges on the rise, people are starting to re-evaluate where they invest their money.

For many, making a profit is no longer enough. Making a profit in a sustainable way is becoming the new normal. What does that mean?

Sustainable development meets the needs of the present generation without compromising the ability of future generations to meet their needs.

In that sense, sustainable investing directs capital to companies and projects that advance sustainable development. Environmental, social, and governance (ESG) insights need to be taken into account in the investment decision making.

Fooled by Appearances

The rise in demand for sustainable investing products (mainly ETFs) has mostly been matched by large financial institutions.

Given that many of them provide such products to prop up their public image, it is wise to investigate the contents of these sustainable ETFs.

Having done some poking around myself, it has become clear to me that some of these products are just the result of greenwashing.

Consider the MSCI EAFE, an index of “sustainable” companies tracked by some ETFs. Among its 902 holdings, some of the major ones include Nestle and Unilever which are in the business of putting food and drinks in plastic boxes, LVMH that creates unnecessary luxury products and Toyota which produces polluting cars.

Am I missing something?

ETFs that respect their publicized sustainable properties exist, the challenge is to find them. The best I have personally found is the iShares Global Clean Energy ETF (ICLN) but unfortunately it is not compatible with my French PEA (tax-efficient investment account). If you have found a PEA compatible green gem, please do share it with me!

The bottom line: if you invest in sustainable ETFs, exercise some skepticism and research the portfolio composition.

Green Solutions

Sustainable investing is harder than it may seem. There are not as many truly sustainable companies as we like to believe, and out of this small sample, many have a hard time generating an acceptable rate of return for asset managers to care.

Because ETFs are bundles of many companies, this scarcity makes it hard for some asset managers to create sustainable ones because at some point, some less sustainable companies are needed to complete the product (and ensure a reasonable return).

The natural solution to this problem is to pick your own companies but that requires thorough research and usually results in higher fees.

But fear not, other practical green solutions exist:

  1. Switching to a sustainable bank (e.g. GLS in Germany, Banca Etica in Italy, Triodos in the Netherlands, Merkur in Denmark, and Ekobanken in Sweden).

  2. Investing in individual projects, for instance by supporting a friend’s newly launched sustainable venture or a stranger’s project on Kickstarter.

  3. Making lifestyle changes to live more eco-friendly because people adopting a sustainable lifestyle is what really matters in the aggregate. Flying and driving less, not wasting water, eating local food and less meat, recycling… These sort of decisions matter more than you may think.

This is all my (non-expert) opinion on the matter. Like you, I’m just trying to figure out what the best use of my money is. My hope is that this got you thinking.

Perhaps profit is not the first thing we should think of when investing…

To reframing finance,

Alex Vikner