Almost everyone wants to make a positive impact with their investments. But we struggle to turn our good intentions into action. Why is that?
1. It's unbelievably confusing
For retail investors, the main route into this type of investing is via environmental, social and governance (ESG) scores.
You’ll most likely encounter ESG scores described as ‘sustainability ratings’ on investment research platforms. These are the only ESG scores readily available to retail investors (rather than investment professionals). And most retail investors only have free access to ratings for funds (and ETFs), rather than individual stocks.
But sustainability ratings are not easy to decipher, even for an experienced retail investor.
A sustainability rating scores a fund out of five. It’s created by averaging the ESG scores of the underlying companies in the fund and comparing the fund with others in the same industry group.
How are the underlying companies rated? Using a highly subjective secret sauce, combining environmental, social and governance factors, with a bespoke set of weightings for each factor, determined by the agency that creates the rating. A different set of factors is used depending on the industry, so you can’t compare ratings across industries.
And while you might see a score for each of the three ESG ‘pillars’, good luck finding out what the scores mean.
2. You can’t find the information you want
Assuming you’ve decoded ESG scores, you probably want them to tell you whether an investment aligns with your values. Is it green? Is it ethical? Is it good?
But that’s not how they work. Most ESG scores calculate the extent to which ESG issues affect a company's economic value. They’re a financial risk metric.
Let’s take the example of a coffee shop chain. An ESG score won’t help you understand its carbon footprint, its water use or how much waste it generates. Instead, it will indicate how far these factors – among many others – are likely to affect the chain's financial performance compared with other stocks in the Consumer Discretionary sector.
This type of information is useful when choosing an investment, but it’s not the only concern of those who want to invest for the good of the planet.
In short, ESG scores are designed for investment professionals with sophisticated portfolio dashboards and a lot more data, not retail investors at home on their laptops. It’s nigh on impossible to use them to research investments yourself.
3. Outsourcing costs more
Given how hard it is to research green investments yourself, you might be tempted to sign up to an online broker or asset manager that specialises in green investments. Even some of the generalist investment platforms now offer ready-made portfolios or long-lists of investment options to reflect your values. For a price.
These portfolios and lists either cover ETFs (which you can access yourself via your existing investment platform) or actively managed funds (which means more fees). By the time you’re set up, you may well have multiple accounts and layers of fees for not much benefit.
4. Fear of greenwashing
It’s no surprise that some companies are more concerned about marketing themselves as green than improving their impact for real. As a savvy investor, you’ll probably be aware of ‘greenwashers’. But how do you avoid them when choosing investments?
Some companies publish annual impact reports and you can trawl individual websites looking for them – if you have the time. There’s no short cut that we know of. Have fun!
5. You haven't tried Sugi...yet
Green investing is a challenge. But it doesn’t need to be. We set up Sugi to bring transparency to green investing. To make it easy for retail investors to research their own green investments. To make green investments accessible – without additional fees. So anyone who wants to invest for the good of the planet, can, and together we’ll make a real difference.
The Sugi beta launches to the public soon. Sign up for priority access and see how easy green investing can be.