Impact investing is considered by many to be the gold standard of sustainable investing – an approach that seeks to invest directly in companies and projects that have a direct and measurable positive impact on the world.
As such, passive investment vehicles like ETFs (Exchange Traded Funds), which were originally created just to track a mainstream index, are not usually seen as a good fit for impact. This, however, is changing as the area becomes more bespoke and is able to stand up against active management.
Marking markets
When investing in stock market funds, broadly speaking, investors have two options:
- Invest in actively managed funds – where the investment manager is trying to earn more returns than the market
- Invest in passive funds – where the fund aims to return the same as the market (minus fees and other costs)
Because the first option requires some (perceived at least) skill, passive funds are much cheaper for investors, as they are not paying for the investment manager’s time and all their research & efforts.
In the two examples above, the “market” is a term that can be defined in many ways. For example, what people mean by the “UK market” is usually the FTSE 100 – the 100 biggest companies in the UK. However, this is just a traditional and commonly used “market”. It could also mean, as an example, all the renewable energy companies in Europe.
So, if you wanted to invest in renewable energy companies in Europe, because you care about climate change and think that companies that are trying to address that problem need to have capital (i.e your money) diverted to them, so they can do more of what they do, then how would you do it?
Passive building blocks
You could choose to invest in an actively managed fund. By doing so you are making a statement: “I am to invest in renewable energy companies in Europe, and I think the best way to do it is to pay higher fees to a fund manager that can pick the best renewable energy companies out of that market, and beat the market in returns”.
Or, you could choose to invest in a passive fund, like an ETF. By doing that, you are also making a statement: “I want to invest in renewable energy companies in Europe, and I think the best and most cost-effective way is for me to invest in all of the market, and earn the market return”.
The example above illustrates how ETFs can be used for impact and sustainable investing. By creating a proper impact instrument – like a tracker fund investing in renewable energy companies addressing the impact problem of climate change – you are then free to choose the best method of implementation for you.
Either way, you will be investing in impact companies aligned with what you believe in, and either way, those companies will receive your capital. But one option is cheaper and earns the market return, and the other option is more expensive, but you could earn more, or less, than the market return. The important point is that the impact is still present in both.
Tackling poor practices
Historically, ETFs that were labelled sustainable or impact have been constructed poorly. For example, certain “ESG” (Environmental, Social and Governance) ETFs have simply take a general market, like the FTSE 100, and put more money in the companies with a low carbon footprint, and away from those with a large footprint. This is a good first step, but ultimately, the ETF is still investing in the worst offenders, just less so.
The future of ETF investing for impact or sustainable themes has evolved from this approach recently, but it’s just beginning.
Our approach at tickr is built around this realization. Our goal is to create a suite of high quality impact ETFs in areas not currently being served by the traditional ETF market. Examples of these include the tickr Housing & Education ETF, and the tickr Financial Inclusion ETF. Both of which will be launched later this year. We also plan to re-create some of the existing sustainable and impact ETFs in the market, raising the impact bar as high as possible,
These ETFs will be free to access for users in our app, and offered to retail investors and institutional investors for competitive fees if accessed via other platforms.
Because ETFs are so much lower in cost than actively managed funds, they are a great option for cost-conscious impact investors, and if constructed properly, they don’t skimp on the impact: money is still flowing to the companies doing good in the world, it’s just flowing via an ETF, not an actively managed fund.
Our aim is to have millions of people investing with impact in the coming years as their default option. Using and creating high quality impact ETFs, offered at a competitive cost, is the ideal tool to do it.
