Hi, Alex here. If you had these three more sustainable investment products in your portfolio
over the past two years, you would have been better off than owning this more traditional
one. So this answers the first question: yes, investing in ESG or more sustainable companies
DOES provide a good return.
Now let’s answer the other ones: what is ESG investing? How does ESG rating work? What
are the more sustainable investment products you can choose if you want to create your
own portfolio? How did I start mine online with only $1000? And also a few best practices
about managing and balancing your portfolio to manage the risks. Ok, let’s get drawing!
A few months ago, my friend Tim Nash from “Good investing” and the “sustainable
economist” blog launched an online course. Having worked in sustainability for 14 years
now and knowing almost nothing about sustainable investing, I figured it was time to do something
about it so I took the course. Now, I am not a financial advisor and this video is not
about giving you financial advice about how to invest your money but this is the video
I wish I had a while ago to learn the basics of sustainable investing, ESG rating, how to start a portfolio. Tim is a financial
planner so feel free to contact him if you need additional help.
First things first: ESG stands for Environmental, Social, and Corporate Governance. ESG investing
refers to investing in companies with strong environmental, social and corporate governance
records as a way to make money for yourself.
A common way to invest is to do it via funds or ETFs (Exchange Traded Funds). I won’t
get into the details on this but there are lots of videos on the subject if you want
to learn more. This ETF for example, has a list of companies with weighing. If you invest
$100 on this one, 3.34$ will be invested in Apple shares, 2.72 in Microsoft, etc. It is
a way to diversify your investment without doing it all by hand, one company at a time.
By looking at the ESG ratings in this Morgan Stanley Capital Index, you can see how many
companies in this ETF are leaders (rated AAA), how many are laggards, how much revenue comes
from fossil fuels vs renewable energy, the carbon emissions per millions of sales, how
many women are on the board, etc. You can see there are fossil fuels companies in there,
as well as weapons, tobacco, etc. If you are not doing sustainable investing, you are probably
investing into fossil fuels, tobacco, weapons, etc.
Over the past few years, assets in ESG ETFs have grown rapidly. In 2019 alone, they more
than doubled to reach about $60B. Many more funds appeared with more rigorous ESG filters
and stronger ESG ratings. If we look at this one for instance (iShares ESG Advanced MSCI
USA ETF), you can see that the carbon intensity is much lower than it was in the more conventional
one we looked at previously, there is no fossil fuel companies, no weapons, etc. This is a
great way to invest more sustainably. Here are a few examples of ETFs with good ESG ratings,
like the ones showed in the intro. You can find the links in the description and use
the tickers to find them online. If you want to fully divest, then you can choose among
these options.
Note that you can find in these ETF companies like Coca-Cola, Walmart and others that you
may or may not want to support. Feel free to browse the list of companies and to look
up their individual ESG ratings to make your decision.
Now, here is how I got started with my sustainable investing portfolio. First, I made sure I
didn’t put all my eggs in the same baskets to build a resilient portfolio. It is usually
a good idea to have a diverse portfolio with companies big and small, from different industries
(tech, health care, etc.) and also different geographical regions. It is also a good practice
to split your portfolio in two: stocks on the one hand and bonds on the other.
Why stocks and bonds? Stocks are shares of a company that can generate dividends when
the company makes some profits. Bonds are loans to companies and governments and these
guys pay you interests. One thing I learned is that stocks and bonds typically move in
opposite directions. During a recession, your stocks tend to lose value but interest rates
go up which makes bonds more valuable. Conversely, when the economy is doing well, stocks go
up and interest rates tend to go down. That’s why it makes sense to own stocks and bonds
so you are ready to face the various situations the market will throw at you in the future.
During a recession, I can sell my bonds and use the cash to buy stocks. However, during
a phase of economic growth, my stocks go up so I can sell some to buy more bonds. A good
rule of thumb apparently is to have the percentage of bonds in your portfolio be more or less
around your age (the older you are, the less you can afford to wait for your stocks to
go back up after a recession).
It took me only an hour or two to start my online portfolio using two websites: Questrade
for trading and Passiv for my portfolio management. The advantage is that you get Passiv’s Elite
plan when it is connected to a Questrade account which makes your trading tasks easier and
more automatic. I opened a Questrade account and put $1,000 in a Tax Free Savings Account
(this is a Canadian account and you’ll have to find your own local equivalent). Then I
created a Passiv account and a model. On his blog, Tim suggests a few model portfolios.
Check them out and see what seems best for you. I chose to go with the squeaky clean
and I created my model along these lines: 50% stocks (2/3 on this ETF that favours financial
returns with decent ESG ratings (what Tim calls “Less evil”) and 1/3 on this ETF
that favours very positive impacts (what Tim calls “More good”), again in the spirit
of diversification); and 50% bonds (to entirely avoid fossil fuels, I got this government
bond ETF, ideally I would get a quarter of my bonds as impact bonds but I would need
more than a $1,000 portfolio to do that).
Once I have everything set up, I let Passiv pass the orders and my sustainable investing
portfolio is on its way. Now, I just need to balance it over time, meaning I need to
make sure that my portfolio matches my goals when the market changes. For example, let’s
say that the economy has been doing well for a while, my stocks are taking more room in
my squeaky clean portfolio which starts looking more like this 50-25-20 and 5 while my goals
were set on 40-20-30 and10. Asking Passiv to adjust my portfolio to realign it with
my goals is going to make me sell stocks (10 and 5) and buy bonds (10 and 5 as well). And
by doing that, I am just selling high (some stocks) and buying low (new bonds). Which
is exactly the right thing to do. I love that! To me it is smart, non-emotional investing.
I don’t need to wonder if I should sell stocks when the market is doing poorly because
I am worried I am going to lose my money or anything. Sticking to my goals with Passiv
makes me buy low and sell high without thinking about it.
There you go. I hope you learned something in this video about sustainable investing, ESG rating, etc. If you learned
something in this video, please feel free to subscribe, hit the notification bell and
the like button. If you want to learn a lot more about sustainable investing, I encourage
you to sign up for the Good Investing course and join a community of people like you in the forum. You
can also book coaching with them and get personalized advice for your own investments. Thank you
to our patrons who make these videos possible and thank you for watching!