The 4 myths about sustainable and socially responsible investments

Clearly, there’s a desire to make a difference. What seems to stand in the way is a number of misperceptions about the actual risks, the returns that can be achieved and the actual impact these investments can have. To answer the question ‘Is this for me?’ – let’s start by dispelling the four common myths surrounding sustainable and socially responsible investments.

• Myth #1: They only come in green

The concept of sustainable investing can mean different things, but it essentially boils down to this: Aligning traditional investing with environmental, social, and governance-related (ESG) principles to improve financial well-being over the long-term. The range of sustainable financial products out there is very diverse and investment choices will entirely depend on the investor’s personal values and preferences. It’s not limited to specific stocks in green energy or organic farming, either. If the investment is in a fund, those companies or activities that don’t meet the investor’s social and ethical standards are filtered out. Investments can also be earmarked for projects that have a positive environmental and social impact. Another option is thematic investing, for instance in renewable energy, biotechnology, healthcare or sustainable forestry, to name the major areas. Between 2018 and 2019 alone, the number of funds that operate under ESG criteria went from 434 to 582 (up 34%)

• Myth #2: Good conscience, bad return

The market shows that sustainable and socially responsible investments are on a par with conventional financial product offerings. Stock companies that subscribe to ESG principles are more than a safe bet. Well-managed businesses that are concerned about their impact on the environment and society are ready to adapt and often more open to innovation. Their employees are well taken care and that makes them better at their job. These companies have a better reputation and are better equipped to weather crises. Which means their business may keep growing. The facts bear this out, especially in the current turbulent market: In the US, for instance, most sustainable funds finished in the top halves of their Morningstar Categories for Q2/2020, and 18 of 26 ESG-focused index funds outperformed conventional index funds. For the year to date, 72% of sustainable equity funds rank in the top halves of their Morningstar Categories and all 26 ESG funds have outperformed their conventional index fund counterparts. Just as the way companies treat their employees and stakeholders has become a differentiator, the way they invest in their employees’ health and safety will become even more important. Sustainable and socially responsible investing will keep up the momentum for this dynamic. And no, the fees aren’t higher than for conventional investments.

• Myth #3: It’s just a fad

The concept of sustainability as an investment driver, which inherently has an ethical component, has been around since the 18th century. Back then, some investors would have nothing to do with the slave trade, preferring to make a healthy profit in other areas. A preview, so to speak, of sustainable and socially responsible investing as we understand it today.

Fast forward to 2009. At the time, sustainable investments accounted for CHF 32.4 bn (up from CHF 7.4 bn in 2005), and by the end of 2019, the volume increased to CHF 1,163 bn. From 2018 to 2019 alone, the share of sustainable funds in the overall Swiss fund market more than doubled from 18% to 38%. Another key reason why sustainable and socially responsible investing is here to stay is regulation. In 2018, based on the results of the Paris Climate Agreement 2016 and the United Nations’ Agenda 2030, the EU launched the Action Plan for Financing Sustainable Growth to:

• Direct capital flows towards sustainable investments

• Mitigate financial risks linked to climate change, natural disasters and environmental and social issues

• Enhance transparency in investment and economic activity (i.e., better governance.)

In other words, the positive momentum developed over the past decade will continue to build. In Europe, we see that investing sustainably is increasingly the new normal, as borne out by the strong rebound after the coronavirus pandemic market sell-off, more than doubling to USD 54.6 billion over the second quarter of 2020.

• Myth #4: It’s not for me

One of the study’s findings: 48% of those surveyed felt that the responsibility to act sustainably rests with companies, about the same for those who felt that sustainability starts at home (45%). As companies are aligning themselves with the new normal, the possibilities for private individuals to make a difference through their investments – while achieving their financial health and well-being goals – are increasing, too. More important than diversity of investment options perhaps, is the fact that the market is open to all, regardless of how little one wishes to set aside for letting sustainable and socially responsible investments grow into a nest egg or a dream come true. Though it’s never too soon or too late to get started, seasoned investors (44%) would recommend starting with a small amount and taking a step-by-step approach. To get a basic understanding of how a capital investment works, click here.

Friends and family can be a good source of advice if they have some experience. Also, the fact that financial advisors may charge a fee should not be a red flag. Their main objective is to make investing work for their clients – who usually are the first to say that good advice is always worth the price. Besides very competitive rates, advisors can also provide tools that allow maximum control over the investment.

But what about after the crisis?

According to ratings agency Moody’s, the Covid-19 pandemic is likely to have far-reaching effects on the financial sector over the coming years, specifically on the way investors and companies approach risk and how they will increasingly focus on ESG factors. The trend towards sustainability and social responsibility was already well underway before the crisis began, it’s just that the crisis has intensified the spotlight on environmental, social and governance factors. In our rapidly changing world, businesses and projects run according to sustainable, i.e. ESG-based principles, are proving to be more resilient and therefore in a better position to offer more stable returns over the long term.

Sustainable investing also plays to one of Switzerland’s strengths: a longstanding tradition in sustainable finance, not least due to an openness that allows for new trends to be recognized and acted upon early on, combined with stable economic and political framework conditions. The result is a financial environment that contributes to a more sustainable world through smart investing, proving time and again that securing one’s financial future and doing the right thing for the planet and society can go hand in hand.

What fees could you pay? Does this 1% cover the custodian fees? What about the investment management fee? And the underlying fund fees? The big one and no one speaks about is the financial planning fee – what is that? Is that included in that 1%?

If you want to manage money by yourself its easy to keep all fees below 1%. You just need to worry about the custodian (where do you hold your investments – avoid banks if you want to pay less than 1%) and the underlying investments (shares = no cost / collective investments 0.2% – 1% p.a.) But do you have the knowledge to manage your own investments? Are you confident enough to avoid common behavioral traits that ruin any best laid plan? And do you know why you’re investing in the first place? What is your Plan?

Outsource the management or if you receive financial planning advice and fees creep up. But not necessarily by much.

The discussion about fees is an important one and knowing what you pay and to whom is important. Not just for your own piece of mind but for accountability. And lump sum fees should never be built into products – you must be able to cancel them. I’m amazed at people who tell me 1% a year is expensive. People think they pay far less than they actually do and they receive little to no service. I look at portfolios that are charged at 0.5% management fee and I look under the bonnet and they pay over 2.5% per year within collective investment fund charges – some fees are explicit and some hidden – do you know where to look?

Also and by no means a small point is the significant impact of financial planning. Not only from a time saving perspective (your time) but you can save significant taxes too. Why are you investing if you can buy back missing years of your second pillar? What’s your tax rate 25-40%? Wouldn’t you prefer a tax saving and a plan to maximize these and balance this with your investments over time? Pay for advice and you might end up investing less than you would otherwise, saving tax and time. You may end up paying for a service that helps you achieve what you want and saves you money. You’d want to pay for that service? Right?

Value. That’s what is important. Not the size of the fee.

When I discuss with clients about investing “now”, the usual answer, expressed as a concept is:
Valerio let’s wait for the “Black Friday” of the stock market.

We all want to buy low, sell high. When the market goes down and you have money, you invest and grab shares of great companies at a fraction of the price. The most important questions everyone should ask are:

• Should I buy now or wait a little longer?
• Should I sell and cash my sizeable profit?
• When will the market bounce back…. Or crash again?

Those are common questions asked by most investors… but not me. I decided long ago to follow a clear investment strategy that doesn’t require me to dither forever about the optimal price of a stock, I buy shares whenever I want based on my investment principles and not the “price of the day.”

To put it simply, I strive to remove emotions out of the “investment timing decision process”. This simple, yet efficient strategy clears out lots of questions leading to paralysis by analysis. How can you seriously define the right price of a stock in front of your computer at home? Even professional managers are struggling to do that.

By keeping a focus on the long-term outcome (retirement in 10-30 years), I don’t have to worry about the current state of the market. I only have to worry about which great companies I want in my portfolio. Waiting with cash on the side would generate tons of questions that I can’t answer, in addition to costing negative interest on many Swiss banks for deposits above 250k.

I get the appeal of cash. Particularly if you grew up through the dot-com bubble or if 2008 is still a vivid memory in your mind and you saw people panicking and struggling to make ends meet when the economy took a serious turn for the worse. Having cash in the bank can feel like a safe place to invest your money, but remove the emotion, and it’s actually one of the riskiest long-term investments you can make. Cash loses value over time. A EUR 100 bill in 2000 is only worth EUR 68 today, when taking into consideration 2% inflation.

This is why simply holding your cash is far riskier than it sounds. With people living longer than ever — and spending more money on things like healthcare and education — sitting in cash as a long-term investment will mean you end up with less purchasing power down the road.

Getting better with money
With all that said, don’t go burning your savings. There is a place for cash in your life. Having a safety net of cash in the bank — three months’ worth of expenses is a good rule of thumb and will help you sleep at night and better handle the curveballs that life inevitably throws at us.

The bank is a good place to keep cash that you might need to access anytime within the next year or so. Longer-term investments — money that you won’t need for at least five years — should go into investment vehicles like the stock market, pension funds or ETF. If you’re a millennial, you have the biggest advantage of all when it comes to investing – time. Don’t squander it by spending all your money or keeping it solely in cash.

1. Protect yourself and your family.
2. Make sure you optimize your taxes.
3. Open a simple savings plan and save for your future.
4. Buy your first property.
5. Maximize your profits by investing on the Stock Market.

But what should you do next?
These days, many long-term investors look to diversify their portfolios by investing in ART.

If you’re wondering whether it is feasible to earn a profit from investing in art, consider this, according to ‘Art Market Research’, in some art sectors the price of art has risen more than 1,000% in the last 40 years. If you have an investment time horizon of 10-20 years or more, the wonderful and profitable world of art may be right for you.

How to Buy Works of Art?
Starting an art collection for investment purposes is a big step. Before you even think about what, where, or how to buy, you need to consider a few things if you want to maximize your profits.

1. Research the Artist
2. Research the Artwork
3. Investigate the Dealer

Where to Buy Art?
In many cases, the question of ‘Where to buy art?’ can be as important as ‘How to buy?’ In answer to this question you have several options:

1. Auctions
2. Galleries
3. Art Fairs
4. Online

Where to Buy Art?
In many cases, the question of ‘Where to buy art?’ can be as important as ‘How to buy?’ In answer to this question you have several options:

1. Auctions
2. Galleries
3. Art Fairs
4. Online

What are the Pros & Cons of Investing in Art?

Advantages:

1. Physical Asset. A big plus for many investors is the fact that you have a physical asset.
2. Enjoyment Value. Fine art is an asset that can be displayed and appreciated. As a matter of fact, if you don’t like art, invest in something else.
3. Appreciates Over Time. Unlike stocks, art usually appreciates steadily with time.
4. No Market Fluctuations. This is seen as one of the biggest advantages to investing in art. The collector can sleep peacefully at night, without the worries of market volatility.

Disadvantages:

1. Barrier to Entry. The main barrier to entry into the art world is lack of knowledge, which is essential for this type of investment.
2. Not a Liquid Asset. Art is not a liquid asset in comparison to other forms of investing.
3. Care of Asset Can Be Difficult. The problem starts with displaying or storing the artwork safely, caring for and maintaining it to preserve its value, and having it insured in case of a fire or natural disaster.
4. No Guarantee It Will Appreciate. The art world is a very fickle environment. New or established artists can quickly fall out of favour as quickly as they rise to the top. The best thing to do is make sure you truly like every piece in your collection.

Investing in art is not for everyone. It can be extremely lucrative and rewarding, but there is no guarantee the artwork you purchase will appreciate in value. For many people, the world of art is not just a hobby or investment – it is a passion. So, consider that carefully and begin your wonderful journey.

I often hear of tales of investor woes. People investing in the stock market, being burnt, and the experience framing their future expectations of investing. We all have that friend or colleague who invested high and sold low; who took a seat on the rollercoaster ride of market volatility, hated every second and pulled the emergency rip cord. Yes, most survive (albeit with less money). But the scars are real. Behavioral Economics 1.01.

As soon as people I meet find out I manage money for a living, the most common question I get asked is ‘where do I invest my money?’ ‘Give me a tip for getting a good return’. To me this is the essence of why people fail with their investments and a question I will never answer unless in jest – ‘The 3.10 at Ascot looks a sure thing!’

I liken the scenario to asking a doctor ‘what’s wrong with me?’ The doctor can never know without asking further questions: diagnostics of the symptoms, and an answer will materialize.

When it comes to investing, some people lose the ability to think logically and strategically. They ignore their own symptoms and forget to ask the main question – Why am I investing? What is the purpose of my investment? Without knowing these two vital points, managing the uncertainty of investing is impossible.

We have to acknowledge uncertainty. It exists. We don’t know exactly what is going to happen in the world tomorrow, next year or in a decade from now. When we think of managing money, there are many unknowns we need to consider. I would split these into two categories:

Personal Life (Subjective) and The Economy (Objective)

In our lives we will all face some certainties, death and taxes are two of the most common. Retirement, if we’re still alive of course. Some unknowns we are better at predicting than others – but others we know could exist (the bank of Mum & Dad – Keeping kids liquid since forever…). Planning for these life events and thinking about the uncertainties are key. We all know how we want life to progress but it very rarely goes to plan. If we plan for uncertainty, we are more adaptable to change and we can avoid having to sell that start up stock we bought 10 years ago that might be worth millions one day (think amazon).

By organizing your money in line with separate goals, you can build clearer objectives for any investment. You need to think about liquidity for events not just in the short term but in the midterm too – disinvesting from an asset because you need liquidity can be tough and you may sell at the wrong time.

The longer the time frame of investment, the higher the risk you can afford to take. The shorter the time frame – what are you trying to achieve? Ask yourself, what is your capacity to invest – Can you afford to? Or can you afford not to? Finding the balance to these questions will stand you in good stead to navigate the investment waters ahead.

We are all aware that the economy is a different life form. It reacts to events in ways that will keep economists in well paid jobs for millennia. Some try and profit from uncertainty in the economy, they gamble on what is going to happen in the world based on their own experience and understanding of the way the world works. The closer their own expectations to the reality, the more profitable people can be. However, this is simply gambling; it is the biggest pitfall of investing for the masses. Very few people ‘win’ on short terms bets in the economy.

The economy provides us the framework for how we earn, save and invest our money. Our understanding of it and our ability to navigate it determines how successful we are with money. We know from academic studies that asset allocation determines both the risk and return dynamics of a portfolio of investments. Diversifying and ensuring the objectives of the investment are understood are so important to achieving the goal of the investment.

So how do we manage uncertainty? We PLAN. We REVIEW. We REACT. And we do it ALL THE TIME.