My Sustainable Investment Strategy: I’m (Nearly) Only Investing Sustainably Now

My Sustainable Investment Strategy

Last year, I asked the question: “Shouldn’t we all invest sustainably?”.

Shortly after I held a public presentation on FIRE and investing in general. Here I also touched upon the subject of sustainable investing.

However, there is just one problem.

I don’t invest in any sustainable assets.

After the presentation, I felt like I had to do something. Otherwise, all the talk was just empty words.

Therefore, I have now decided to invest most of my money in sustainable assets. I am super excited about it!

My new sustainable investment strategy

I now put 80% of my monthly investments in sustainable index funds.

Why not 100%? Because I like to be exposed to Asia. None of the sustainable index funds currently available in Denmark have this focus for Asia.

I have decided to invest 80% of my monthly investments in the index: “Sydinvest Morningstar Global Markets Sustainability Leaders“. It’s a brand new index fund by the Danish investment company, Sydinvest.

The index fund tracks Morningstar’s Global Markets Sustainability Leaders Index. The fund is passive and invests 90% of the assets in companies from that index.

Why have I chosen this index fund? There are several reasons:

  • It has the highest sustainability rating by Morningstar (5/5)
  • Its sustainability score is in the top 1% of 1,000 global index funds
  • The environmental and social ratings are high with governance being above average
  • The annual fees amount to 0.61% compared to my old global index at 0.48%
  • It delivered a return of 26.5% in its first year (I know I shouldn’t look at historical data though)

Previously, my strategy wasn’t focused on sustainable investments. This was because the funds were not ambitious enough. With this index fund, I have finally found one that is.

What about the remaining 20% then? I still invest those in an index fund without an ESG focus. That fund has a sustainability score of 3/5. It’s not ideal, but it’s my strategy for now.

If there had been an Asian fund with a dedicated ESG-focus, I would have chosen that one though.

If you don’t live in Denmark, I recommend you to check out Vanguard or Blackrock ESG funds.

Why we all need to invest sustainably

Capitalism has been great for us.

Capitalism has taken millions of people out of poverty. Capitalism has given us great inventions. Capitalism has increased the average life expectancy by decades.

However, capitalism has also caused a world that is out of control.

We are using finite resources at a faster rate than they can be replenished.

At the end of July each year, we have already exhausted the biological resources our planet can renew within a year. And that trend is moving in the wrong direction.

We are seeing climate change making parts of our world uninhabitable at a fast pace.

We are seeing companies exploiting cheap labor in developing countries.

We are seeing income distribution being increasingly skewed. The rich get richer.

Our current capitalistic system hasn’t been able to fix these problems. It will not be able to fix this if we continue the things as they are.

Changing the way we invest is an important place to get started.

In simple terms, investing in companies is like putting a vote on them. If you take away your vote (and their financing), they will have a harder time investing in future growth.

If we all start channeling our funds to companies that have high environmental, social and governance standards, the remaining companies will eventually change their behavior.

Why it makes financial sense to invest sustainably

Investing sustainably is not only good for the world. It might also be good for your net worth.

Several studies show that investing sustainably has a positive effect – and at least not negative – on returns.

McKinsey & Co published a report on sustainable investing becoming mainstream indicating that it appears to have a positive effect, if any, on returns.

Harvard Business Review found that 48% of people who invest sustainably do it because of a positive impact on financial performance.

In addition to good returns, it makes long-term financial sense to invest sustainably. You want to make sure there is a decent world to live in where you can actually use your returns.

Lastly, we will see a shift towards sustainable investing. 67% of the millennial population is investing sustainably in 2019. In 2015, that figure was 50%. It’s growing fast and all the big funds are coming out with several sustainable investment products. This also means companies increasingly will focus on sustainability. The winners of tomorrow are sustainable – and that’s where your money should be.

After reading this, you might be left with the question: “Why should I start investing sustainably?”.

The world is better off in many ways and you make equally good or better returns. The real question is therefore “why should I not start investing sustainably?”.

19 comments

19 comments

Harry February 9, 2020 - 15:56

HI Carl, i am a expat in Copenhagen ? what is the taxation on the ETF index funds in denmark ?

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Carl Jensen February 10, 2020 - 20:58

Hi Harry,

This is a bit technical. It depends on the fund, how large your gains are, whether it’s as a private person or business, and whether it’s through a pension or not, so you should read up on it on SKAT, but as a guideline:
– Accumulating Danish index funds (“investeringsforeninger”) are taxed yearly based on gains as “kapitalindkomst”
– Non-accumulating Danish index funds are taxed upon realization as “aktieindkomst”
– Foreign index funds are taxed yearly based on gains as “kapitalindkomst”

“Aktieindkomst” is taxed at 27% below 55,300 DKK and 42% above in 2020. “Kapitalindkomst” is more technical and also depends on interest you pay for e.g. bonds (housing loans in Denmark), but expect maximum of 42% + church tax.

This is a good source on the subject (in Danish unfortunately): https://majinvest.dk/invester-med-maj-invest/fri-opsparing/skatteregler/

Hope it makes sense 🙂

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Erik February 11, 2020 - 09:16

Hi Harry and Carl, I’d like to add that there is indeed a suitable way to invest in ETFs outside pension depots, and that’s in an aktiesparekonto, which you can get in for example Saxo bank. The tax will be 17%, and “lagerbeskatning”, so yearly taxation on the profit. There is no reason to have ETFs on a regular depot, as you would be higher taxed (27% or 42%), and still yearly as Carl describes. Not all ETFs can be bought for this special depot however, only the ones that are on “SKATs positivliste” (google) (but there’s quite many).

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Julian Satran January 31, 2020 - 09:52

I agree with supporting sustainability in capitalism. But I do not understand exactly how this works with stock directly. In theory a company is interested in how it’s stock fares at issue time (public offering). Afterwards its like votes in a democracy – you need a sustainability party to govern. That implies more than the stock price. The general meetings are influenced by price movement but not only by it if at all. Big investors – like pension funds, insurance companies etc. may be moved by dividend more than price and young investors by growth prospects. If by law you will see companies taxed differently based on sustainability your influence is certain. And that is in line with capitalism. Sustainability as a stock buying criteria is IMHO not going to be very effective for any of the parties involved.

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Carl Jensen February 6, 2020 - 22:01

Thanks for your comments, Julian.

You are right that a company is interested in how its stock fares at the time of issues (IPO). However, once you issue shares you suddenly get lots of new owners who have a say in the company. These owners, in general, expect their share prices to increase to get a decent return on their investment. The only way their share prices can increase is if the demand for the stock is there. If shareholders start seeing the value of their shareholdings decrease because people move their investments away from these companies, I promise you they will start demanding action from the companies. It will become a thing at the general meetings. I see every day how people at annual general meetings are asking ESG questions and demanding transparency and action from companies.

You are right that if companies are taxed differently based on sustainability or if concepts such as carbon pricing (fees and dividend) are introduced, this would be other powerful ways of moving companies in the right direction. We are seeing However, one thing doesn’t exclude another which is why sustainable investing matters.

There’s plenty of research showing better performance and return from sustainable companies. Research by Boston Consulting Group has shown that companies with high ESG standards (or Total Societal Impact as they call it) perform better in many aspects:
– Margins up to 12.4% points higher
– 3-19% higher valuation multiples
– 90% of studies on the cost of capital indicate ESG standards contribute to lower cost of capital
– 88% of studies show that good ESG practices result in better operational performance
– 80% of studies show that good ESG practices positively influence stock price performance
… and all of those things matter a great deal for investors/shareholders! I would rather invest in a company (if not only for moral reasons) that performs better 🙂

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Evan January 21, 2020 - 08:27

I have had some of the same considerations. However, I ended up pursuing sustainable investments by being 25% exposed to the Danish C25 index (e.g. Sparindex C25 is top 14% of global funds in global category) as I am somewhat sceptical of the current ESG-industry. In this way I also have some “qualitative feeling” of what the index actually covers. And, I have intimate knowledge of the political climate (Denmark/EU) that will influence regulation etc. You could then argue that diversification is lower, however, e.g. the Danish Pension Commission found that C25 is so “internationalized” that you have a quite good diversification even though it is not MSCI world or the like. Did you consider this approach?

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Carl Jensen January 21, 2020 - 17:02

That is an interesting perspective, Evan. Thanks for sharing it.

I haven’t considered that approach, but I’m not sure it has that ESG-focus I am looking for. I am looking for a passive fund that uses professional estimates as to what is relatively high ESG standards. The stricter the requirements the better. I’m not sure the C25 does that – also, I would be a bit skeptical as to the international diversification from only investing in the C25, although it naturally is international in some aspects.

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Nick @ TotalBalance January 20, 2020 - 12:37

I think I would have to join the “critical voices” in the other comments on this one, Carl 😉

Being an index investor doesn’t mean you shouldn’t care which companies are in the index, if you ask me 🙂
I completely agree that this is a step in the right direction, but it seems a bit “cheaply bought” to slap an ESG label on Cisco or LVMH and then “Poof”, suddenly these companies are “green”. But I guess it boils down to how you define “sustainability”. Lets hope that the future will see a lot more granular division of these ESG labels, so it becomes clearer who is actually actively working to make the world a better place, and who is “just looking to reduce their carbon footprint” and boost their CSR 😉

I completely get the idea of index investing, but I really dislike not knowing/caring what/who you actually invest in. I know that I do the same (currently with my pension), but I don’t think we should put too much emphasis on the “sustainable” part – as the companies in these indices are most likely only marginally “better” (if at all) than the ones who are not included (for various reasons).

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Carl Jensen January 20, 2020 - 17:12

I must say I respectfully disagree with you, Nick 🙂

I have never said I don’t care which companies are in the index. Of course, I care which companies are in the index. That is why I invest in a sustainable index. I let professionals (Sustainanalytics on behalf of Morningstar) decide which companies have the highest standards on environmental issues.

I invest in a fund that is top 1% out of 1,000 global funds on ESG standards. If you look at a standard global index, you will see that many of the top companies there are missing in the ESG fund. This is because their ESG standards are not high enough.

Can it become even better? Yes, of course, but currently there’s no better option out there.

You say the companies in the index are “most likely only marginally better”, but have you looked at the methodology behind and do you know how the ESG-ratings are made? I can’t make or find better ESG-ratings out there.

I always follow a rule in my life: if you criticize something, you have to come up with a better solution 😉 what’s the better solution for a passive investor who doesn’t have time or capabilities to ESG-evaluate companies on an ongoing basis? It’s always easier to criticize than come with better solutions and/or act 🙂

P.S. Let’s discuss the ethical aspects of investing in P2P lending next 😉

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Nick @ TotalBalance January 24, 2020 - 10:29

Hehe, you got me there 😉 I don’t have a “better solution”.
While I completely understand the reason behind your decision to “switch index”, I believe that you are in fact jeopardizing your own strategy by doing so. In your old index your investments was spread across more than 1500 global companies. Your new index currently only have positions in 103 different companies and 35% of your portfolio is now in Technology stocks (it was 15% in your old index). Which sector do you think is going to take the biggest hit in the event of another bear market? 😉
You’re not getting enough company/country/sector spread in your new index if you ask me. But that’s just my opinion. I’m sure you’ve done your own research before making this decision.

P2P omg. That’s another one that I’d really like to talk about! 😛 I’ve never hid the fact that I really dislike P2P, which is why I’m in the process of removing it entirely from my portfolio (besides Mintos – that’s kinda the “mother ship”, you have to be onboard that I think). P2B is another thing. If they’d only make proper REAL platforms with real/proper P2B loans around the 12-14% (which is more realistic than 20%+), I’d be over the moon 😉 But I’ve yet to find such a platform. I’m kind of hoping Crowdestor could develop into something like that though…

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Carl Jensen January 25, 2020 - 18:36

You are right that I will not get as large a spread as previously. However, some studies (I can’t remember which) point to the fact that above 30 global companies should give you enough diversification. Also, you know I don’t really care about bull and bear markets since I am in it for the long run. If anything, the tech stocks will be at the largest discount during a bear market 😉 I also imagine that tech stocks will actually do better in the long run than other industries, but that is purely guessing.

I know what you mean. P2P is becoming increasingly dangerous – just look at what happened with Envestio!

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Erik January 17, 2020 - 00:09

Hi Carl, thank you for a good post. I haven’t seen the Sydinvest fund before, but then again, I mostly look at what’s available in Nordnet Månedsopsparing (= Sparindex when it comes to Danish indexfunds). Do you buy this fund manually each month (and pay courtage)? All the best, Erik

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Carl Jensen January 17, 2020 - 08:12

Thanks, Erik.

The fund is relatively new, so I recently discovered it too.

Yes, I don’t invest through Månedsopsparingen. I invest relatively large sums, so the fees do not have that large impact and I like to have the option to choose all index funds (including this one).

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Mikael N. January 16, 2020 - 11:52

Could you please define exactly what you mean by sustainability? And why you think Cisco, Adobe, SAP, Salesforce and Accenture (top 5 positions) makes the world a better place? Indeed looking at the full list of holdings I see no companies like Vestas and Ørsted (clean energy), but for instance you have in 7th place LVMH Moët Hennessy (luxury goods) which, if anything, is all about consumption.

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Carl Jensen January 16, 2020 - 17:02

Thanks for asking critical questions, Mikael.

Yes, by sustainability I mean companies that are performing best on environmental, social and governance standards. The ratings used by Morningstar are made by Sustainalytics. You can read more about them here: https://www.sustainalytics.com/esg-ratings/

Keep in mind that I am an index fund investor. I cannot and will not evaluate every single company in an index. I will have to rely on external parties to make these assessments. Right now, the index fund I mention is the one that goes the furthest, but if more progressive index funds come along, I’ll be more than happy to shift to them. If you know of any Danish index funds, please let me know.

Sustainability is not only about clean energy, although I sure hope some of them are in the index. Vestas and Ørsted are perhaps not large enough to make a global index. The companies in the index are rated as some of the companies with the highest ESG standards. We will and should not get rid of consumption. If LVMH Moët Hennessy is on there, I expect they have a bigger focus on sustainability than their competitors and hopefully investing in them could inspire their less sustainable competitors to go in the same direction.

The decision of which companies have the top positions is not made based on who is most sustainable. It’s an index, so their relative size is used to determine how large the positions are. Thus, if a company is deemed sustainable and can be part of the index, its position is based on its size and not its sustainability score. Otherwise, it would not be an index.

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Mikael N. January 17, 2020 - 08:44

Hi Carl,
Well, indices are a dime a dozen, but since this index is used by actual funds, and has the word ” sustainable” attached, I think it’s important as an investor to at least be aware of how sustainability is defined and see if it aligns with your expectations, otherwise you’re really just buying into a trend without making a conscious decision.
When I look at the list of included companies, I wouldn’t have guessed they are part of a sustainable index, probably because to me sustainability means something along the lines of clean energy, clear water, recycling, waste treatment, fishing/farming/forestry without depleting natural resources and so on. I.e the E in ESG, whereas the index seems to consist mainly of companies that adhere to the SG part (which is probably why there are so many IT/finance companies included).
To each his own, and if this is what you’re looking for in an investment, by all means go ahead. As you might have guessed I’m not totally sold 🙂 For now I’m sticking to a global fund, but since the recent changes in danish tax regulations concerning ETF’s I’m contemplating putting a small part of my investments into some of the so called alternative iShares’ ETF’s and see how they pan out.

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Carl Jensen January 17, 2020 - 16:43

I don’t believe you are right in your assumptions about what environmental (E) means. Environmentally concious companies don’t have to work on solutions to combat climate change. Companies with high environmental standards can focus on minimizing their greenhouse gas emissions – or becoming carbon neutral. I would much rather invest in companies that are mindful of our environment than companies that aren’t. Those companies are rated by professionals as having high environmental standards.

You are not right in assuming that the index fund focuses primarily on SG. In fact, the rating is high for E and S, but only above average on G. If you read the prospectus, you will see that specifically greenhouse gas emissions are an important part of the Morningstar ratings.

Which global fund are you investing in? I believe iShares also have some good options, but unfortunately the tax regulations in Denmark are still not favourble compared to Danish index funds (due to lagerbeskatning). If this changes, you will also see me looking abroad for even more sustainable indexes 🙂

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Diogo January 16, 2020 - 18:53

Good point, Mikael. The metrics really are critical.

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Carl Jensen January 17, 2020 - 08:13

Fully agree! This is why I’m leaving it up to professionals to decide 🙂

I would be happy to hear about even better index funds though if you know any.

Reply

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