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.

Data from the FinaMetrica (a renowned risk profiling platform) spanning different market conditions over time, demonstrates remarkable consistency in the average scores. Consistency is a good thing. If a client’s risk tolerance changed every time they came to an advisor’s office (or joined them on a Zoom call) it would be very difficult to give consistent defensible advice.

A client’s risk tolerance is how emotionally comfortable they are with taking risk. Imagine a continuum from reducing risk to avoid unfavourable outcomes up to embracing risk to achieve higher returns—where a client sits along that continuum is your risk tolerance. Risk tolerance is a psychological trait, a distinguishing characteristic that makes each person different, much the same way I could be on a scale somewhere between introverted and extroverted.

Like other psychological traits, risk tolerance tends to be stable over time and market conditions. Most people do not change from being an introvert one day to an extrovert the next, nor does their risk tolerance change. Not all questionnaires that claim to measure a client’s risk tolerance are created equal. Psychometrics—the marriage of psychology and statistics, provides standards for evaluating tests, sorting the good from the bad. A good test should be both valid—measures what it purports to measure, and reliable—measure consistently over time with accuracy.

FinaMetrica published data built on more than 1.2 million risk tolerance tests globally from January 2008 through to April 2020, spanning the Global Financial Crisis (GFC) of 2008 to the boom leading up to the current Covid-19 crash. Risk tolerance, globally and across the major markets of Australia and New Zealand, United Kingdom and United States, stays at an average of around 50 (on a scale of 1 to 100). Sure, there is some variation, but not in magnitude nor very correlated to market movements. Interestingly, because FinaMetrica has had thousands of the same clients take the test both before and after a crisis, researchers have confirmed this consistency is not only on average but that individuals largely test the same after a crisis as before.

A risk tolerance test that follows short term market volatility is dangerous for clients and advisors. If a poorly constructed test was applied during bull markets and it made people look more aggressive than they really are, when a downturn comes, they might panic sell and crystalize losses. Conversely, if a faulty test were applied during a down market and it indicated people are more risk averse than they truly are, their advisor could invest them more conservatively than they should, and returns could be unnecessarily sacrificed. Poor risk tolerance tests correlated to the market are also challenging for financial planning professionals and their firms, who must satisfy regulators that the tool they are using is fit for purpose. This is hard to do if the results change every time the client is tested.

So why do many advisors believe a client’s behaviour changes in a downturn and that they become more risk averse? Or why do so many clients do the wrong thing, panic and sell more equities in a market crash if risk tolerance is stable? Maybe it is not the client’s risk tolerance that has changed (as indicated by the FinaMetrica data) but the perception of risk in the marketplace. Clients might be quite willing to live with a 30% drop in their portfolio value but when CNN tells them this crisis could lead to the next Great Depression, no wonder they can become scared!

COVID-19 has brought a market shock and there will be others to come. Advisors who have performed a valid risk profile for their clients (and as we discussed many clients have not completed a proper risk assessment) find that clients are more likely to stay the course. In all cases advisors can and should provide an important role helping clients manage uncertainty to deal with the fear generated in the media, through proper guidance and education. If assessed properly, risk tolerance will be a stable factor in any financial planning conversation, steering the focus towards long term risk and return expectations; restraining excitement during upturns and dispelling unnecessary fears during downturns.

Now, that being said – this is a blogpost from the perspective of a Financial Consultant, so let’s talk figures. A latest study from the “Zurich Office for Youth”, Credit Suisse and the OECD shows that the average direct cost of raising a child in Switzerland for a couple is 22’200 CHF per year, meaning over 18 years a direct cost of 400’000 CHF.

Beware, this does not include school fees – so if you think of sending little Heidi or little Einstein (I know he was German, but he became Swiss later on, so it still works) this amount can go up quite significantly.

Coming back to the figure of 400’000 CHF, it is split as follow:

• 32% on accommodation (the more children you have, the more this number goes down in terms of proportion of income)

• 18% on day-care (unfortunately Swiss day-care is the most expensive in the world)

• 17% on food (such costs go up as your baby becomes a teenager that can literally eat anything without putting on weight – I know, so unfair…)

• 13% for healthcare

• 6% on clothing (again, as you can imagine dressing a 13 – 18 year old is much more expensive than a baby considering you pay mainly for the brands our youngsters/teens so desperately need to forge an identity)

• 1% for telecoms (only considers here children above 13 years old – so if little Heidi comes asking for a phone at 10 years old, don’t hesitate – it’s not in the official budget from the Zurich Office – and if you can get away with this explanation, you’ll know as a bonus you have an aspiring public official in the family)

• 14% on entertainment & miscellaneous incidentals and accidentals

Now, this is where I must promote what we do before letting you go. So here it is: you can’t plan for the above “ongoing cost” of raising a child, but you can certainly make sure you plan for higher education needs so when university cost of living and tuition “hits you”, you are ready for it …

Until then, we love our children …

Before we concentrate on overcoming this issue, we must understand why it occurs. Believe me, you will see this happening in every mundane corner of life, procrastination, diet, exercise and financially. Over 25% of people claim they do not have savings and the most common reason for not building savings for the future is that it can feel like a loss right now. This cognitive effect has detrimental impacts on retirement funds. People have not saved enough for retirement and subsequently compromise their standard of living upon retirement.

Another consequence of the present bias is rushing into investments. Crypto currency is easily accessible; gratifying the urge to invest in one simple click of a button – this often is not a thought-out plan! Subsequently the present bias will be at play when we see the markets drop. An overwhelming urge to vacate the bad situation and associated feelings. Sell and run (sadly locking in the loss!). The present bias is an emotionally driven, cognitive influence that can easily steer us into bad decisions.

So…you have read this far. Now the question should be resonating, how do I control this?

Its relatively simple, it all boils down to a plan. The reason why you are doing something must outweigh the urge for instant gratification. It could be putting the snack aside so as not to spoil your dinner, a smaller rental to build a deposit for the dream home or simply a little here and there to secure your financial independence. Whatever the motivation, it all boils down to the plan and remembering the true reason ‘why’.

As you age, one thing you are probably thinking about more and more is retirement. Whether you’re on the cusp of this life milestone or just realizing that you have more than a decade or so left to save, you should take some time to consider your retirement prospects seriously.

How much have you managed to save so far?………How do you know how much is enough?………..How much have other people your age saved?

The truth is when it comes to savings most people are falling short. Nearly 60% of adults have less than 5,000 in their savings accounts, with retirement funds looking equally bleak. This harsh reality stems from the younger generation and their inability to save. We’ve all heard the saying, “I’ll save more when I’m making more”. But whether you’re making 50,000 a year or 200,000 a year, we all have challenges saving money. Generally, what happens is when people make more, they end up spending more. A bigger house, a nicer car, more holidays, the list can be endless.

The sooner you start saving for retirement or any other major purchases in life the better. After all, time is on your side when you’re young, and thanks to the power of compound interest a small amount put aside each month early on can make a big difference later in life. While the amount you need in savings is highly personal, and specific amounts arbitrary, a simple formula can help you figure out if you’re setting aside enough money.

In your 20s: Aim to save 25% of your overall gross pay. That 25% is the combination of pension withholdings, matching funds from your employer and any cash savings that you have. The trick is to make sure your lifestyle expenses don’t exceed 75% of your gross income.

By age 30: Have the equivalent of your annual salary saved for example. If you earn 100,000 a year, aim to have 100,000 in savings when you hit 30. Again, this includes any retirement account contributions, matching funds from your company, cash savings, or money you have invested elsewhere in index funds or other assets.

By age 40: Have three times your annual salary saved.

By age 50: Have five times your annual salary saved.

By age 60: Have seven times your annual salary saved.

The ideal amount is to have at least 10 times your annual salary by the time you retire, which for most of us will be around 65- 67 years old. While this can sound super daunting today, if you’re putting that money to work starting in your 20s, it’s not as difficult as it sounds.

Of course, these are the ideal numbers, and experience will teach you that things don’t always work out as we plan, life is anything but linear. More than likely you’ll have to adjust, by saving more in some years and less in others, depending on major life events, such as having a child or buying a home.
Employing the services of a financial advisor early on can however ease the burden. They can give you an accurate view of where you are relative to your current lifestyle and the standard of living you hope to have in retirement. Utilizing current technology, they can show you different possible retirement outcomes and how to prepare for both the good and the bad.

They will help you develop a clear understanding of how much money you’ll need to retire based on your own personal requirements as well as establish solutions to help you achieve that taking into account your risk profile. Knowing if you must put your nose to the grindstone and save more money is vital when you’re getting closer to your final working days.

Unfortunately, the consensus thinks that if you don’t have much saved, you don’t have enough to work with an advisor. The truth is you can’t afford to not work with an advisor. The closer you get to retirement the greater the need for capital preservation, as the time to recover from a financial mishap is greatly reduced.

Partnering with an experienced professional will allow you to consistently build wealth whilst managing all the associated risks and challenges along the journey of life. When it comes to finally hanging up those working boots, you’ll be well prepared and ready to put your feet up and enjoy the sunshine

The dream is becoming a reality. But taking the time to plan is important.

There are additional costs to consider. Moving expenses, time off to prepare, storage facilities, rental contracts, mortgages, household bills, tax bills, extra winter clothes (The weather in Zurich is somewhat different than Lisbon during winter).

Bills and expenses don’t stop when you move to a new country. In most cases they’ll increase before your move. Make sure you’re saving some cash each month before you move to cover these additional costs. If you need to take on debt, take a low-cost loan or use interest free periods on credit cards in your home country – you don’t want to take on debt as soon as you land. We would all like to believe we will be successful, and everything will work out, but always have a plan B and short-term savings will help you achieve this.

2. Just Arrived

You may find that whist acclimatizing you eat into your savings – generating a social circle will be important to help you feel comfortable in your new surroundings. Social spending may increase in the short term and there are a few key areas that you need to be address.

Understand your new tax environment. Low taxes are great, but what help will I get from the state? What if I’m ill? What if I can’t work? What happens when I die? What will happen to my family?

It is more than likely that without addressing these issues you run the risk of financial ruin. Policies that you previously had in place may now be invalid. For example, most Life Insurances taken out in the UK will not cover you for prolonged periods abroad. Health insurance is a big one. Switzerland has a relatively complex Healthcare system, for any newcomer. A review of what you have and what you need immediately is essential. Don’t let your loved ones suffer, make the future safe and protect what you can and what’s most important to you.

Understand what you are entitled to from your old tax environment. Not sure if you’ll be staying long? You have a 3 to 5-year plan and you’re going to return home? Want to spend more than 3 months back ‘home’ each year?

Generally speaking, if you call the UK ‘home’ and you spend more than 90 days there you could be deemed a resident and therefore taxed as such. In many cases, the time frame could be shorter depending on how many ties you have with the UK. Understanding your position is key to avoiding expensive mistakes. If you are deemed a UK tax resident your income could be liable to UK tax.

As an expat, you can also still contribute to the UK tax system through National Insurance contributions and benefit from accruing things like the State Pension. You can also contribute into a UK pension scheme up to £3,600 gross per year. Many pension schemes will give you basic rate tax relief at source and therefore it will only cost you £2,880 each year. There is a time limit on this ability and you can only do this for 5 years after you’ve left the UK.

Knowing what you don’t know, is a skill we ignore all too often. Speak to those that do.

3. One Year In…

You’ve survived the first year! By now you should have a good idea about what’s coming in and what’s going out every month. If you don’t you should do. Budgeting is key to understanding where your money is going and how much extra you have at the end of the month. Expats enjoy a healthy salary and have the opportunity to secure their financail future. Don’t waste it.

Make the most of what you have where you live. In Switzerland you have access to very tax efficient savings vehicles. Planning early enables you to take advantage of tax savings earlier, and you’ll benefit from compound growth, the eighth wonder of the world! You don’t need to save a lot each month if you start early enough.

Start to set goals for what you want to achieve. The kids’ future, your retirement. We’re more likely to get to where we want to go if we have a map. Split the goals into short term, midterm and long-term goals. Remember to stay liquid and have enough cash for an emergency.

Where are you going to invest? Think about your currency exposure. This will be a new risk to consider if this is your first time working abroad. Reduce the risks you can. And save in a currency that you will likely spend in the future. This might be spread across different currencies in different jurisdictions.

4. Three Years In…

By now you’ll have your routine set. You know all the good places in town and the career is going from strength to strength. You may have more disposable income and re-budgeting and keeping on track is key to realising those goals you set yourself. All too often wage increases coincide with lifestyle changes and we tend to forget the longer term objectives.

New life events are a common theme for seasoned international workers, whether this be a new child, children starting school, marriage, family death, divorce… life goes on and your ability to withstand and build after these events will largely depend on the planning you have made previously. Reviews and readjustments are a part of life and yours goals may alter. You might be starting to think about that magic number? What is yours? What do you need to leave, to start a new life somewhere?

You might be thinking about disposing or selling assets down in your home country. In the UK for example, after three full tax years, certain assets can be sold capital gains tax free in the UK for non-residents. That stock holding from a previous employment, your investment account with the bank – now is the time to consider your options.

What about that UK Pension? How’s that getting on? Do you know what you’ll get from it? What if you die before taking it? When looking at your assets based in different countries, don’t forget about your pension. It can be one of the most valuable assets that you own and if you don’t look after it, it may not be able to look after you!

5. Ten Years In…

A seasoned veteran expat. Your advice to new comers is essential and you will have learnt from your experiences. But how long are you planning on staying? What’s the exit plan? Have you saved enough, or do you need to do more?

By now you need to know what income level you need in retirement and how far you are away. Funding any shortfall whilst you can will be invaluable for your financial future.

You might be in a position where you’ve built up assets in a rather random fashion and need to reorganise what you have. Making use of the right tax wrappers and ensuring you put these in place well before you leave will only benefit you financially in the future. For example, international investment bonds offer savers time apportionment relief from tax – i.e. the longer you’ve held the policy internationally, the lower the tax burden will be if you return to the UK. Even if you top the policy up at a later date, the date of the relief is given from the day you took out the policy. Couple this with other tax advantages, such as tax deferred withdrawals and optimising the use of international trusts and you might just have saved thousands, if not hundreds of thousands in tax.

6. Leaving and Heading Home

Your time has come but it’s not too late to make some small changes that will have a big impact. Whether you’re leaving to enter retirement, you’re home sick or just finished one step in your career to take another, there are certain things you can do.

Depending on where you are heading next, make sure the assets you hold are in the most tax efficient vehicles. Forgot about any stock holdings with large capital gains? Think about crystallising those gains and rebasing the assets. Use the right tax wrappers to protect your capital from any taxes on growth or income. Think about how your investments are structured, do you need an income from them? How much do you need? Much the same as when you first arrived, there are factors to consider around increased short-term costs and any debts should be paid off before you get on that plane.