As people living abroad, we have a front-row seat to how our actions impact all corners of the globe. Some of these behaviors go against our values, negatively impacting the environment and our fellow humans. The investment industry took note and is developing ethical investing funds and strategies for consumers.
The theory is simple: if we want to change negative behavior, then we should reward companies that promote positive values by directing investment towards them. So far, investors agree, making it one of the fastest-growing sectors in finance.
Expats and digital nomads are no exception to this trend. In fact, as global citizens, we have a lot to gain from a more equitable, fair and accessible world. People often ask us about ethical investing and how people abroad can place their money into funds that match their values. Here are our tips for expats and digital nomads for ethical investing.
ESG, SRI and other fun acronyms
Before getting any deeper, let’s quickly go over the concept and some of the terms covering ethical investing. The goals of ethical investing are clear: investor money should go to companies that help the greater good. Since firms need capital (i.e., your money) to operate, those who do not practice ethical investing stand to lose out financially.
There are many ways to define and measure a company’s ethical performance. Some measurements look at metrics such as environmental impact and corporate decision making. Others focus on the social good created by the business. Because of these various methodologies, different investment strategies or ‘themes’ exist for ethical investors. Let’s take a look.
ESG or “Environmental, Social, Governance” is currently the most popular ethical investing theme. As the name implies, ESG looks at a company’s performance and relationship with both the external world and its internal culture.
To break that down a bit more, funds will measure:
- The environmental impact (E) of both its products and its operations
- How it interacts socially (S) with both its employees and outside partners.
- The rules governing (G) its management, including pay, shareholder interactions, and adherence to laws and best practices.
A fund manager will typically decide the importance of each factor when building a fund, depending on the objective. For example, a fund focused on driving environmental change will favor a car manufacturer actively transitioning to an all-electric product line. A social-minded fund would prefer companies that pay decent wages and treat their suppliers well.
That said, an ESG fund will look at a company’s financial performance before its impact on society. In that sense, investors wanting to invest in their values first might want to look at SRI or Impact Investing.
SRI stands for “Socially Responsible Investing.” SRI’s methodology screens for certain factors in a company’s business activity and either excludes or includes them. For example, some “negative factor” SRIs will exclude companies in the fossil fuels industry or greenwashers. Others exclude “sin” products such as alcohol, tobacco, firearms, and gambling.
SRI funds can also include companies through positive filtering. In this case, the investment company will build funds aligned to a particular value set, such as renewable energy or fair trade.
Unlike ESG funds, Socially Responsible Investing is values-driven. In other words, the resulting impacts on society and the planet come before financial gains. While the fund manager will decide the balance between social outcomes and profits, her first goal with an SRI fund is meeting the investors’ values.
Impact investing varies from ESG and SRI. Instead of filtering companies based on negative or positive indicators, impact investing takes a more hands-on approach. The managers of impact funds will go to target companies and, using their financial leverage, pressure the board to adopt business strategies that have an external positive influence.
Since the fund manager has to travel and take a hands-on approach with businesses, impact funds carry a higher cost. Additionally, these funds target a smaller range of firms, which limits their diversification and increases certain risks.
That said, the investment fund industry is moving towards a more active role in pushing through positive change. These companies manage trillions of dollars in investments (seriously). They can use their position to guide corporate decision making. It’s more than fair to say that impact investing will become more prevalent in the upcoming years.
Real estate is a subcategory in the ethical investing movement. Generally, real estate looks and acts differently than stocks and bonds (we cover the basics to real estate here). “Ethical” real estate investing will look at two different factors:
- The environmental footprint/energy efficiency of a building including the origin of the materials
- The source and treatment of the labor to ensure that the builder treats the workers humanely.
So far, ethical real estate investing remains a niche. However, fund companies are paying attention, and we should expect to see ethical real estate investment funds rise in popularity in the 2020s.
The best investors (and the ones who can sleep at night) invest within their risk tolerance. Do you know yours?
Tips for ethical investing for people abroad
Now that we’ve covered the basics of ethical investing, let’s go over some tips for expats and digital nomads to invest.
Decide what’s best for you
Before getting into ethical investing — and spending hours researching different funds — you need to define your criteria. What are you uncomfortable investing in? Where do you want your money to go to work?
Are you a socially responsible investor, preferring to exclude certain factors and valuing social impact over profit? Or do you prefer to encourage companies that are changing for the better? Maybe you prefer funds that actively steer companies towards green practices.
Regardless, investing should, in part, be about voting with your wallet. If an investment doesn’t align with your values, then by no uncertain means, avoid it.
ETFs, Mutual Funds, and other broad investments.
Once you’ve figured out how you want to invest, the next step is finding the right investment vehicle. As a rule of thumb, you’ll always want to diversify your portfolio to keep risks under control. Thankfully, there are plenty of funds that make diversification easy.
Most funds will track an index, which will then invest in the companies listed in it. Exchange-traded funds (ETFs) and mutual funds (also known as SICAVs) offer people affordable access to ESG and SRI products.
Retail banks also offer in-house funds focused on ethical investing. Keep in mind, though, that there are drawbacks to the banks’ products, including higher costs and less transparency.
Not all funds are meant for global citizens
Of course, finding the right funds and getting the right balance is complicated. For people abroad, all funds are not created equal. Expats need to find ones that follow them around, instead of the other way around. Otherwise, the ensuing tax headache and management costs make them more trouble than they’re worth.
For example, many of the ESG products sold by local banks become inaccessible to their clients if they move abroad. The funds that do remain available, the cost of reporting and the potential for double-taxation quickly make them the wrong choice for expats and digital nomads alike.
With ETFs and mutual funds, it will depend. Some of these products have global recognition, making them a good fit for worldly investors. Others tend to focus on the domestic market, which creates issues for people abroad.
We recommend that expats and digital nomads speak with investment advisors focused on this community to ensure they’re getting the right advice. This last step is especially useful since investment professionals help their clients find the best balance of funds for their individual needs.
For the more adventurous investors, crowdfunding offers a great way to get deep into an ethical investing project. Instead of buying into a fund, crowdfunding lets you place your money directly with a business trying to enact change.
For example, you might be interested in helping a Peruvian startup solve water shortage issues in rural communities. Because you believe that this is a cause worth solving, you can place your money directly with the company. In this case, you’re either lending your money or asking for shares in return (the crowdfunding platform will explain that to you in greater detail). In return, you’ll be able to make an impact on a socially-positive project directly.
Keep in mind, though, that crowdfunding comes with certain risks that don’t exist in funds. These risks can be quite costly, so it’s essential to understand what you’re getting into with crowdfunding. We’ll cover that in more detail in a future post.
As investors become more conscientious, investment firms and companies alike are reacting. Ethical investing is continuing to grow in popularity. As this trend continues, we’ll see more and more options entering the market.
Of course, ethical investing might not be for everybody. And that’s fine. What is crucial is finding the right investment for each person’s needs and values. After all, making our money grow should be about us and positively changing the world we live in. Thankfully for us living abroad who see many parts of it, our ability to do so will only get stronger.
Abroaden is a company for expats, digital nomads and other world citizens looking for low-cost and transparent financial advice and investment management.
Note that this article is for information and educational purposes only. It does not constitute financial advice.