Yes, we are taking a break from the ABCs of traditional ETF (exchange-traded fund) investing. Today, we're all about the ESGs.
In this episode, Nick Nicolaides, co-founder and CEO of Pearler, joins us again for a follow-up to our previous episode . Last week, we revealed the Top 10 ETFs that had everyone in Pearler community talking in 2023 . This time, Nick explores Pearler’s most popular ESG ETFs as he shares the trends and personal thoughts about ESG investing.
First off, ESG isn't just a corporate acronym to throw around at dinner parties (though feel free to do so for awareness). ESG stands for Environmental, Social, and Governance. It's a serious framework that investors are using to evaluate companies based on their sustainability and ethical practices.
However, “ethical” is a chameleon word. What's ethical to you might be different for someone else. Think “carbon neutrality” versus “gender equality in employment”. It’s different strokes for different folks.
Before you start pursuing to ethical investing, here's some advice: always look beneath the surface. ESG investments vary widely in what they actually offer, what they stand for, and how they fit in your investment portfolio. It's crucial to ensure they sync up with the reason you started investing.
And this is where Nick’s insights, backed up by Pearler community data, come in handy. In the spirit of realism and optimism, this episode is meant to give you a general view of things you perhaps hadn't considered about ESG investing.
Women leading the charge in ethical investing
Historically and generally speaking, investing has been a bit of a boys' club. Before the pandemic, previous data suggested this split floated somewhere around 70-30 (or 60-40, depending on which country you assess).
But, as times change, so do trends. In 2020, for example,
45% of people who bought ASX-listed investments were women
. And a similar trend is most likely happening among younger people.
In fact, when you zoom in on the top holdings among Pearler's community, something interesting emerges. Out of the top 10 ETFs in 2023, the scales of ownership across eight ETFs are pretty much balanced in terms of gender and age.
Except (and here's where it gets juicy) for the two ESG ETFs. The gender distribution in these funds tips the scale, with a significant lean towards women investors.
Take FAIR , for example, a BetaShares ETF focusing on Australian companies with a strong ethical backbone. This fund is championed by women, holding a whopping 77% of its ownership, compared to 23% by men. The top five ESG ETFs in 2023 show a similar pattern, with a 70-30 split favoring women investors.
Let’s put these numbers in perspective below…
So why do more women invest in ESG ETFs than men?
Do women favor long-term vision over immediate gains?
The answer to that question isn't straightforward, yet it's a conversation worth diving into. Nick scratches his head over this one. He wonders whether this trend has something to do with the younger and forward-thinking demographic of Pearler community.
Maybe it's not just about age or being progressive. One hypothesis is that women investors might be more inclined to take a longer-term view of their investments.
For women investors, it may not just be about the historical returns of the sharemarket. Sure, in general, that stuff matters. However, when it comes to ethical investing, there's always the bigger picture. Women may feel okay missing out on the profits from, say, mining and oil today if that means a just and sustainable future.
What’s more important to ESG investors is they can sleep well at night, knowing their money goes to the right places.
Women’s empathetic nature aligns with ethical investing, say GRSC listeners
Tash took the question to Instagram and came back with a basket of thoughts about gender identity and roles. According to the GRSC community, women, in particular, are generally considered to be hardwired for more empathetic and nurturing actions. This might explain why they gravitate towards investments that promise a better future for the next generation.
Of course, we are not claiming men are all about the returns while women might make decisions with their heart over their head. While some might scoff at the focus on women, the suggestion here isn't about capability, but about perspective. It's like saying, "Hey, maybe there's something to this whole caring-about-the-future business.” In fact, if you check out Nick’s investment profile , 80% of his portfolio is in EGS ETFs.
All that is to say: your investing choices, regardless of gender, ultimately depend on how long your outlook reaches. For anyone interested in ESG ETFs, Nick says it’s about asking: "Can I afford the world I want?”.
Parental influence on financial decisions
Or perhaps, as Ana suggests, it may be a parental instinct to leave a better world for their children? As a mother and investor herself, Ana says her decision to invest in ESG ETFs is deeply influenced by the kind of world she wants for her children.
Yet, as Nick points out, all that concerns the future of businesses or the world is a big question mark. Nobody knows the future with a 100% guarantee. But, parents like Ana may be happy to take the short- to medium-term risks for a less disastrous future.
Ultimately, what someone else does really shouldn’t influence your own investing decisions. It’s your money and you’re totally valid to feel you’re not ready for the big Maybe’s yet.
How to get started with ESG investing
A common concern among ESG investors is the fear of missing out on returns from the traditional ETFs. So, Tash and Nick bring a broader perspective: ethical investing doesn’t need to be linear. Nick notes that investors are now taking a more nuanced approach of treating ESG ETFs as part of a diversified portfolio.
There’s almost no need for an all-or-nothing view here. It’s possible to start with a small percentage of ESG ETFs in your portfolio. This strategy not only hedges your bets against the unpredictable future of sectors like oil and gas, but also allows you to shift the scales over time as your understanding of ESG evolves and ESG ratings quality become better.
On top of that, what “ethical” means for someone depends on their values and understanding of our world. Nick’s advice? Don't let the pursuit of a perfect ESG portfolio paralyse your investing decisions. The goal isn't to overhaul your portfolio and change the world overnight. In the end, the most ethical portfolio is the one that allows you to sleep soundly, knowing it’s a reflection of the future you wish to see.
What are the challenges of ESG investing?
Recently, ESG funds have gained a lot of attention. But like all things new and trendy, they come with their own set of challenges.
The price tag of doing good
One of the first bumps on the road to ethical investing is the cost.
ESG funds are relatively new players in the financial market. They carry the promise of a better world, but also a higher expense ratio compared to their traditional ETF counterparts. Nick points out that, in essence, you’re paying to exclude a fraction of companies that don't meet certain ethical standards.
Is it worth it? That's a personal decision every investor needs to make. It's like choosing between a regular latte and its fair-trade counterpart. Both will give you that caffeine kick, but one aligns more closely with certain values.
Always check the label
Not all ESG funds are created equal, and the ethical lines can be blurry. Just because a fund labels itself as ESG doesn't mean it's entirely free of companies with questionable practices. While we aim for perfection, the reality is a little murkier. Disappointing, but does it make it a deal-breaker? Here, Ana and Tash stress the importance of researching current options. The more you know, the better choices you'll make.
Eventually, more ESG funds true to their purpose will pop up. And you might find the ESG fund that really comes close to your ethical criteria.
Does ethical investing make a difference?
The simple answer is yes. The impact might not be felt immediately, but it's there. Investors have realised that where they put their money can influence corporate behaviors.
When scandals erupt, whether it’s about environmental damage or mistreatment of employees, they no longer get buried under profit reports. The court of public opinion (a.k.a. social media) ensures that news travels fast. And public image now weighs almost as heavily as the bottomline.
When enough investors shift their focus towards businesses for good, it sends a clear message. Companies are forced to take notice, not necessarily for the ESG badge, but to stay relevant and competitive.
However, the real question isn’t just about whether ethical investing makes a difference.
In a simple world, ethical investing sounds like a no-brainer. Put your money where your morals are. Yet, the reality of something being completely “ethical” can sometimes leave us feeling a bit unfulfilled.
Discussions about what’s ethical is not just about its impact on the planet. We’re looking at how a company treats its people, its suppliers, and the communities being affected by the business. It’s a broader conversation recognising that a company's purpose goes beyond just making its shareholders happy.
At the moment, the “ethical” label is filled with debates, setbacks, and sometimes confusion. Does that mean we throw in the towel? Not quite.
The power of persistent, collective change
Sure, we've all heard the horror stories. Companies that claim to do good but are hiding proverbial skeletons in the closet (a process known as greenwashing ).
However, historical shifts like women’s suffrage and the civil rights movement didn’t happen overnight. They were the result of persistent and collaborative efforts over time. It’s the same thing for a transition to a just and sustainable future. It takes a village – or, in this case, a whole bunch of investors – to call for change over time.
With that said, Nick clarifies that ESG ETF investing is more about exclusion than direct action. It's about favouring companies that do less harm, rather than expecting your investment to rebuild the world brick by brick. It’s also worth noting that ESG investing is not a badge of moral superiority but a tool to cast a vote for the world you want to see.
Looking at the big picture of ESG and ethical investing
So, what's the verdict? Nick has hopes for the future of ESG and the investment space around it.
The concept of ESG is on a journey – evolving and maturing. It's going through growing pains, sure. But these challenges are necessary steps toward better criteria of what ESG means and how it's implemented.
We’d like to think that companies are collections of individuals, and individuals can change (and be changed). More people will certainly educate themselves and persuade executives to take the right side of history. Companies will then realise doing the right thing is no longer just nice-to-have – it's a must-have.
The hope is that, over time, this will lead to businesses that aren't just "less bad". Rather, the people sitting in the boardroom are genuinely striving to be better in every sense of the word.
Looking forward…
One thing’s certain: we’ll hear more about real changes around the challenges of ESG investing today.
As it becomes more mainstream, we can hope for more affordable options and more rigorous ESG criteria. Until then, there's homework to be done – read, research, and stay informed on ESG issues. Discuss it with other investors on the Pearler Exchange . Reflect on what ethical means for you, and make the investing decision that personally feels right for you.
If you've found value in our insights, spread the love. Rate, review, or simply pass it on. And for the social butterflies, follow the trail. Join us on Instagram at @getrichslowclub , or catch Tash at @tashinvest and Ana at @anakresina .
Happy investing!
Tash & Ana
