How sustainable is your portfolio?

Climate change is currently the single biggest threat to large businesses in the global financial markets. Financial markets will adjust in the 21st century as leading investment firms and managers around the globe begin to assess how resilient a business will be in the future. Businesses will be assessed on their ‘carbon footprint‘ and in particular their use of resources such as water. Water scarcity for countries such as China, Australia & Chile will be the most affected. These countries are where intensive mining occurs and those businesses are water intensive. Many of these companies and are not in action around consumption, preservation or recycling through de-salivation plants. The CDP found that industries that engaged in climate change and took action related to a higher performance such as return on equity, cash flow stability and dividend growth.

The right time to invest

The obsession with the price of shares usually ignores the return or the income that is generated from investing in the market. “Will shares  go up or will they go down”? These are the doubts and fears  that paralyze us when deciding to invest. These short-term decisions ignore the simple fact that shares are an investment that generate an income through dividends. Fluctuations will happen it’s the nature of the market. If you considered investing in property 30-40 years ago you may have experienced the same doubts.  You may have thought when you initially purchased a residence that you were paying too much. It’s a similar sentiment with shares, however the volatility in shares is reported on more as it makes for good news and that makes people nervous about investing in a different asset class.

Creating wealth is really about choosing the best asset to invest in. Over the long term, the total income derived from shares will exceed the interest payments on term deposits, even though the initial yields are higher. With the interest rates falling  (the RBA meets on the 7 April) it makes sense to begin investing in shares and creating an income for later on.

Investing in a sustainable future

When investing in a company, ask yourself, “where will this business be in 100 years time, or even 20 years?” A major challenge facing businesses around the world is climate change. Advanced economies like Germany are moving to a renewable energy future, while solar technology companies, are ‘hot’ right now in a way that coal mining companies aren’t. At a broader investing level, you may wish to consider investing in companies that are adapting to a lower emissions, more environmentally-sustainable future.

A major driver of action to address climate change within the world’s largest companies is the Carbon Disclosure Project (CDP).  Eighty-one percent of the world’s 500 largest public companies are participating in this project where they report their environmental impacts and strategies to investors. Under the CDP system, companies are given a rating out of 100 depending on their responses to questions on emissions reduction targets and actual results. Any disparity between what they said they would do and what has occurred is measured and represented by a letter A to E. It is a measure of the positive actions that the company has demonstrated through their CDP. 

Using the CDP rating, I can invest in companies with a long term commitment to environmental responsibility and ultimately, financial stability. Businesses that are already deep into planning and even operating in a low emissions framework will have a strategic advantage to those companies that do nothing. Google Finance includes the CDP rating on participating companies. Sectors that have the highest number of companies without emission reduction targets are Utilities, Energy and Materials. Sectors that have a low carbon footprint or a high CDP score are Financials, Healthcare, Industrials & Information technology.

Investment opportunities should emerge at a national level. For example, in South Africa, there is the Nedbank Green Index or the BettaBetaGreen exchange traded fund (ETF). Units in an ETF can be bought and sold like a company share. In this case, the BettaBetaGreen ETF has taken equity positions in “a selection of shares from the top100 South African companies listed on the JSE. Constituents are selected and weighted based on both environmental and liquidity criteria”.

ETF’s like this fund should begin to emerge on other Stock Exchanges around the globe. 

A measure of success.

To measure the performance of each market sector indices are used.The range of indices includes the S&P/ASX200 and is used as a barometer for investor sentiment. For example companies such as AGL Energy, Commonwealth Bank of Australia, Ramsay Health Care & Toll Holdings are included. The All Ordinaries or XOA comprises 95% of 500 the largest securities listed on the ASX and is often used as a benchmark for investors.
The remaining 5% are referred to as penny dreadfuls and are traded by speculators usually from the resource sector and are not included.

I am going to use the S&P/ASX Net Total Return or the ASX200 Accumulation Index as my benchmark because my strategy is to reinvest the dividends from my shares back into buying more shares in my portfolio and take advantage of compounding. It works like this;

Rise or growth in original investment includes;
(a) The return on share prices alone, and
(b) Share prices and dividends reinvested-accumulation.

Dividend yield-based strategies, which focus on both income and capital appreciation, have proven to produce stable income streams and provide protection during market downturns.
Total returns are important as they will give me the true indication of my performance and if I’m on track to achieving my financial goals. Table 1 shows the returns on investment if you had of invested in the ASX200 Accumulation Index. I need to do better than this. Annualized -  a fancy term for a return on  investment!

ASX Accumulation Index Returns -Table 1.

With dividends reinvested the value of your initial investment trebles, then 18 times then 69 times.Warren Buffett reinvested all dividends back into to buy more shares and his company did not pay dividends for over 50 years. He told his shareholders if they wanted dividends to sell some of their shares. When you buy shares you select what you wish to do with your dividends.
Most listed companies operate a DRP - Dividend Reinvestment Program.









.