We need to be aware of the impact of our money decisions
For decades the world of investing, whether for private or institutional investors, moved within the comfortably secure number-based triangle of liquidity, profitability and risk. Risk-return ratios determined how the algorithms and the models were built. This was quite a simple world in which one important question was mostly ignored: “What will be the impact of my investment on society and planet?”.
Yes, we all mean well, and want the best results. No financial investor consciously wants bad things to happen—or well?, except for those who invest in weapons, tobacco and porn. They don’t care what they finance. They, however, are becoming a minority. Increasingly, professional and private investors are applying exclusion criteria when making investment decisions. In the mid-1970’s this approach lead to the defeat of the apartheid regime in South Africa. Calls for boycotts, especially those from church groups, led to a gradual drying up of the flow of capital to that country. This early use of the exclusionary criterion, “No money for segregation”, was a successful slogan. But merely reacting in an “exclusionary” manner to avoid harm is not enough.
“Let’s do good things with our money!”
This was the motto of the next generation of investors who wanted to invest their money directly rather than with banks. Funds were channeled into microcredits to alleviate poverty, wind energy to reduce air pollution, and eco-bonds to support the organic farmer. This was a convincing argument. All too often, out of a noble sentiment, people even forfeited some of their earnings. One could just as well have made a donation. Most recently, in their moral zeal, investors have lost sight of their objectives. They often put considerations of risks, yield, and availability, with their unintended side effects and consequences, on the back burner or even forgot about them. The intention was noble, to be sure, but often not purposeful. This is especially true in the context of climate change, where one has to consider systemic relations and longterm effects. However, the all-important question has been raised:
“What impact do I want my money to have?”.
The intention to want to do good is not enough, as we have seen. We have to learn to think in a completely new way. Let’s not put the cart before the horse, but in back, where it belongs. Approach our investment looking from a future perspective: “What do I want to contribute to? What does my investment trigger in this world? What problems can it solve?” In other words, we should not only ask what financial rewards our investment produces, but what will be the ultimate impact on society and planet. This essential distinction between „output, „outcome“ and “impact” should guide us every time we hold a Euro in our hands and decide what to buy, save, donate, spend, give, and invest.
“Considering a ‘green’ Investment”
Let’s use the example of TESLA. As the market leader in electric mobility, their shares should be an ideal investment in sustainability. Is this the right place for your money? Sounds great, so let’s purchase 16 TESLA shares for, say, 10,000 Euros. Outcome/result: We have now done something that helps provide for our retirement. TESLA’s capital position is getting stronger. More electric cars will be produced. Our portfolio (and conscience) has become “greener”. The impact: If the electric car is “fueled” with green electricity, then we are indeed reducing C02, and have a positive climate effect. However, there can also be adverse effects: the battery in the big TESLA produces approx. 15-20 tons of CO2 during its manufacture. This results in a massive negative climate effect, even before the car is off the assembly line. In addition, the consumption of raw materials for the body and especially the battery pollute the environment. Gigafactories like the one planned in Brandenburg consume natural landscape and lower the ground water level; the working conditions in the TESLA factories have been described by one worker: “Everybody feels like the future but us” (THE GUARDIAN, 18 May 2017).
So is TESLA the right investment if one wants to invest sustainably and green? To be honest, it is difficult to say. One thing is certain that looking only at the outcome is clearly not enough. The impact must be taken into account and ultimately assessed personally by each investor. Determining what mattersforyou, personally, is important: Does the C02 savings outweigh the other effects or not? Is the climate and the future of everyone worth more to you than the landscape of Brandenburg or the working conditions of a handful of workers? You, and only you, must find an answer.
“Hey, that’s what ESG rating agencies and green labels are for, you will say“. Without going into detail (I will do so soon in this BLOG), just this from an unsuspicious source, the Wall Street Journal from 17.9.2018: “…the ESG ratings … are used as if they were some sort of objective truth. In reality these are no more than a series of judgements by the scoring companies about what matters – and investors who blindly follow their scores are buying into those opinions, mostly without even knowing what they are.”
So, do not blindly delegate your opinion and decision making to others. This applies to private money investors as well as to every asset and risk manager working in a bank, insurance company and/or an investment firm. What to do? One must make the right decision, i.e. the optimal decision for yourself and the planet, and thus achieve the desired and correct impact! To do this, we have to leave the normal patterns of thinking and behaviour in money matters and embark on a new path: “Be clear about what you want ” (step 1) and “Know the right thing” (step 2).
Step 1 “What do I really want?”
A person must be clear about one’s own motives and forces driving the decision making process. One must be clear about one’s own values and about one’s own inner compass that guides us. “Where is my personal north?” What does your intuition, your inner wisdom tell you? What future do you have in mind? Do you picture your children and grandchildren in an environment that is worthy living in? In this step, explicitly include your intuition and your emotional world in the decision-making process. This is much more than your gut feeling! If you reflect on your intuition, your emotional world of experience is an inexhaustible source that you can access through mindfulness.
Mindful Finance brings inner knowledge to one’s relationship with money and finance. With the help of mindfulness, money and finance can become a source of self-knowledge, well-being and sustainability.
For all asset and risk managers who may now smile, here is a reading tip. Behavioural Finance has been the scientific foundation for financial decision making since the 1960s. The theory has now reached the “second generation” (Meir Statman) and explicitly includes emotional considerations. “Second-generation behavioural finance says that normal people buy lottery tickets for the expressive benefits of being “players” with a chance of winning, the emotional benefits of the hope of winning, and the utilitarian benefits of the minuscule chance of winning.” (M. Statmann, Behavioural Finance – The second generation, 2019, p. xii). So – take heart, explore your intuition and emotion before making money decisions.
Step 2 “What do I really know?”
Your task: first obtain the facts, then evaluate the consequences, including their unintended effects, when making your calculation. If you want to invest responsibly, you must know the interrelationships. You have to consider the intended and unintended effects and consequences of your decision, doing so soberly and without prejudice.
Did you know that even a massive expansion of e-mobility can only reduce the temperature increase by a few tenths of a degree by 2100? With currently about 100 million new registrations of combustion engine cars worldwide, it will take decades before e-cars contribute significantly to C02 reduction if one considers the additional negative effects mentioned above.
Did you know that the EU is the second largest forest destroyer on the planet? We import much of the soy, palm oil and beef that is grown and produced on deforested areas in South America and Indonesia (the orang utan in the picture at the beginning has been rescued from a deforested rainforest).
“Consider total impact”
When investing money, it is particularly important to develop a sense for the negative side effects and unintended consequences and their evaluation. For example, when investing in clean hydropower, you should take into account the degree of regulation along the river and the effects on the ecosystems in the wetlands and the surrounding watershed. When investing in wood-based “bio-power plants”, you should take into account that C02 is clearly released and your investment contributes to deforestation (I refer to the planned large-scale wood-fired power plants in France and England). With a climate scenario simulator such as “en-Roads” by Climate Interactive, the complex interrelationships of climate change are accessible to both asset managers as well as for private individuals.
So, “wanting to do good” with money is a good start. However, thinking through to the end and considering the impacts is even better. Impact strategies, mindful finance, and climate scenario simulations help us make the right money decisions for ourselves and our planet.