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Sustainable investing: selecting for impact

Have you ever wondered which world your savings bring about? Or what is impact of the companies you invest in?

Being unaware of how we invest – ignoring impact – is one of the key reasons the world is on an unsustainable track.

Capital has the power to redesign the world, and investors have the strength to influence corporate action. It’s time to change the way we invest and become conscious, values-based investors.

Why sustainable investing?

Traditional investing is two-dimensional. It’s looking for the best opportunities in terms of risk and return while ignoring the impact on people and the planet.

Sustainable investing adds a much-needed third dimension – the larger impact on people and the planet.

The investment world calls this dimension ESG.

Considering ESG in your investment strategy is not a tree-hugging version of investing that sacrifices gains for the greater good.

On the contrary, the three-dimensional view on investing makes a lot of financial sense.

First of all, the economy is already changing as a result of carbon-reduction policies. This brings along a lot of opportunities. But every industry also has risks related to the shift to a low-carbon economy (especially concrete, steel, aviation, automobiles, utilities and fossil-fuel industries).

Such transitions have major effects. Some sectors of the economy could face big shifts in asset values, higher costs of doing business, outplacement of technology, or a drop in customer demand. It could be the result of people preferring more sustainable solutions. Unsustainable practices also pose a risk to a company’s reputation.

Sustainable investing has the potential to manage uncertainties related to transitions and to capitalise on opportunities.

It also helps with the practical implementation of already existing technologies that help to combat climate change, protect biodiversity or improve waste management.

Sustainable investing allows you to support the causes you believe in and earn market-based financial returns.

How do we select financial instruments?

There are already more than 3000 sustainable funds around the world. It made no sense for Grünfin to start another one at this stage.

Instead, we’ve chosen to build our client portfolios from the best sustainable Exchange-Traded Funds (ETFs) in the world.

We view investments in the major market indices through the lens of Environmental Social and Governance (ESG) and the UN Sustainable Development Goals (SDG). We specifically focus on three: Climate Change, Equality, and Health.

As part of our investment processes, we screen the best sustainable ETFs by the world’s top asset managers, with no preference to service providers. Unlike banks, who are often interested in selling their own instruments, we have committed to being service provider neutral.

We believe in a long-term, low-cost, well-diversified and values-based investment strategy.

Aerial view of wind turbines

Not all ESG funds are built equal

The focus of ESG funds on sustainability and impact varies a lot. So you need to look beyond the label and get to know different sustainable investing strategies. This is especially important when going beyond minimising risk aims and moving to values-based, more impactful investing.

Investor intentions and fund philosophy matter.

Our climate change portfolio complies with EU Sustainable Finance Disclosure Regulation, Article 9 (“dark green”). These funds have specifically set sustainable goals as their objectives (for example, investing in companies whose goal is to reduce carbon emissions).

Grünfin’s “Equality” and “Health” portfolio complies with EU Sustainable Finance Disclosure Regulation an Article 8 (“light green”). Article 8 funds promote E, S and G characteristics but don’t set them as the overarching objective.

Article 9 sets high standards for the funds. At this time, we could not introduce Article 9 funds in our Equality and Health portfolios. This is because, currently, none of the passively-managed ETF and index funds in these themes would comply.

We will be keeping our eyes open for new Article 9 funds in Equality and Health themes. The hope is to introduce them to our portfolios as soon as possible.

Keeping an eye on asset owners’ words and actions

We are also analysing the asset owner’s behaviour in active ownership or stewardship.

Do they have appropriate shareholder engagement programs? Do they report to their investors on the impact of their engagement efforts? Do they report on the societal impact of the companies they own? Or on the projects they help finance through their fixed-income investments?

Active asset owners can encourage businesses to develop socially responsible practices by taking an active role in their ownership.

With active ownership, the investor or fund encourages the companies to improve their ESG risk management and develop more sustainable business practices like setting targets to decrease their carbon footprint. This can happen both through direct engagement as well as proxy voting.

Does Grünfin provide impact investing?

Impact investing and sustainable investing have a lot in common. They both aim to bring about a better world.

However, sustainable investing is liquid – it’s possible to buy and sell anytime. Impact investing is illiquid. Impact investors invest in private companies, may compromise on financial goals and have larger management fees.

At Grünfin, we assume that financial goals and liquidity are as important for our customers as impact goals.

We believe that if the asset owner sits on a large polluter’s board and engages in sustainability topics, the results have more weight than financing small community impact projects. This means direct influence over setting targets to lowering their carbon footprint by 7% each year or coming up with new, clean technology.

Of course, impact investors may be able to measure impact more tangibly. On the other hand, it does less to change the big picture.

Focusing on 20% usually gives 80% of the results.

A screenshot of Grünfin’s portfolio view

Investing for the long term

An important decision we made along the way was to focus on long-term, low-cost and diversified investing.

New tools have made investing and trading stocks incredibly easy. Investing products that offer commission-free trading have increased access to financial markets.

At the same time, these products have encouraged people to take on risks similar to gambling. One study found that over twelve years, only 5 percent of active retail traders made any profit at all. Outsmarting the market is usually a bad long-term strategy.

We are consciously encouraging people to hold onto their investments over a long period.

The longer timeframe helps the dynamics of financial markets deliver performance to achieve set targets.

How do we deal with changes in the market?

Investing is all about focusing on your financial goals and ignoring the noisy nature of the markets and the media that covers them.

Once you have established your portfolio, we recommend buying and holding the investment for the long haul. Also, it’s best to keep on investing according to planned investment contributions.

Do not let yourself be influenced by short-term market movements and stay focused on the long-term portfolio saving goals.

Usually, when there is a sudden market downturn, there’s a lot of fear and anxiety. You might see your investment portfolio value go down. But selling at that time and locking in losses is the worst thing you can do. Often it’s actually a good time for portfolio managers to rebalance your portfolio, buy more of relatively lower-priced asset classes. This way, you’ll be taking advantage of the market turning upward again.

We commit to ensuring that our customer portfolios are rebalanced annually to keep target asset allocations and take advantage of market movements.

Our investment principles

Here’s a summary of Grünfin’s sustainable investing principles:

  • We don’t just consider risk and return, but also the larger impact on people and the planet.
  • We screen, analyse and rate the best sustainable ETFs worldwide to build our client portfolios without preferring any single service provider.
  • We prioritise impact, investor intentions and fund philosophy and tailor portfolio based on your values.
  • We rebalance not just to maintain risk levels but also to increase the portfolio returns on market movements.
  • We encourage a focus on long-term investing (low cost, diversification) and portfolio results.
  • When your portfolio performance exceeds the targets and does well, the success is shared between the customer and Grünfin.

Read about Grünfin Sustainable Investing Principles in detail on our website.