Oftentimes we might think that our decision don’t change the world. Claire Smith is arguing that we may have more power than we think through “green and sustainable investments”. The founder of “Beyond Investing” will take you on a enlightening journey to vegan stocks, current developments in the stock market and the power behind it.
You have just launched the US Vegan Climate Index. Why?
As a vegan myself I am acutely conscious that there are no broad or complete investment solutions for vegans looking to invest their pensions, or make regular savings. It is something that I have directly struggled with since taking over the investment of my own pension pots. Without getting the full list of holdings of a fund, and going through it stock by stock, no vegan cannot be confident that they are not investing in companies whose activities they abhor. How is it coherent for a vegan to avoid eating meat but through a regular index investment to be investing in, for example, McDonalds? Likewise clothing companies, or those that engage in animal testing, or who produce chemicals that kill bees?
What exactly is the US Vegan Climate Index about?
The US Vegan Climate Index takes a broad market index, the type that would be used as a benchmark for most traditional investment (such as the $7.3 trillion which tracks the S&P500 index) and goes through that universe of stocks checking if any company has activities which go against our policies. These policies incorporate all aspects of the rearing and killing of animals and production and sale of animal products, and the use of animals for animal testing and other forms of exploitation, such as theme parks, or racing. Companies for which these activities are more than a tiny fraction of their revenues are removed from consideration for investment.
We also screen out fossil fuel, since animals are just as affected, if not more so, by climate change as are humans, since it destroys their habitat, their access to food and shelter and is even changing their ability to mate. Just think for example of polar bears, the coral reefs, turtles who due to changes in temperature are emerging from their eggs all female. And I have yet to meet a vegan who is a climate change denier…
The group of stocks which remain post screening are supplemented by smaller stocks which are just outside the broad market index, but who do not engage in these harmful activities. This allows us to invest in for example vegan food companies or renewables companies once they reach a certain size.
The total portfolio is constructed in such a way that the risk profile is close to the traditional market investment, and as such it provides an appropriate alternative for an investor who is sensitive to these ethical principles, whether an institution, or the mass market investor, and wishes to apply a broad market approach for their core investment portfolio.
How was the launch going?
The response to the launch of the US Vegan Climate Index has been extraordinarily positive, with many people contacting us direct to find out how they can invest. It was taken up as a story by the vegan, financial and sustainable investing press, and created a flurry of activity on social media. It gives us great confidence that we are on the right track and should move swiftly to create products that vegans and environmentalists can invest in.
What are the next steps planned with the USVCI and your company Beyond Investing?
The Index is at present not investable; it requires the structuring of funds or notes in different jurisdictions. We are working with investment platforms and banks to create investment products based on this index, with the first likely to be a US-listed Exchange Traded Fund (ETF), which will come out in the Autumn. Our projections suggest strong demand and we encourage all your readers to sign up for updates here (bit.ly/veganETF) to that we can keep them informed on when an investment product will be launched in their region.
The benefit of a US-listed ETF is that it can be bought by investors the whole world over, provided they have access to a stock trading account. It is the product with the widest reach that could be invested in by the largest number of investors, hence our goal to create this as soon as possible. Beyond the initial US Vegan Climate Index, our plan is to expand our coverage to other markets and asset classes, and incorporate other social screens, with the ultimate aim being to construct multi-asset class portfolios which are consistent with the principles of veganism, to be used for long-term savings and pension plans. We encourage any existing product provider to get in touch with us direct to see how we can work together.
Why should people take a closer look at the USVCI?
Whereas our primary aim was not to create a portfolio that outperforms, only one that was ethically consistent, we are excited to see that, without any tinkering on our side to achieve outperformance, the effect of our exclusions has been to create a portfolio which has outperformed the market over the last 5 years, since June 2013. We feel that there are secular trends at work which are undermining the business models of many of the companies which we have excluded, and these trends are likely to continue.
Fossil fuel company valuations rely on the worth of their unexploited oil reserves, but will they be permitted to continue to extract oil to be burnt, as temperatures continue to rise? This is the problem of “stranded assets” and we perceive the same is possible within the animal agriculture industry as the intensive factory farming complexes and slaughter plants experience declining profits and are shut down. The more people switch to a plant-based diet, the fewer chronic and acute illnesses they suffer, and the demand for pharmaceuticals and medical devices will fall. Hence we consider there are ample reasons to suppose that this outperformance of our Index will continue.
How do you think, will the index market change within the next 5 to 10 years with focus on green investments?
The rise of sustainable index investing, which incorporates social impact investing as well as environmental investing, is linked to the consumer and investor becoming more conscious of the influence that his or her money and capital can have on companies.
But it also relates to some changes which have wreaked the asset management industry in the last 15 years. Some 15 or 20 years ago, the majority of assets were actively managed with each fund manager aiming to justify their fees by outperforming the market. This was not just a zero-sum game, the majority actually underperformed even before fees. This led to a massive trend in investing which was to invest passively through indexation. These portfolios have very little turnover so can be offered with very low fees.
The flow of capital continues in this direct with this article saying that $500bn shifted in this direction in first half of 2017 and commenting on some of the negative aspects of this trend: https://www.cnbc.com/2017/07/10/passive-investment-is-frightening-says-morgan-stanley-strategist.html
Passive index investing across an entire market is basically owning a stock simply because it exists, in proportion to its size, and so effectively attributes no value to any fundamental assessment, nor to any consideration as to whether the activities of that stock have value to society or are in fact damaging.
I believe that the rise in sustainable and ethical investing, as cited in this study http://schroders.com/en/media-relations/newsroom/all_news_releases/schroders-global-investor-study-2017-sustainable-investing-on-the-rise/ is partly a response to passive investing in a market benchmark, as well as reflecting consumer trends to desire more transparency and responsibility. With active investing having been shown not to work then frankly there is nothing else to look at other than a company’s benefit (or otherwise) to society, and, from our perspective, to people, animals and the planet. Hence the need for Indices that are based on ethical measures, whose rules embed the concept of investing sustainably.
If you want to change the world, there is a further benefit to investing ethically. The price at which a company’s share trades is reflective of the proportion of investors that want to hold it. The fewer investors want to hold a share, the more it falls. Already companies with poor ethics, such as tobacco companies, have to encourage investors to own their stocks by paying high dividends, which is a cost to their business.
The sheer act of selling out of a market index to switch into our index on a dollar for dollar basis will create selling pressure on those companies which are excluded.
Our Index focuses on the top 500 stocks in the US market, which are widely held. But a lot of that money is only holding those stocks because they are in the top 500 (as mentioned previously some $7.3 trillion is tracking the S&P500 index). Suppose through vegans selling, these companies drop below the top 500?
There has been academic research on the impact of being in or being excluded from a market index, see below: http://www.nber.org/digest/nov13/w19290.html
It does have an impact on companies share prices.
With enough selling pressure, companies could fall below the top 500 in ranking, and in that case they would get dropped by S&P from the S&P500 Index. Then, all of the passive money which is tracking the S&P500 index would by absolute necessity have to sell their shares of that company, since they are obligated to hold only those stocks which are in the index. This further selling could cause some dramatic falls in their stock prices, undermining their ability to continue to do business.
“Green” or sustainable investing has the power, if enough people do it, to significantly impact the future prospects of companies. More sustainable Indexes, and public listed products on those Indexes, which make it easier for everyone to invest according to their principles, could have a dramatic effect on which companies succeed, and which fail. And, to my mind, that can only be good for the world.