Sustainable Investments: Should You or Shouldn't You?

As the Glasgow Climate Summit is being held over the last week-end in October, I thought it was timely to dedicate this entire newsletter to sustainable investing and covering some of the issues involved.
While clients have always mentioned a desire to make sustainable investment, there has certainly been an uptick in these types of inquiries in recent months and it is easy to understand why. Climate change and related environmental issues have certainly found their way to being front and centre.
However, before I begin, I think it’s important to clearly outline what drives the investment decisions I make on behalf of clients, of whom most are either in or near to retirement and the work I do in managing superannuation accounts.
My starting point is to minimise risk wherever possible, while trying to maximise the income generated by investments along with generating some long-term capital gain.
It also means taking full advantage of the prevailing treatment of fully franked dividends, which can boost the return on say a Commonwealth Bank share from about 5% to 6.5 % and for those in retirement, this 6.5% return can be generated completely free of tax obligations.
So as a result, I stay close to what are often referred to as the retiree’s bet friends. Companies such as BHP, ANZ and Wesfarmers who have a proven history of paying high-yielding, fully franked dividends in good times and bad.
Any decision to invest funds away from these types of companies, will mean either taking on more risk or accepting reduced income and/or both. If I could find a sustainable investment, that matched BHP or CBA in terms of stability or return, I would already be investing funds in it.
So in deciding to place funds in more sustainable investments, as a starting point you need to accept this might happen, that is that you might generate less income then you otherwise would or you might face the prospect of greater risk or loosing funds.
When you think about it like this, you may not be so keen to invest in sustainable investments or if you still are you might decide to just invest a percentage of your portfolio say 10 per cent or maybe as much as fifty percent as a way of reducing these risks.
So What Is A Sustainable Investment?
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The next thing you really need to focus on is what exactly are you thinking of when you suggest you want to invest in sustainable investments. Are you thinking for example of wanting to investing in new technology such as batteries that can store electricity or are you thinking of investing in companies that are reducing their overall environmental footprint.
Its worth pausing and thinking this through.
For example, would you consider investing in nuclear technology. Many people believe it is only a matter of time before Australia will generate electricity using nuclear powered generators, as they generate no greenhouse emissions. Others believe nuclear by-products are an environmental hazard that can do irretrievable damage to the environment for thousands of years.
Depending on your attitude to nuclear waste you might find the answer to that question clear cut, but would you describe Fortesque Metals Group as a sustainable investment. I know the founder of the company, Twiggy Forest would, although many would struggle with thinking a company such as Fortesque Metals which digs up mountains of iron ore from the Pilbara in Australia’s north west and ships it to China, where is it turned into iron, as a sustainable company.
However, the company has put in place clear plans to re-configure its massive iron ore operations so they are carbon neutral by 2030.
This means Fortesque will be using giant hydrogen-powered mining trucks as well as giant hydrogen powered trains and giant hydrogen powered ships, to not just dig up but transport its iron ore.
Its important ground-breaking stuff in terms of sustainability, from a company that has a proven track record of generating high-yielding fully franked dividends. They are also not alone with both BHP and Rio Tinto taking similar steps to reduce their carbon footprint.
Other companies are also becoming more mindful of their obligations to create a more sustainable environment. At the Commonwealth Bank’s annual general meeting earlier this month, it announced it was including a range of environmental standards when deciding to finance a project
Reflecting this, CBA’s lending to gas and coal projects and assets is down over the year and it has targeted to lend some $70 billion by 2030 to companies focused on creating renewable energy solutions.
So in saying you would like to invest in more sustainable assets, it is quite possible depending on your criteria that you are already investing in companies that are making big efforts to change the way the world does business.

What Are Your Sustainable Investment Options?
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Sustainable options do exist but its important to think through exactly what they are, the level of risk attached to them and what the expected returns are.
It is easy for small companies that are basically researching new technologies and hoping to get those technologies to market in a profitable way, to grab the headlines as the next ‘you beaut’ investment that everyone should support.
However, I think this is more akin to placing a bet on a horse in a horse race then investing. It’s a punt.
It doesn’t matter how good the technology is, for investors to make money out of any investment be it an investment in the combustion engine or a new electricity storage battery, that company needs to have the right management, the right resources and for good or for bad, luck.
So until a company with sustainable technology proves that it can generate significant fully franked dividends for investors for the long term, I doubt I will recommend any individual ‘sustainable’ company to clients.
There is also a big problem within this sector of investments that promote themselves as investing in sustainable investments and repeat this in all their marketing but are effectively doing little more than ‘greenwashing’.
That means they are telling the world they make sustainable investments but when you drill down, they might make a few investments in what most people would think are sustainable investments but these investments are not significant.
However, there are a number of managed funds operating in this space and I am willing to recommend investments in these types of companies.
For example I am happy to recommend investments in the Australian Ethical Diversified Share Fund. This company was started in 1985 and has always looked to invest funds in sustainable and environmentally friendly companies.
It has a clearly disclosed Ethical Charter and so doesn't invest in tobacco, coal mining companies or nuclear weapons companies – although I should point out I don’t’ recommend any company that does either.
Australian Ethical Fund’s focus is in investing in a diverse range of smaller companies that have a clear stake in creating a more sustainable world such as Vestas Wind Systems and Brookfield Renewables Partners.
However, I note that this fund also investments in companies such as Medibank Private, Bendigo Bank, National Australia Bank and Telstra. All these companies pass their ethical criteria for investing but I am not sure most Australians see them as leading sustainable investment options.
The five-year average return on this fund is 14.7 % which puts them on par with a general return from share market investments during that period and they distribute earnings twice a year.
The company themselves describe this investment as very high risk and that it should be held as a long-term investment and they also charge 1.1% of funds under management as a straight investment cost whether they make money or not.
I would though support placing a share of your investment portfolio into this fund if you do feel strongly about making an investment that supports your environmental or ethical concerns first and your need to general income safely, second.