High returns with a clear conscience

We answer the most frequently asked questions about sustainable stock investments.

 

What does ESG mean?

ESG stands for Environment, Social and Governance. When we talk about ESG factors, we are therefore talking about a company's impact on the environment and society, but also about the regulations and management practices within the company.

You can consider all these factors both quantitatively and qualitatively: At Leeway, for example, quantitative data is an important factor. This includes topics such as emissions, waste, pollution, taxes and investments in the environment and the common good. However, we also look at information on certifications, implementations and methods of companies.

Why are ESG factors important for my investment decisions?

First, there is increasing evidence that ESG factors should be incorporated into financial analysis and portfolio construction in order to achieve better returns in the long term. Institutional investors are increasingly applying ESG criteria to their analysis process to identify risks and opportunities. These developments are based on an updated understanding of fiduciary duty. To understand why, we can look at some examples: For companies like Shell, the finite nature of oil reserves means the finite nature of a viable business model and thus also of income - if no sustainable approach is found (Environment). In cases like Wirecard, scandals in corporate management led to the stock collapsing completely within a few days (Governance). Even in less severe cases, companies are frequently faced with fines and negative ratings that can impair the value of a stock for a long time.

Furthermore, we must remember that we are financing a company's business activities with our investment. More than that: By making an investment, we acquire a tiny part of the company. It literally becomes our business. This means that we have a responsibility that goes beyond returns. As investors, we should ask ourselves which companies we want to support with our money.

How do I find sustainable investment opportunities?

Short and simple? Quite a bit of research. At the moment, investors need to look at company websites and publications, annual reports, sustainability reports, news and so on in order to make an informed decision. Even if you opt for an ETF or fund, you should take the time to understand their investment criteria. You will often be surprised by the type of companies that make it into an investment product labeled as „sustainable“. For this reason, we recommend creating your own portfolio. To support our users with this task, we have invested a lot of effort in developing our ESG score. With this score, we want to free investors from hours of research.

Personally, I also like to look for interesting stories and new sustainable business models that I would like to support. Then I would analyze the company based on its financial metrics and make my decision.

 

According to which criteria are a company's practices classified as sustainable?

The biggest problem in the area of sustainable investments is currently the lack of standardization of non-financial reporting and analysis. Although there are certain standards, certifications and norms, many companies as well as funds etc. choose their own criteria for reporting or for the analysis and selection of stocks for a portfolio. The lack of standardization goes hand in hand with a lack of transparency - it becomes very difficult to make an informed and responsible investment decision.

 

How sustainable are ETFs and funds?

As mentioned above, this differs from case to case. If you really want to invest in a fund or ETF, I would recommend taking a close look at their investment criteria. However, I know that many people, including myself, prefer not to give up this control and invest directly in a selection of companies they want to support.

Is sustainable investing a trend or is it here to stay?

I think we can all agree that sustainability and social responsibility are becoming increasingly relevant in all areas of our lives - in the way we live, how we eat, how we get around and how we invest our money. The responsibility to protect our environment and resources and to reverse or minimize damage is becoming increasingly important. In addition, with advancing digitization and globalization, social injustices and governance scandals become public even faster.

So far, our ESG score has been an important door opener - even to large institutions such as international banks. These institutions recognize the relevance of automated ESG analysis, but have not yet found the perfect solution. When we look at cooperations and financing in the fintech segment, we can still observe a focus on payment methods, mobile banking, etc. However, based on our conversations with banks, funds and research houses, I am confident that the combination of AI and ESG in particular will have increasing relevance for institutions.

 

Are there examples of surprising findings from the Leeway ESG analysis?

As you may have noticed, taxes paid by Amazon, or rather not paid, have been a much-discussed topic in recent years. However, in our analyses we could not determine that Amazon pays particularly low taxes. And in fact, the reporting was limited to US Federal Taxes, a very small part of the tax issue surrounding a global company. Last year, Amazon's balance sheet showed a tax rate of 17%, not a high rate but by no means an extreme example of tax avoidance. The average tax rate in OECD countries is around 23%. Apple, for example, only paid 14.4% of its profit to tax authorities. Among the major German companies, Beiersdorf and Adidas stand out positively with expenses of around 30%. Deutsche Post, on the other hand, pays on average less than 20% of its profits.