Money can’t buy me love, or the song goes. But could it buy a better world?
What would happen if the 500 million people with over $100 trillion in financial assets invested in a future aligned with their values? It would go a long way to solving most of the world’s material problems like hunger, disease, climate change and the rest of the Sustainable Development Goals, which the UN has estimated to require $5 trillion to $7 trillion annually. It may also make it feasible for political and business leaders to seize a just and sustainable future, emboldened by so many people voting their values with their dollars.
Cicero said “freedom is participation in power.” By aligning their investments with their values, investors have the power to shape a future they believe in. It is reasonable to expect empowered investors to become similarly mindful and increasingly empowered in their roles as consumers, citizens and employees, getting us where we want to go even faster.
This wouldn’t be the first time investors helped change the world. Investors played a critical role in the movements that abolished apartheid in South Africa and made cigarettes a social taboo in North America. But the critics contend that this could never happen at a grand scale. After all, with rare deviations, investors invest to make money, not to save the world, right?
Not quite. It is true that the vast majority of investments take place within an ethical vacuum, but this does not translate into investors having no scruples. Survey after survey confirms that a growing majority of investors are interested in applying their values to their investments, with women and millennials (a cohort set to inherit $30 trillion over the coming decades) leading the charge.
There are three main reasons why 71 per cent of people say they want to invest their values but only one per cent do: a perception that there is a trade-off between investing one’s values and making profits; a lack of know-how, and an absence of fit for purpose investment options.
There are sweet and sour cherries to pick on both sides of the performance debate. The quick summary: Investing your values has almost no impact on performance, and going forward could provide less risk and more opportunity for stocks in greater alignment with societal and planetary interests.
In most cases, the performance difference of applying your values would have been statistically insignificant. That’s because the stocks that make people cringe account for a small portion of the investable universe, and likewise for the stocks that make people feel warm inside. Take the S&P 500: Only 13 per cent of its stocks are associated with the dirty dozen themes of predatory lending, corruption convictions, tobacco, weapons, gambling, pornography, links to repressive regimes, child labour, climate change (thermal coal), private prisons, severe environmental damages and animal cruelty. And only 13 per cent of S&P 500 stocks are gender equity leaders (maintaining more than 30 per cent female directors) or green solution providers (deriving more than 20 per cent of revenues from green sources as determined by Bloomberg or FTSE). Guess how much you would have lost over the past three years if you sold off the former to invest in the latter? Zero. It would not have meaningfully impacted returns. And that’s generally the story, plus or minus one per cent, as verified by over 10,000 simulated scenarios run by Corporate Knights.
While some of these dirty dozen themes have experienced a post-election Trump-bump, the long-term trends point in a good direction for values-based investors. For a long time, companies made profits by externalizing costs onto society or the planet. That business model doesn’t work so well with 7.4 billion people crammed onto a hot and crowded planet with strained public sector balance sheets.
At some point, societies decide they can no longer afford to subsidize these freeloaders and begin to stick companies with the bill either directly or indirectly through regulation. That point has arguably been reached by the 40 countries which already have a placed a price, however modest, on carbon.
Going forward, expect companies that create problems for the planet and society to bear greater costs, and those that deal in solutions to reap more revenues. The trick is figuring out how to act on your values as an investor. That requires knowing which stocks are aligned or not.
Surprisingly, most wealth management companies and platforms do not offer this service to their investors.
Investors want tailored solutions, especially when it comes to their values. So off-the-shelf exchange-traded funds (ETFs) or generic sustainability ratings are unable to satiate this demand alone. There is a dearth of tools which allow people to define and apply their values in the context of their investments. Encouragingly, this is changing fast thanks to better data on the social and environmental attributes of investments, lower trading costs and growing industry appreciation of the importance of customization.
California-based investment advisor Aperio Group pioneered a standardized way to create unique portfolios for investors tailored to exclude companies which are not aligned with their values and to tilt toward low-carbon or clean-tech companies. U.S.-based OpenInvest, whose co-founders herald from WWF, the world’s largest environmental NGO, and Bridgewater, the world’s largest hedge fund, is the first robo-advisor to offer automated portfolios for the mass market tailored to an investor’s specific values.
There are also a growing number of free single-issue tools like Fossil Free Funds and Deforestation Free Funds that make it easy for U.S. investors to figure out what lurks inside their mutual funds. On the more positive side, the Clean200, a Corporate Knights co-production, lists the 200 largest clean energy stocks by revenue.
So what does the future of investing look like? Investors will have the option to populate their personal values profile alongside their investment objectives and to hold a concentrated but diversified portfolio tailored to their risk-reward objectives and values that’s generated and maintained at a fraction of the cost of today’s ETFs.
Anything else would be uncivilized.
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