What motivates you as investor?

If you are motivated to make your money matter more and invest in so-called ESG funds or impact funds you expect your money will be put to work in activities that will make the world a better place. Right? MSCI provides this concise overview of motivation drivers here.

Let’s assume there is a fund open to investors like you. That fund will use your capital to create workplaces for which less carbon material is used and is more energy efficient. Or improves working conditions in factories for high street fashion or build solar parks. What happens when you buy a share of that fund?

If the fund issues new shares (its first in its Initial Public Offering, or later offerings) your money will be put to work in accordance with the fund’s objectives. That’s good.

If you buy shares on a stock exchange via your investment manager, your bank, or directly which were already owned by someone else what do you in fact contribute to? Someone else’s wallet for sure. But the fund is not benefiting, and there is a good chance neither will your cause.

Are ESG funds or impact funds useless to achieve your goal?

No. Their activities generate cash flows which will enable more investments leading to more activities and so on. Maybe part of earnings will go to the investors as dividends. Keeping investors onboard by staying attractive will sustain activity growth. Paying part of earnings to investors as dividends is a means to a cause. As long as the majority of cash flow generating capacity is reinvested in more future growth, the business case of these funds is good. But it is about finding new projects to generate business. And size matters. Large initiators (funds being a dominant possibility) simply get awarded more, larger, interesting projects. So a fund generally has more meaningfulness than a single initiative. To make a difference with your money, you need to be able to select something with a good reputation, proven capabilities in not only finding opportunities but especially transforming these ideas into successful ventures, and replication capabilities. These gems are not found on billboard signs.

Are ETFs the solution?

We think not. According to Investopedia an Exchange Traded Fund (a.k.a. a tracker) is “a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same as a regular stock. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies”. An ETF is therefore an artificially created mini stock exchange to channel investor money into a topic. As by definition an ETF follows other shares its purpose for the investor is purely financial; no timing questions, no active management so relatively cheap to manage but it has no function towards management of the activity. It only has a function towards other owners of the stock of companies which comprise this “topic”. We are not saying ETF’s are useless but merely as there are “horses for courses” we believe ETF’s have no use in making your money matter to a cause you wish to support in the ESG or impact arenas.

Do you sacrifice investing more directly in ESG or impact opportunities?

In principle nothing. Although there is no guarantee in any form of investing it is a reasonable expectation that the returns from actively managed investments are high enough to compensate for costs associated with active management. We argue any investment adviser should be able to demonstrate expected returns after all costs of the proposed scheme are superior to relevant alternatives.

You can also choose for investing in the private market. Here the risk increases because your investment title (what do you own exactly) is less liquid (more investors active in exchange trading their shares every day) and not diversified over many companies. But here you see exactly what your money does. A recent example was a producer of commercial batteries to store solar generated power. Interesting business case in a market growing out of infancy, first orders from commercial customers being produced, 4 year investment, depending on the type of investment title returns expected 4-12%. And there are more. We recommend you discuss the benchmark the advisor intends to use first; why is it a good benchmark, was it a good benchmark before markets changed for the better or for worse, is it a benchmark just for you or also for other clients and in the market in general?

Choices, choices

The number of new investors in the past 12 months is astonishingly high. They have increased demand, and we fear given their investment inexperience with potentially more volatile share prices in its wake. At the same time the “Paris” driven number of ESG and impact initiatives have sought an investor base. We believe this perfect storm of supply and demand has tremendous opportunities for those who know what they are doing. We can only recommend you seek suitable advice, of course fitting with your financial plan.

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