How to make profitable investments in sustainable assets
Sustainable investing became very popular among large institutional investors. However, for individuals with less available capital, investing in ESG funds could be too expensive and sometimes unaffordable. Here we share our insights how to make profitable investments in sustainable assets.
The cost factor of ESG investing for individual investors:
The cost to invest in ESG (Environmental, Social, and Governance) funds for an individual investor can vary widely based on several factors, including the specific fund chosen, the fund’s expense ratio, and any additional fees associated with buying, holding, or selling the fund.
Here are some common costs associated with ESG fund investing:
Expense Ratio: This is the annual fee that all funds charge their shareholders. It represents a percentage of the fund’s average assets under management and is used to cover the fund’s operational expenses, including management fees, administrative fees, and other costs. ESG funds can have varying expense ratios, often ranging from as low as 0.10% to over 1.00% per year.
Transaction Fees: Some brokerage platforms may charge a transaction fee when you buy or sell shares of a fund. However, many brokers now offer a selection of no-transaction-fee mutual funds and commission-free ETFs.
Load Fees: Some mutual funds charge a sales load, which is a commission paid to a broker or salesperson who sells the fund. Loads can be “front-end” (charged when you buy shares), “back-end” (charged when you sell shares), or “level-load” (charged annually as a percentage of assets). Many ESG funds are no-load, meaning they do not charge these types of fees.
Minimum Investment: Some funds require a minimum investment amount to get started, which can range from a few hundred to several thousand dollars. In general minimum investment in an ESG Fund could start from $25,000. ETFs, on the other hand, typically allow you to buy as little as one share, which could be more affordable for individual investors.
Performance Fees: Rarely, some funds may charge a performance fee if the fund exceeds certain benchmarks or performance targets.
Investing in individual stocks can be sustainable:
Environmental Consideration: Investors can choose stocks of companies that have a minimal negative impact on the environment, engage in practices that reduce their carbon footprint, use renewable energy, and strive for sustainable resource management.
Social Responsibility: Companies that treat their employees well, engage in fair labor practices, support community development, and ensure product safety can be considered for sustainable stock investing.
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Ethical Governance: Sustainable investing also involves choosing companies with transparent and ethical governance, including fair executive compensation, shareholder rights, and lack of corruption.
Sustainable stock investors often use ESG ratings and criteria to screen potential investments. Many financial service companies provide ESG scores for publicly traded companies, which can help investors make informed decisions. Additionally, investors may use shareholder advocacy and proxy voting to influence corporate behavior towards more sustainable practices.
It’s also important to note that sustainable investing doesn’t mean sacrificing returns. Studies have shown that companies with strong ESG practices can perform as well or better than their less sustainable counterparts over the long term, as they are often better at managing risks and capitalizing on opportunities.
Investing in individual stocks can provide higher returns and more flexibility
The profitability of investing in individual stocks versus ESG funds can vary and depends on several factors, including market conditions, the specific stocks or funds chosen, and the time horizon of the investment.
Investing in individual stocks provides the opportunity for higher returns, especially if an investor is able to pick “winning” stocks that outperform the market. However, it also comes with higher risks and requires more research, knowledge, and active management. Investors who select individual stocks need to analyze financial statements, understand industry trends, and keep up with company-specific developments.
On the other hand, ESG funds, which include mutual funds or exchange-traded funds (ETFs) that focus on companies with strong environmental, social, and governance practices, offer diversification and professional management. Although ESG funds may have slightly different investment goals, they can still be quite competitive with traditional funds in terms of profitability. In fact, some studies have shown that ESG funds can outperform traditional funds, as companies with strong sustainability practices may be better positioned to manage risks and take advantage of emerging opportunities related to sustainability. The main question here is how to make ESG Funds more affordable for individual investors with modest capital at hand.
It’s important to note that ESG investing is not just about financial returns but also about investing in a way that aligns with personal values. Some investors might be willing to accept slightly lower returns for the peace of mind that comes with supporting companies that have positive environmental and social impacts.
Ultimately, whether investing in individual stocks is more profitable than investing in ESG funds will depend on the individual investor’s strategy, risk tolerance, and ability to identify high-potential investments. Both approaches have their own sets of advantages and challenges, and investors may choose to incorporate both individual stocks and ESG funds into their portfolios to balance potential returns with risks and personal values.
Our view:
In the current technological availability it is possible to pick up individual stocks skillfully and make significantly higher returns. The diversification of an ETF means that the positive impact of any high-performing stocks within the ETF is diluted by the presence of medium- and low-performing stocks. Thus, investor can loose opportunity to generate higher returns. The second issue is the dividend yields. Some individual stocks may offer higher dividend yields than an ETF that holds a variety of stocks with varying dividend policies. So, investor loses the opportunity to realize higher dividend on its sustainable investment. Of course, investing in individual stocks requires more time and effort from investor. Ultimately, investors could search for experts’ advise in order to make highly profitable sustainable investment portfolios. The choice depends on personal risk tolerance, investment goals, and investor’s personal preferences.
For more detailed insights, please do not hesitate to contact us.