How can I invest in a way that helps the environment?

I often write on Quora.com, where I am the most viewed writer on financial matters, with over 415.7 million views in recent years.

In the answers below I focused on the following topics and issues:

  • How can I invest in a way that helps the environment?
  • Is the city of London doomed after Brexit?
  • Who shouldn’t invest in stocks?

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Some of the links and videos referred to might only be available on the original answers. 

Source for all answers – Adam Fayed’s Quora page.

How can I invest in a way that helps the environment?

There are two ways to do this. One is to invest less in areas which are damaging to the environment.

Those could include investing into:

  • Private businesses such as most mines
  • Sometimes numerous properties if they aren’t very efficient.
  • Investing into a majority stock portfolio which is linked to high emitters

This isn’t necessarily environmentally friendly but reduces the worst excesses.

If you replace physical stuff with digital equivalents, this can also help. For example, digital art as opposed to the physical stuff, and using more digital businesses as a consumer.

Another way is to be more active, and seek to invest in environmental and social governance (ESG) funds.

These are funds which try to “rank” firms based on their ESG criteria, and therefore invest in the best in this sector.

As more institutional investors such as BlackRock are getting into this trend, this also means that such funds might achieve higher performance in the years ahead.

In much the same way that more indexing and ETF usage pushed up the FAANG prices for a few years, because more money was naturally going into big tech when people were buying these indexes, the hope is that more institutional investors buying ESG funds will push the price higher.

However, you have to remember the negatives with ESG funds, which include:

  1. It is early days. It is therefore difficult to have objective ESG criteria. Elon Musk, and others, have highlighted some of the pitfalls with the current ESG rankings. Hopefully, this will improve over time
  2. Like any investing sector, ESG could become a fad or a bubble. I doubt it will be a fad, and it isn’t a bubble yet, or even close. One day, it could become a victim of its own success.
  3. You are getting into bed with the government, which is intrinsically high risk. Many environmental projects, such as sustainable energy, rely on friendly governments. Governments can change every 4-to 5 years, and even the same government can be fickle if they feel they can win more votes.

I do think ESG is here to stay, so getting an allocation makes sense, but I wouldn’t go all in.

There are some ESG funds which work similarly to indexes, where they are “hugging” the index, but are just tilted a bit towards ESG stocks.

That is on the lower-risk end of the spectrum, compared to something which requires more government support, such as sustainable energy ETFs.

Is the city of London doomed after Brexit?

These things can be a bit more “sticky” than expected. Legacy brands live on.

Look at Hong Kong. It isn’t what it was. Hong Kong is dead, in terms of being what it was in the 1980s and 1990s – the number one destination for expats and international companies in the Asia-Pacific alongside Japan.

Singapore has taken that mantle in many industries, but Hong Kong is still number one on many measurements when it comes to banking and financial services.

People have gotten used to using Hong Kong for trust, banking, investment, fund management and many other financial services.

So, even though many people want to leave Hong Kong, that doesn’t mean that everybody is closing their financial services businesses there.

I have lost count of the number of people in my network who are Hong Kong-based fund managers, who want to leave physically, but won’t move their business.

Now to the City of London. Brexit will indeed affect it. The UK, like Ireland, was an English language hub to gain access to the EU.

However, not all the services connected to the City of London are connected to the EU. There are plenty of people who want access to the UK’s financial system (onshore and offshore).

It is seen as a relatively safe way to access financial markets, in a similar way to Switzerland and other offshore markets are.

I don’t think it is doomed. Its dominance in Europe is merely under threat, and the high taxes and other policies in the UK, won’t help matters.

Just a few weeks ago, the UK Government put a windfall tax on the oil & gas companies.

That isn’t linked to banking and finance, but such policies, if repeated, could also harm foreign direct investment into the UK.

What type of people should not invest in the stock market?

There are three main types of people who shouldn’t:

  1. Those who are short-term oriented

If you are investing to pay for your wedding next year, that is a bad idea.

Want to buy a bag in two months? Probably not a good idea to invest.

You should have a 5-year+ time horizon. Ideally, you should be investing forever. That means investing money you don’t need when you are younger and gradually withdrawing in retirement.

Withdrawing even small amounts of money should only be done in an emergency. This is because whilst markets are a great way to make money long-term, they can easily fall short-term.

Even if you have a 5-year time horizon, you should be diversified and not be 100% in the stock market.

2. People who are speculators

If you are like 99% of the public, your chances of beating the stock market by speculating are close to 0%. Yes, you can win over a year or a few.

You won’t beat the market, or even match it, doing this long-term. Everybody would do it if it was so easy for people to find a way to beat the market and take less risk.

This excellent graphic from contracts for difference illustrates the point:

3. Those who are terrified about volatility

Markets, as per the first point, have gone up long-term, especially adjusted for dividend reinvestment.

However, that doesn’t mean markets don’t crash. They do. Sometimes they take a while to recover.

If you bought the US stock market, say the Dow or S&P500, on January 1 2000, you would have needed to wait until 2011 to break even – unless you added more in the years where the market was down.

You would have needed to wait until 2014 for the Nasdaq to recover, yet over any 30-year time horizon, the performance of the market has been good.

Many people overestimate how much volatility they can handle. Actions speak louder than words.

People say they would be happy if stocks fell because they could buy more, and they know they shouldn’t time the stock market.

When push comes to shove and somebody sees their account down 20%-30%+, many waves of panic are seen.

I illustrate the point here:https://www.youtube.com/embed/qMh2h6u8hcc?enablejsapi=1&iv_load_policy=3&autoplay=1&start=2

Pained by financial indecision? Want to invest with Adam?

Adam is an internationally recognised author on financial matters, with over 438.5 million answers views on Quora.com and a widely sold book on Amazon

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