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Sustainable investing with findependent

Name: findependent
Brand: findependent
Rating: 5.0 (63 reviews)

What is important to us

Like in many other areas, ‘sustainable’ is not precisely defined when it comes to investing. When a financial investment is considered sustainable or how one can best prioritize sustainability in investing is not a black-and-white matter – on the contrary, it leans more towards «Fifty Shades of Green».

The topic of sustainable investing is currently hotly debated and engages a wide range of stakeholders, from individual and institutional investors, banks and asset managers, to NGOs and climate movements, and even governments. Sustainable investing has been on the agenda for us at findependent since the beginning. In this article, we therefore provide insight into our stance on sustainable investing and the sustainability of our investment solutions. But one thing at a time.

How does sustainable investing work?

Sustainable Investing – a Definition

The Swiss Sustainable Investment (SSF) association defines “sustainable investments” as a collective term for “any investment approach that integrates environmental, social, and governance (ESG) factors into the selection and management of investments,” thus defining sustainability very broadly. There are various approaches to implementing sustainable investing. On one hand, one can decide in various ways what to invest in and what not to invest in. On the other hand, there is also the possibility to engage in dialogue with companies in which one is invested and to effect change for sustainability there. (Swiss Sustainable Investment Market Study 2021)

ESG Criteria

“ESG” stands for “Environmental,” “Social,” and “Governance.” These three pillars form the basis upon which sustainable investments can be evaluated.

3 Main Motivations for Sustainable Investing

In broad terms, there are also three distinct main motivations for sustainable investing:

Alignment with values
Improvement of the risk-return ratio
Achievement of positive impact in the real world

Aligning Investments with Values

A primary motivation for sustainable investing can be the desire to invest in companies that align with one’s own values. For example, one may wish to avoid investing in companies that engage in highly environmentally damaging practices. Or it may be deemed unacceptable to receive dividends from a company that manufactures components for controversial weapons.

This is also the primary motivation for us to employ sustainable investments. More on this in the section «Investing Sustainably with findependent».

ESG-Screening

ESG screening involves defining, through specific filters, which sectors, companies, or activities are eligible or ineligible for inclusion in a sustainable investment solution. In this way, investors can apply certain criteria within the ESG domains to consider personal preferences, values, and ethics for their investment solution.

For instance, screening can serve to exclude the largest greenhouse gas emitters from a sustainable investment solution (negative screening), or to only consider the lowest emitters (positive screening / best-in-class).

Improving Risk-Reward Ratio with Sustainable Investing

In addition to ethical considerations, financial security can also serve as a motivation for sustainable investments. It is assumed that companies that do not operate sustainably have poorer future prospects. This is because, to counteract climate change, the price of CO₂ emissions must inevitably rise, meaning that companies will have to pay more per emitted ton of CO₂. This reduces the profit of carbon-intensive companies, ultimately affecting the returns of investors who include these companies in their investment solutions. To mitigate this risk, it may be wise to reduce or even entirely avoid investments in companies with a large carbon footprint.

Achieving Positive Impact through Sustainable Investing

Achieving a positive impact (“Impact“) in the world through sustainable investing is ultimately the most complex endeavor. Genuine impact occurs only when there is a causal connection between an investment and real change. It’s important to understand that trading stocks or other securities (referred to as the “secondary market“) does not have a direct impact on, for example, the climate. Holding a specific security does not fundamentally make a difference in the real world, as securities themselves do not emit emissions. Instead, it’s the companies and governments that need to operate more environmentally friendly and reduce their CO2 emissions to make a difference.

Although sustainable investing on the stock market does not directly lead to saving a certain number of tons of CO2 or avoiding waste, there are unfortunately some products that suggest otherwise. In an interesting case, the German Dekabank took down its misleading “Impact Calculator” in spring 2021 after being accused of greenwashing by a consumer protection organization. (nzz.ch)

However, it is possible to exert influence through investing. “Investor Impact” occurs when investors succeed in driving change in companies, which in turn have positive real-world impact with their sustainable products and services.

One way to do this is to help such companies grow by providing them with capital. This is especially important for young and small firms to scale their sustainable solutions. This can be done outside the stock market (referred to as the “primary market“), for example, through venture capital or other forms of private equity, or by facilitating access to loans.

The second option is to accelerate the transformation to sustainability, especially in larger companies that are not yet sustainable but have great potential to be. Shareholders can, for example, engage in sustainability by voting at shareholder meetings.

Because implementing sustainable investing with real and measurable impact is so difficult for ordinary investors in practice, one could say in a simplified way: Saving the world with sustainable investments is not feasible. However, not investing at all is not a solution either.

At this point, let’s consider what the alternative would be: hoarding money in a bank account. But that money isn’t just hoarded there. The bank does business with it. Credit Suisse and UBS, for example, often provide controversial loans with their clients’ money, such as to fracking companies that extract oil and emit harmful gases into the air. An interesting documentary film on this topic is available from SRF Dok. The good news is that they, too, are increasingly feeling pressure from the public and politicians, and have now implemented guidelines, for example, for their coal business. Even with domestic banks, lending is less problematic.

〉 In SFF’s market report, you’ll find not only a great overview of the various types of sustainable investing but also many current statistics on the Swiss market, information on regulatory developments, trend predictions, and an engaging interview on the topic of «Investor Impact».

How to Measure Sustainability in Investing?

ESG Rating

Since sustainability and sustainable investing in the realm of financial investment lack a unified definition, measuring them becomes even more challenging. ESG ratings provide some guidance, although even here, there is no standardization in how providers create their ESG ratings. Each has its own approach to data and methods for analysis.

MSCI, the publisher of the indices represented by the ETFs we use, assigns ESG ratings to companies as follows: MSCI captures a company’s business activities, size, and locations of operations and analyzes the extent to which they are exposed to specific ESG risks in their industry and how they manage them. They are then compared to other companies in their industry. Companies receive a rating ranging from «CCC» (laggard) to «AAA» (leader).

MSCI’s ESG Rating for Companies

MSCI has defined a total of 35 ESG risks. Those related to corporate governance are applied to all companies. However, in the areas of environment and society, a company is only assessed for those ESG risks that are relevant to its industry. For example, while “water scarcity” may pose a significant risk for coal companies, it may not be relevant enough for a pharmaceutical company.

Now let’s take a look at how the ESG rating works for an entire ETF. MSCI also assigns an ESG rating of “CCC” to “AAA” for each ETF. The rating for the ETFs is determined by the weighted average rating of the holdings (for example, all companies included in a stock ETF). Additionally, it is examined whether the rating of the holdings has improved or deteriorated and how many holdings with the lowest ESG ratings “B” and “CCC” are included, exposing the ETF to extreme risks.

〉 Overview of all 35 ESG risks defined by MSCI. Including an example from the beverage industry with companies like Coca Cola.

〉 MSCI’s search tool for companies. Displays the ESG rating, distribution within the industry, and many other details.

〉 MSCI’s search tool for funds. Displays the ESG rating, distribution of its holdings, and many other details.

Rating by findependent

We believe that alongside the ESG rating, ESG screening should always be taken into consideration. This is because in markets where sustainability standards are generally still in their early stages, ETFs that mirror these standards may not achieve a high rating despite screening.

Criteria

We label every ETF in our app that is screened according to ESG criteria with a , and additionally, for an ESG rating of “AA” or “AAA,” we award , or , respectively.

Options for Sustainable Investing

Below, we present three different types of ETFs that allow for investing aligned with sustainable values.
Afterward, we will briefly introduce an investment product that enables investors to consistently hedge against the financial risks of rising CO₂ prices.

ESG Screened ETFs

All companies in these ETFs adhere to the United Nations Global Compact. Additionally, companies from the following controversial sectors are excluded based on clearly defined and measurable criteria:

Nuclear power
Coal-fired power, coal mining
Oil sands extraction
Tobacco industry
Nuclear, controversial (e.g., cluster munitions), and civilian weapons

In total, around 10% of companies are excluded through screening.

〉 Learn more about MSCI’s ESG Screened Indices

〉 Learn more about the United Nations Global Compact

SRI ETFs

The abbreviation “SRI” stands for “Socially Responsible Investing.” SRI ETFs are similar to ESG Screened ETFs but go a step further. Companies for these ETFs are selected as follows:

Value-based exclusions (e.g., weapons, tobacco, alcohol, gambling)
Environment-based exclusions (e.g., coal mining and power plants, oil sands, fracking)
Top 25% from each sector with the best ESG rating
For some ETF providers, additional exclusion of the top 10% of CO2-emitting companies

This means that in addition to categorically excluding certain sectors, a “best-in-class” approach is applied in each sector, with only the top 25% of companies with the best ESG rating making it into the ETF. The method of SRI ETFs is therefore very comprehensive. However, they still contain companies that are controversial in the media, such as Nestlé. Additionally, due to the relatively strong filtering, there is a certain risk that the returns may deviate slightly from those of the “normal” ETF counterpart (due to higher tracking error and turnover), although both should perform very similarly in the long run. SRI ETFs are well-established, and there is already an SRI ETF available for Swiss stocks. Furthermore, the product costs (TER) of SRI ETFs are slightly higher than those of ESG Screened ETFs.

〉 Learn more about MSCI’s SRI Indices

Paris Aligned ETFs

The name “Paris Aligned” refers to the Paris Climate Agreement, which aims to limit the average global warming to 1.5°C compared to pre-industrial levels. Paris Aligned ETFs are designed to align with this goal by selecting companies as follows:

Mild, value-based exclusions (tobacco, controversial weapons)
Environment-based exclusions (e.g., coal mining and power plants, oil sands, fracking, companies with more than 10% of revenue from oil and gas)

In a second step, the selected companies in the ETF are weighted differently. More is invested in companies with below-average CO₂ emissions that disclose their CO₂ emissions, have defined CO₂reduction targets, and have reduced their CO₂ intensity by at least 7% over the last three years. Conversely, less is invested in companies that do not meet these criteria.

Through this mechanism, the ETF ends up with companies weighted to collectively reduce their total CO₂ emissions by 10% annually. Compared to their “normal” ETF counterparts, companies in Paris Aligned ETFs are also weighted to have overall 50% lower CO₂ emissions.

Paris Aligned ETFs have a strong focus on climate. However, they apply relatively few value-based exclusions, meaning that companies in sectors such as civilian weapons, nuclear power, or alcohol may be included. Due to the relatively complicated selection process including weighting, a Paris Aligned ETF typically includes about 50% of the companies in a “normal” ETF. Consequently, it also has a moderate tracking error and turnover. One disadvantage of Paris Aligned ETFs is that they are relatively new and not yet established. This means that trading spreads are still somewhat high, and there is a potential risk that the ETFs may be delisted. Currently, at findependent, we do not offer Paris Aligned ETFs, but we are monitoring their development. Furthermore, there is currently no Paris Aligned ETF covering the Swiss stock market. In terms of costs, they fall between the cheaper ESG Screened ETFs and the more expensive SRI ETFs.

〉 Learn more about Paris Aligned Indices by MSCI

In the following table, we have summarized the presented options for sustainable investment solutions.

Sustainable ETFs compared

As we have seen, a commonality among all three ETF variants is that the main motivation is aligning with personal values. There are also options primarily focused on improving the risk-return ratio. Next, we will briefly introduce such an investment product.

Hedge-Portfolio

Swiss company Finreon has developed a concept that consistently eliminates the financial risk of rising CO₂ prices for investors. They use a hedge portfolio designed to mitigate the mentioned risks while still maintaining investments in all companies. However, as this is relatively complex and not currently applicable to our situation, we will not delve further into it here. Nevertheless, it is an intriguing concept, and those interested can explore it further on Finreon’s website or in this NZZ article.

Investing Sustainably with findependent

ESG Screened ETFs for our findependent Investment Solutions

We have chosen to steer clear of certain industries – industries that are simply too critical from a sustainability standpoint. Therefore, for all our equity investments outside of Switzerland in our five ready-made findependent investment solutions, we exclusively use ESG Screened ETFs.

Our aim is not necessarily to achieve direct “impact,” as mentioned, this is extremely challenging in practice and not readily accessible to small investors. Rather, our mission is to make investing accessible to people without enormous wealth. Our focus lies in aligning investments with certain ESG values through screening, enabling us to stand behind them socially and environmentally. The ESG Screened ETFs we use are not more expensive than their non-screened counterparts, providing a straightforward, transparent path to increased sustainability at equivalent costs. Therefore, it was clear from the outset for us that we wouldn’t differentiate between a “standard” and a “sustainable” investment strategy, but rather that “sustainability” would be our standard. At the same time, with our chosen approach, we can currently only offer ESG Screened ETFs for foreign equity investments – there are currently no ESG Screened variants of the selected Swiss equity ETFs on the market that are sufficiently established. (In other words, the trading volumes are still relatively small, which carries the risk of the ETF being delisted and also entails higher trading spreads, i.e., costs.) Once this changes, we will also incorporate an ESG Screened ETF for Swiss equities into our investment solutions.

findependent investment solutions

Building Your Own Investment Solution and Considering Sustainability Criteria

For those who find our pre-packaged investment solutions lacking in sustainability, there is the option to prioritize this aspect when assembling their own ETF investment solution.

Among the approximately 30 ETFs available for creating a custom investment solution, there are several sustainable ETFs. On one hand, there are those screened according to ESG criteria, such as SRI ETFs or ESG Screened ETFs currently available. On the other hand, there are ETFs that allow investors to allocate funds to specific “green” themes.

We find Paris Aligned ETFs very intriguing and will include them in the selection of ETFs once they become more established. Furthermore, we continuously monitor for the emergence of additional sustainable ETFs in the market that we could offer and warmly welcome suggestions from our community.

Create your own investment solution

Our Thoughts on Carbon Offsetting

Increasingly, companies are compensating for CO₂ emissions on behalf of their customers by planting trees upon purchase or use of their products. For example, Neon launched the Neon Green Account last summer, which not only plants trees monthly but also adds an additional tree for every CHF 100 spent using the Neon Green Card to offset consumption. Another well-known example is the young fashion label Nikin from Lenzburg, which plants a tree for every item of clothing sold and even provides customers with a tree certificate upon request.

Therefore, we have also considered offering CO₂ compensation. The beauty of tree planting is that it effectively removes CO₂ from the atmosphere (assuming the trees are allowed to grow). An investment product that also involves tree planting could thus have a real impact on the climate. The mechanism is easy to understand, and CO₂ compensation becomes tangible – one can visualize trees being planted.

But what does tree planting have to do with investing? While at Nikin, tree planting compensates for the CO₂ emissions associated with producing and delivering a T-shirt, or with the Neon Green Card, it offsets CO₂ emissions from personal consumption in general, the same principle cannot be directly applied to investing because there is nothing to compensate for directly. As described above, buying or selling investments per se is not environmentally harmful. However, planting trees – especially per deposit or with increasing investment amounts – would suggest otherwise. (businessinsider.de)

If findependent were to introduce CO₂ compensation, another challenge would be defining how much CO₂ to compensate for. One option would be to take the average CO₂ consumption of Swiss individuals as a measure and compensate for this annually or break it down to an estimated number of deposits. However, the major drawback of this approach, in our opinion, is that it does not truly offset one’s own individual CO₂ footprint, which may not be very satisfying. In the case of the German fintech startup Tomorrow, the media even criticized the blanket CO₂ compensation as a marketing gimmick.

Because there is no direct connection to the product, we would essentially be a “middleman” for tree planting, as our customers could compensate for their CO₂ footprint without us. While it might be more convenient and perhaps cheaper to do it through findependent, doing it oneself would prompt greater engagement and awareness of one’s individual CO₂ footprint.

Table with Pros and Cons of CO2 Offsetting

CO₂-«compensation» with findependent – Pros and Cons Overview

Our conclusion: There are several reasons in favor of CO2 compensation, but also many against it. Therefore, we have decided not to plant trees for the time being, but we will continue to gather feedback on this idea.