The Art of Green Finance

When people think about investing, they most commonly think about stock markets. This post therefore refers to bonds, stocks and shares and funds that hold these. Other investments may be considered in future blog posts.

If you have emergency savings and some pension savings, and still have money left over at the end of the month, you may be wondering if investing that money, might be one way of beating inflation. Historically, stock markets have out-performed both property and savings. However, there is no guarantee that this will continue to be the case into the future.

Richard Templar describes investing as essentially gambling in his book The Rules of Wealth. While others would argue that investing via a well diversified portfolio is in fact much safer than gambling, it is important to remember that all investments can fall in value and you may get back less, even significantly less, than you have invested. Therefore, before investing, aim to have cleared debts and built up some emegency savings. If interest rates are high, consider whether you would rather have the guaranteed security of savings, rather than risking money with investments.

Warren Buffet, probably the best known investor in the world, is a big fan of low cost passive tracker funds. The low fees make a significant difference to returns and these funds are by definition well diversified in whichever market they are based (although they will not cover all international markets). However, if you are an ethical investor, you will probably want to stay well clear of these. You will inevitably be investing in fossil fuel companies, tobacco companies, weapons manufacturing companies and companies with questionable policies towards employees etc.

If you have discounted low cost tracker funds for the above reasons, still want to invest but also want to keep costs low, a passive tracker fund with ESG credentials could be an option. These do tend to be slightly more expensive than traditional passive tracker funds as there is a cost implication in screening out companies that do not meet the defined ESG standards. However, it is important to carefully consider the ESG criteria that have been used. For example, some ESG funds avoid companies with large coal operations, but are happy to invest in gas. Other funds exclude weapons manufacturers that make the most destructive weapons, such as cluster bombs, but do not exclude all arms manufacturing. Unfortunately, there is a significant amount of greenwashing around ESG funds. Research fund holdings and ESG criteria carefully before investing. Also be aware that ESG funds tend to be skewed towards investing in tech companies. This may be financially beneficial if tech companies are performing well as they have over the last year. However, you may also want to take into account the track record in ethics of tech holdings.

If you want to be sure that your money is being used in a manner which you are happy with, the best way to do this is to carefully research and invest in individual companies via bonds or shares. But, beware – this is the riskiest form of investing! Most traders in the city fail to beat low cost passive tracker funds, so there is every chance that you will fail to beat low cost passive tracker funds as well. This form of investing is much closer to Richard Templar’s gambling description of investing than using a low cost passive tracker fund. So, why would one consider investing this way? Well, you are likely to be in a relatively secure financial position if you are considering investing and you may therefore be prepared to take a higher risk with a proportion of your money in order to avoid companies that conflict with your ethics. You may wish to support companies that you think are having a strongly positive impact in the world. Finally, you may find that you enjoy reasearching companies and making well informed investment decisions. However, this form of investing is clearly not for everyone.