Single-digit millionaires may not be at Bill Gates levels of philanthropy yet; but that doesn’t mean they can’t make a substantial difference. I’m not talking about donating a pricey piano or a library to your old school either: as a single-digit millionaire, you have portfolio options that can make a real difference to the world (or at least your corner of it). That’s through ethical and impact investing:
What is ethical investing?
Ethical investing means your personal values are a primary filter, as to which assets you pick. The best-known example of this is probably Halal investing: practicing Muslims are careful to ensure their funds and sub-funds don’t include assets related to alcohol, pornography, gambling, or other prohibited products / services.
Religion aside, there are also investors who have political values. I have, for instance, encountered investors who refuse to invest in certain regions of the world; this may happen because they consider a particular state to be despotic, a human-rights violator, or a threat to their own country’s interests.
Some investors also have values that are personal. Examples are those who won’t invest in tobacco companies because they’ve lost a family member to lung cancer, or those who refuse to invest in firearms and defence industries because they are avowed pacifists.
In the past, investing this way was challenging, because you had to do a lot of detective work to trace what each company is involved in. Today however, there are ethical investing funds, which filter the assets for you. The most common of these are Environmental, Social, and Governance (ESG) funds.
(Mind you, not every investor fully trusts fund managers, and some may insist on continuing to pick the assets themselves).
What is impact investing?
Think of this as the more proactive version of ethical investing.
With ethical investing, you just filter out the assets you morally disagree with. With impact investing, you seek out and fund initiatives that – in your opinion – will better the world.
An example of impact investing could be clean water investing, in which your capital funds companies building more effective – and hence more affordable water – filtration systems for poorer countries.
This can be a win-win arrangement, since if their technology works, even developed states like Singapore will probably be interested; and there can be solid returns while benefitting whole societies.
Other examples are investments in sustainable energy companies, or the microloans industry (i.e., making loans to poorer countries so they can buy agricultural equipment, or improve town and village infrastructure).
But can you make money doing this?
The jury is still out. This is a rather new form of investing, compared to traditional funds that only had to focus on the bottom line. What we do know for a fact is that, based off Morgan Stanley’s findings, ESG funds outperformed their regular counterparts by an average of 4.3 per cent during the Covid-19 epidemic (this was back in 2020).
On a whole however, the consensus is that ESG funds perform neither better nor worse than a regular fund. The ESG portion seems to have very little impact on returns. So while they may not outperform regular funds, they can still deliver comparable returns, while allowing you to invest according to your values.
Good news if you’re principled, as it means you can continue to grow or protect your wealth without compromising your values.
Besides, there are consequences that go beyond the fund’s performance:
Optics can be a major consideration
If you’re a celebrity, business owner, or other high-profile figure in your community, you need to pay extra attention to what you’re invested in.
Consider the potential impact if someone discovers you have investments in vice companies, such as casinos or adult entertainment. Even if you weren’t aware of it (e.g., it’s in a managed fund that you have only a few units in), this can be used to tar the public’s perception of you.
On a positive note, impact investing can mean a boost to your public image. If you’ve put venture capital into education companies, agricultural assistance for developing nations, etc., it will help to show others what you stand for.
Single-digit millionaires who are in the public eye need to weigh these concerns, and it often inclines them toward ethical / impact investing.
Long-term profitability and risk management
Given the near-global rejection of cigarette products, it’s far less likely that a cigarette brand will be a corporate powerhouse in the future. This has also been said regarding fast food brands, chemical companies dealing with agriculture. As the public becomes more health conscious, many of these industries – which look like blue chips for now – are less likely to remain so in future.
On the flip side, mass adoption of technologies such as solar power or electric vehicles may bring outsized returns later. These technologies are still growing, and impact investing means you can buy in while they’re still affordable to you.
If you have a long investment horizon (e.g., 20+ years), this can make a big difference to your portfolio in later years.
How do you take part in all this?
Choosing a managed fund, such as an ESG fund, will usually provide more diversification than picking stocks yourself. It’s also a big time-saver, as all the relevant companies have already been vetted.
This does include an element of trust though. You need to be confident that the fund manager(s) are properly adhering to your principles, and that you won’t look inside p a sub-fund to discover something nasty later.
There is also the issue of how you qualify a company as being “ethical.” There’s no universal measurement for this right now. Take, for instance, sustainable investing: some investors may look at the carbon footprint of a company, to determine if it’s an acceptable investment. Others may base their decision on the company’s initiatives, such as replanting trees or protecting wildlife.
It’s possible that a company may pass one criterion, while failing another.
There may also be companies that hold one set of values, but not another. For example, a sports apparel company may be a major contributor to reforestation, but also have a reputation for using sweatshop labour. Such a company might sneak its way into a green portfolio, despite its abhorrent labour practices.
For these reasons, its best to check what’s inside a fund or sub-fund, rather than just blindly accepting it. I would suggest having a real wealth manager or financial advisor, who can you walk you through the fund and explain each element. For help on this, do reach out to me on Single Digit Millionaire. You can also follow this site for future tips and trends on optimising your wealth.
