Examining why we must look at the real impact of our investments

"There is no such thing as a neutral investment"

Long read

Most investors base their decision-making on financial returns. "That is at the very least strange," says economist Hans Stegeman, "because in many other areas, people usually do take all sorts of consequences for their actions into account when making a decision."

There are no investments that do not have a certain impact

Investments can have a positive impact, but also a negative one. In other words, every investment has an impact on the economy and therefore on society. As a result, investments are, by definition, never neutral. Still, many people do not appear to realise this.

By looking exclusively at the financial return of an investment, the underlying objective of investing is ignored. This objective is to provide capital to people, companies and projects, so that this capital may be used to realise initiatives. In other words: the investment should result in real economic activity with added value. The real value of an investment therefore lies much more in how money is used and the impact that this has on the economy and our society.

Enda inter-abe, a real positive investment in the real economy
"The real value of an investment therefore lies much more in how money is used and the impact that it has," Hans Stegeman. Enda inter-arabe is a pioneering example of a microfinance institution that our inclusive finance funds finance.

Where did it go wrong?

At some point during the last fifty years the idea emerged that investing is mainly about financial value; that the choices that you make about how you invest have nothing to do with your ideas as a person or the impact that the investment has. When you talk to investors it is all about the balance between financial return and financial risk. Now and then some incidental issues are brought up, like 'Don't invest in anything bad, for instance in cluster bombs.'
The main focus however is usually on what may be expressed in terms of financial value.

This is how investing has degenerated into making money with money. Maybe I am exaggerating a little, but not much.

But this is of course untenable in the long term. Using money to make more money simply does not add anything to society. Whether we are talking about packaged and resold mortgages just before the crisis, inflated company valuations during the dotcom bubble or bitcoins: in the short term it may produce attractive returns for some, but in the long run it usually goes wrong somewhere. And then those returns prove to have been nothing but redistribution because the investment was not productive, and thus nothing has really changed in the real economy. The 'winners' are those who got out just before it went wrong. And the losers? They end up holding worthless financial papers.

Using money to make more money simply does not add anything to society.
Hans Stegeman

It is impossible to pinpoint the exact moment when many people's views on investments became detached from the underlying real value. It seems to have been more of a gradual process that evolved over several decades. We can, however, identify three important reasons why investors are becoming increasingly removed from the objects that they invest in. It has all become about money; many investors have lost sight of exactly what they invest in and furthermore, more and more is left to artificial intelligence.

1. It is all about money

The first factor is the 'financialisation' of society. In short, it is all about money. This is reflected among other things in the fact that financial arguments are used as the main motive to act for investors: not the consequences of investing come first, but maximising shareholder value with a short-term focus. Investing exclusively in the real economy is therefore no longer seen as a driver for the financial sector, but the financial value has become an argument in itself: the only thing that matters is that an investment should generate more money; how that is achieved is irrelevant.

Short-term thinking prevails. We literally no longer have any idea about long-term developments, such as climate change. Anything that does not generate short-term returns is simply overlooked. Instead of investing in opportunities for change, change is simply not valued. Anything that cannot be translated back into financial value, is considered worthless. And the consequences are disastrous: a debt-driven economy with a short-term focus in which financial arguments are usually the only ones that are still considered valid.

2. Many investors no longer know what they have invested in

Large listed companies often operate in many different countries, both as manufacturers and as distributors. For almost all technological equipment such as smartphones, cars, laptops and TVs, it has become virtually impossible for the average consumer or investor to determine where and under what circumstances parts are produced and where the raw materials are sourced; therefore, the clear link with the real economy has become much more obscure due to the development of global value chains. We call this global integration.

no neutral investment
"Many investors no longer know what they have invested in."

And financial integration does not exactly make things more transparent either. The days when it was obvious where a company with a listing on the New York or Amsterdam stock exchange actually operated are long gone. Also, the dividing line that demarcates whether part of the financial affairs of a company occur in a specific country for real economic reasons or purely for financial reasons, such as tax evasion or balance sheet optimisation, is becoming blurred.

3. We leave more and more to artificial intelligence

Lastly, algorithms and artificial intelligence (AI), which is also referred to as robotisation, play an increasingly important part in investing. Robotisation can be used to solve all manner of problems. For instance, the use of AI can contribute to realising the Sustainable Development Goals (SDGs) of the United Nations, for instance by gathering better data about poverty, crop growth or methods for preventive screening, which can help improve the health of many people. But AI also has negative effects. In the investment world it is used, among other things, for building algorithms that enable flash trading. Flash trading involves reacting to price signals. You may sometimes be a shareholder for only a few seconds without even being aware of it!

Algorithms are used more and more often for automatic trading on the financial markets. In a culture of financialisation this is indeed an obvious application for this technology. When certain price signals are registered, algorithms for instance autonomously decide to sell or buy shares, in order to arrive at an equity portfolio allocation based on the programmed instructions. The combined impact of all those individual - but often similarly programmed - algorithms on the stock markets is more violent, faster and harder to control. This has negative consequences for the stability of financial markets. The reason for this is that the decisions are no longer taken by human beings who think about how they really feel about a situation and what it means for the economy, but by computers.

These sorts of effects are further reinforced by the trend towards 'passive' investing. This involves investing in a basket of shares that is identical to an index. As a result, investment decisions no longer have anything to do with the actual developments within specific companies in which shares are held. All these developments have the same outcome: an increasingly less self-evident relationship between the investor's money and the visibility of the consequences of that investment decision.

...these developments have the same outcome: an increasingly less self-evident relationship between the investor's money and the visibility of the consequences of that investment decision.
Hans Stegeman

What are the consequences?

All these developments do of course have consequences, although long-term interests and consequences of decisions that have been made no longer appear to be issues that the average investor thinks about. Where it concerns the price of a stock, or negative effects of actions ranging from corruption to environmental pollution, these are only translated into the immediate financial short-term interests of investors, as illustrated through:

Paris Climate Agreement

If investors appear interested only in the short term, then developments that do not have an immediate effect can easily disappear off the radar. Just think of climate change. The Paris Climate Agreement and the ensuing steps make emissions more expensive and create more opportunities for sustainable alternatives. The business models of greenhouse gas intensive companies entail considerable risks.

paris climate agreement solar energy alternative
"The Paris Climate Agreement and the ensuing steps make emissions more expensive and create more opportunities for sustainable alternatives."

From the perspective of financial return, in the longer term this constitutes a risk for investors with a mainly 'fossil'-based investment portfolio. You would therefore expect investors to react more to this risk, by quickly scaling back their fossil-portfolio and investing more in sustainable alternatives. But this is happening a lot less than might be expected, because the impact mentioned earlier is not immediately obvious in the short term and in relative terms far too little is still invested in renewable energy.

Huge palm oil plantations

Something similar applies to the risks in the food industry. If the only objective is maximising production and profits, then the logical consequence is usually large-scale crop production and livestock farming: from huge palm oil plantations to mega cattle farms. The negative impact on biodiversity, the environment and animal welfare are then no longer taken into consideration when making these decisions.

The big question is: how can we make the negative impact of investments evident for investors, so that they base their investment decisions on the real returns?

What is the solution?

There are already investors who take so-called ESG factors into account when investing in listed companies. ESG stands for Environmental, Social and Governance. Impact investing, a term used for microfinance and investments in sustainable projects, has also seen considerable growth. The assets managed by impact investors are growing every year, but compared with the total amount of assets invested worldwide the effect of impact investing is still very modest. Many investors are still investing the wrong way, in the sense that they do not look at the real value of investing.

What needs to happen for the group of conscious investors to become bigger?

Investors, do not invest if you don't understand the consequences

Try to determine what you actually own as an investor. Do you invest passively in an index? The performance of which companies then determines your performance? How do you feel about that? Do you understand the risks? Do you invest in a fund? In that case the same questions should be answered.

As an investor, think about what you want to contribute to the world with your investment. And assess how you feel about that yourself. Even if no information is available yet about the exact consequences or impact of a particular investment. That does not excuse us from at least trying to assess and weigh all the consequences as best as possible. Forming your own judgement, the human capacity to judge, is the basis for assessing the value of an investment.

Companies, make impact measurable

Clearer, standardised and compulsory reporting on the - positive as well negative - impact of investments gives investors insight into the real value of an investment. This starts with reporting by companies. This wheel does not have to be reinvented, but 'merely' needs to be applied: initiatives such as integrated reporting (a summary report in which companies indicate how sustainable they are) are already available. They must, however, be actually used and used widely. This is the information that investment funds can use to show what effects investments have. The measurability of positive impact is something that many investors are already taking into consideration, but remarkably, are providing information about negative impact is still rarely required.

Governments, set requirements for this

Governments can contribute by making reporting on the negative as well as the positive impact that a company has compulsory. If governments require companies to publish reports, no company can continue to easily hide its polluting activities. That is the best solution for putting an end to 'green washing'. This transparency and standardisation also make it easier for investors to assess the effects of their investments. They also make it possible for governments to make adjustments: CO2 pricing is an obvious first step, but the negative effects of production - for instance the emission of particulates - could then also be taxed.

Personal choice

Investing the wrong way is a personal choice. Not knowing what your money is doing, is another personal choice.  There is no such thing as a neutral investment and an investor always make a choice (whether knowingly or willingly or not); once that idea inplants itself, investors may start to realise that they cannot consider their investments exclusively in the context of financial return. It is important that for each investment the real value is considered. Only then will all consequences of an investment decision become clear. And only then, can we be rest-assured that human judgement will once again become the basic principle behind decisions. Perhaps in the subsequent ten years, every investment will contribute to the necessary transition of a truly sustainable society.



Hans Stegeman

Hans Stegeman has been Head of Research and Investment Strategy at Triodos Investment Management since February 2017. He has over twenty years of experience as an economist in the areas of macro economics, long-term projections and circular business models. Before joining Triodos, he worked as chief economist at Rabobank and as economist at CPB Netherlands Bureau for Economic Policy Analysis and trade union ABVAKABO. Hans obtained a degree in economics from Maastricht University and is currently working on a Phd on circular economics.


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