How’s that for a title kids? That ought to get at least a few of you a little hot and bothered, huh? Sustainable index investing is a joke.
I love the environment so much that I want to just give a tree a great big hug sometimes. (See what I did there?) In fact, starting right now, I’m going to make sure all my decisions are based on what’s best for the environment. If I know someone who isn’t recycling, I’m going to punch them in the face. If I see a car with the engine idling, I will shut it off and throw the keys into the nearest snowbank. I will find a t-shirt made of hemp and wear it continuously until it smells like a bag of hockey equipment in February. (Canadian joke!) And, starting right this minute, I’m only going to invest in companies that have sustainable business practices.
Luckily for me and my laziness, there are all sorts of mutual funds already set up that exclusively invest in sustainable businesses via a sustainable index. One of the best performing ones is from RBC, it’s called the RBC Jantzi Canadian Equity Fund. It’s actually up 10.2% annually for the past 3 years, which makes it a pretty solid performer compared to some of the other eco-friendly funds out there. Rather than just blindly believing that it’s an environmentally friendly fund, let’s take a look at some holdings of the fund, just to make sure. Internet fairies, do your thing:
Top 10 Sustainable Index Holdings
Royal Bank of Canada
The Toronto-Dominion Bank
Newmont Mining Corporation
Bank of Nova Scotia
Suncor Energy Inc
Canadian Natural Resources
Potash Corporation of Saskatchewan
Canadian National Railway
Bank of Montreal
Uhh… these are the best sustainable companies in Canada? Is oil sands producer Suncor really the best choice to go into a fund like this? Newmont Mining? Really? Where are the solar and wind power companies? What’s up with all the banks on there? What do they do to help the environment, besides recycling their bottles?
Just for the fun of it, let’s take a look at the 10 biggest companies in Canada, based on market cap:
Top 10 Companies
Bank of Nova Scotia
Canadian Natural Resourses
Bank of Montreal
Canadian National Railway
Potash Corp of Saskatchewan
But those are practically the same… This exercise continues to be fun for me. What’s the difference in management fees?
RBC Fund: 2.11%
XIU ETF: 0.17%
Okay, I’m picking on just one fund. Maybe there aren’t that many Canadian companies that are actively trying to better the environment. Let’s take a look at a fund from Bank of Montreal, called the Global Sustainable Opportunities Class. Maybe this fund has made some better investment choices. They have the whole world to pick from, not just Canada. Rather than making you sit through another top 10 holdings list, let’s just look at the top 3.
Top 3 Holdings
Seriously, their top holding is Nestle. This is the same company that sells billions of bottles of water in North America alone, each one in a little plastic bottle that no one can argue is good for the environment. Their 3rd biggest holding is global mining conglomerate BHP Billiton. While BHP doesn’t have the reputation that Exxon Mobil or BP have, a mining company isn’t really the best choice for a mutual fund based on sustainability. How does it get included in a sustainable index?!
If there’s a sustainable index fund that’s actually investing in green initiatives, I couldn’t find it.
Might I suggest an alternative to your sustainable investing ways? Maybe you shouldn’t bother.
A publicly traded corporation exists for one reason – to make shareholders money. After all, they are the owners of the thing. They elect a board of directors who attempt to make the company as profitable as possible. A corporation doesn’t exist to give people jobs, or to donate to charity or to do good things for the environment. Sure, a corporation may decide to do these things, but only after the shareholders have made money.
When a company issues shares to trade on the stock exchange, only one thing determines whether they’ll end up being bought – demand. If there isn’t enough demand for the shares, the issue flops and it never makes it to trading on the exchange. If there is demand it’s because investors think they can make money off the stock. As long as it’s legal, investors will snatch it up.
Once the shares hit the stock exchange, someone owns every single one of them. A sustainable thinking investor may boycott those shares, but it doesn’t do much good. Someone still owns those shares and they can find someone else to sell them to. All you’re accomplishing is feeling good about your choice to not support those evil companies. And yet, those evil companies just keep on doing business as usual.
Companies like Wal-Mart will implement environmentally friendly initiatives in one segment of their “sustainable” business, while running other parts of their business with little regard to the environment. Only a complete moron believes Wal-Mart cares about the environment. The folks from Bentonville care only for their bottom line, and if making certain changes that happen to help the environment better that bottom line, then they’re all for the change. Just about every other large company around the world operates in much the same way.
In theory, a company with little concern about the environment will make more money, since they’re not wasting any of their cash on any green stuff. Also, how is the average Joe investor supposed to really know how green friendly a company is?
Which is why you shouldn’t bother with sustainable index investing. Instead, do like the rest of the market does. Put your cash in the spot where you feel it’ll get the best return. Then, if you’re so inclined, spend your profits on whatever environmentally friendly hippie stuff you want. Investing should be about making money, not saving the world. The two just don’t mix.
What are your thoughts on sustainable index investing?
Sustainable PF: I have had this topic on my “to write” list for some time. I was pleasantly surprised Nelson decided to tackle it and even more surprised my views were much like his. For the record, these sustainable index funds are modelled to include the “best of industry” so of the oil sand giants, at least one has to be more socially responsible than the others. Ridiculous from my perspective. Instead of these “sustainable” index funds (of which, the iShares Jantzi Social Index Fund (XEN) has a MER of 0.50%)) we opt to invest in individual renewable energy companies, especially hydro power while we avoid oil etfs!