How do I align my finances with my values?
‘How should I invest my money?’, ‘Are sustainable ETFs good?’, ‘Is my bank financing polluting industries?’. Those are the questions we get from friends when working in sustainable finance. When you already go small on flights and meat, what should you be financing? If you have more than €10,000 (1) in financial assets the answer could prove quite impactful… finance isn’t neutral.
If you were to follow your bank recommendations the answer to the above question would probably be: invest in large companies, governments and a bunch of other stuff. ‘Which organizations?’ you’d ask. Well, no one really knows. This is because an investment, say a pension, holds shares in tens of funds, each fund holding tens or hundreds of underliers, and sometimes these underliers are other funds [sic]. Those layers regularly change through phase-out, re-weighting, or phase-in to seize opportunities and balance risks (2).
Financial management hence sounds tricky to start with, but it doesn’t mean we should sit on our hands. Below we compiled key aspects we look at when investing, including examples. It is not financial advice, rather thoughts based purely on our own experience. It is not perfect, nor complete but something to start with.
Each person has their own risk tolerance and financial objectives, depending on their circumstances. There are also a lot of greenwashing attempts which don’t help to choose knowingly… A fund called Europe Climate Pathway contained plenty of Shell, BP and TotalEnergies shares. As a result, do not choose just based on names.
So, what type of financing instruments/vehicles/products can you actually invest in ? Finance is complex, it has plenty of products with funny names like exotic rainbow option derivatives, high frequency trading and crypto bros. We are not here to redpill you. We’ll simply break it down into the most common and simple products (3).
Investment in a company: you own a share of equity or debt from an organization that does something you value. This is an excellent way to know real information about what you are financing. In France, Bellevilles Foncières (building renovation) or Enercoop (renewable electricity) follow this model. Invesdor (Europe) and Lita.co (France) include plenty of options that may fit with your values. It can also be more traditional companies like Orsted but you need to find a vehicle to invest in it (e.g. a PEA in France).
Investment in multiple companies: you own a share in an Exchange-Traded Fund (ETF), an actively managed fund, or a saving account that owns shares/lends to other companies. This is the case of NEF’s Livret B, a product with very high impact but lesser return.
Investment in multiple funds: These products have a lesser traceability, you’ll need to rely on the fund / product strategy and exclusion criteria as looking at the individual constituents may be dawning. Green-Got offers such a pension investment in France called “assurance-vie”, having selected only funds without direct fossil exposure (no TotalEnergies at the menu).
You may also have “money at the bank”. This is (very) roughly equivalent to lending it to their large companies and SMEs clients. We invite you to contact your bank’s customer services to ensure they align with your values. Even if they don’t reply it sends a signal. You can also review their progress using Banking on Climate Chaos (Global), Mothertree (UK), or Bank.green (US).
What types of impact criteria do we look for to ensure a better alignment to sustainability values?
Exclusions: make sure there are no sensitive activities (e.g. fossils, deforestation, pesticide…). It may be communicated in the annual report, fund strategy or SFDR disclosure. Triodos Pioneer Impact Fund for instance is screening out fossils and pesticides.
Real economy progress: you can check if companies you invested in have sustainability commitment and progress disclosure (this is less frequent and targets are often quietly dropped!), for example climate science-based target (SBT) or B-Corp labelling.
Thematic investment: renewable energy, sustainable real estate, some funds are entirely dedicated to a sector or theme but they tend to be less diversified by nature. Robeco Sustainable Water is an example of a water thematic fund.
Sustainability labels: FCA labels, SFDR article 9, label ISR (and more!) - labels tend to signal more environmentally friendly funds.
Engagement: invest with financial intermediaries that engage with companies they own or lend to. For example you can check if your asset manager is part of Climate Action 100 or Nature Action 100.
Which risks and returns should you expect?:
Typical rates of return: we recommend aiming for at least 1.5-2% to hedge against inflation with anything > 4% in western countries being good. Most times you won’t know and will never get full guarantee in advance. ‘Time in the market beats timing the market’ (4) as they say: investing is a long term strategy.
Risks of losing your investment (partial/total): risks are usually communicated, read the documentation (and the footnotes!) and reach out to a more experienced investor friend to get their opinion.
Hiddentransaction costs: between the fund manager, the financial intermediaries, and all the different taxes, your net return on investment may differ. Make sure you know and understand those costs.
Diversification: avoid investing all your money in one company. Asset classes, sectors, companies: the more, the merrier.
While it is recommended to keep a liquidity of around 3 months, you can start investing even with minimal amounts to push tomorrow’s economy, hedge your future and learn more about finance and impact!
(1) The €10,000 in assets threshold typically means emissions of 1.5 tCO2e/year (similar to a Paris-Cancun one way flight according to MyClimate) and could be much more if you are financing fossil expansion
(2) More info at: Investopedia. Portfolio Weights Explained.
(3) Note that most investment require a minimum investment, usually in the tens of euros but sometimes more
(4) A quote from Kenneth Fisher, a famous investor