The core-satellite strategy and how impact also works for equity funds & ETFs

If you already invest with ecoligo, you have already made a big step towards sustainable investment and a solar plant in an emerging country could be financed. It is there that the fight against climate change will be decided, because demand for energy is exploding: by 2040, the International Energy Agency (IEA) expects 90% of the global increase in energy demand to come from the emerging economies, where people are catching up to our current level of prosperity.

The first and cheapest option available is fossil fuels, which in the long run continue to heat our atmosphere and pollute the environment. Of course, we cannot dictate to other sovereign countries, but we can offer perspectives and proactively promote and finance sustainable development. Because capital is scarce, especially in emerging countries, and that’s exactly what you provide with ecoligo – great! But what happens to the rest of your finances?

This post is to show you how to search and find impact in your other financial topics as well. If you’re not yet investing in ecoligo, looking at the big picture may help you better understand investing in ecoligo and give you the confidence to finally make a conscious commitment to it.

A holistic perspective

Surely you’re not just investing in ecoligo. Maybe you still have a securities account with your bank or an online broker. Even your pension plan for retirement is nothing more than a long-term investment that can continue to support fossil fuels, pollution, and human rights abuses.

But it doesn’t have to be. It is also possible to consider sustainability in these areas and create a positive impact. While it’s not always as intuitively simple there as it is with ecoligo, where you see your money driving funding for a photovoltaic project. And in fact, you won’t get as much impact with your annuity or the funds and ETFs in your portfolio. But since you probably have even more money lying around in these areas, they are at least as important in the end!

Before we look at how you can get the most out of these areas as well, let’s look at a concept that will help you stay on top of your overall investment.

The Core-Satellite Strategy

According to the core-satellite strategy, you invest 80% of your money in a planning-safe “core”. These are primarily broadly diversified equity and bond funds or ETFs on the stock market but also include real estate. You allocate up to 20% to various satellite investments like renewable energy with ecoligo, forests, startups, or even cryptocurrencies if you’re interested.

This ensures that you always have a solid foundation, which may fluctuate in value, but is very secure in the long term, so that you can, for example, build your retirement provision on this. You invest the remaining 20% in projects that you consider worthy of support or interesting. Taken on their own, these may or may not fail. Overall, though, there’s a good chance that the gains on your satellite investments will, on average, offset any losses. And if the worst comes to the worst, you still have your core investment. ecoligo scores high among satellite investments with its 0% default rate to date, making it a perfect first satellite. But what about the remaining 80%?

Sustainable investment in funds and ETFs

Whether active funds or ETFs – here you invest mostly in shares and thus become a co-owner of the companies in which you invest. You may even have already considered sustainability and think to yourself “my ESG ETF is already the sustainable option” or “with my dark green fund I only invest in green companies”. But is that really what you want?

First of all, ESG has surprisingly little to do with what most people think of as sustainability. How do you explain that French oil company Total scores almost as well on MSCI, the largest ESG data provider, with a rating of 30.5 as electric car pioneer Tesla does with 29? Sure Tesla has some controversies too, but that still really doesn’t make sense on a scale of 0 (best) to 100 (worst).

This is simply because ESG does not assess sustainability, but how well sustainability risks are managed. Simply put, instead of assessing the impact of the company on the environment (the Footprint), the impact of the environment on the company is assessed. And unsustainable companies in particular often impress with good management practices to manage their ESG risks, which is reflected positively in ratings.

Have you already figured this out and do you really only invest in truly sustainable companies? But what do you contribute to what are, in fact, sustainable businesses?

Effect of sustainable investing on the stock market

The stock exchange is a so-called secondary market. Here, you are not buying a share from the company and thus providing it with capital, but from another investor. For the time being, the company is not aware of this at all. In theory, as demand for shares in sustainable companies increases, their share price also rises, which would indeed be good for the company, which would then obtain more favorable credit terms from banks, for example. In practice, however, there is a problem, the cause of which is also the reason for the ETF megahype: Market efficiency.

Nobel Prize research from the 1970s simply states that the stock market is efficient at moving capital to where it will yield the most return. The first conclusion from this, which is also often empirically proven, is that it does no good to try to be better than the market average by selecting individual stocks – the birth of ETFs, which simply “blindly” copy the entire market.

However, the second conclusion – and research has also been providing empirical evidence on this for several years – is that the theory of rising share prices of sustainable companies does not work in practice. If there is more demand from sustainable investors for shares in sustainable companies, the demand from conventional investors who have been happy to hold the shares for purely economic reasons but sell them as soon as the price has risen beyond economic reasonableness falls.

To learn how you can make a real impact with funds and ETF instead, check out this post on the Finance 4Future blog!

Niklas talks to his WertWende colleague Mike about how you can also make your pension plan sustainable in episode 10 of the Finance 4Future podcast.

Guest author profile: Niklas Krämer

Parallel to his mechanical engineering master’s degree, Niklas began researching the effect of sustainable investments. In the Finance 4Future podcast, he interviews a wide variety of experts on topics ranging from shareholder activism, investing in renewable energies and impact start-ups to ESG ratings and CO2 certificates. In October, he joined the sustainable financial consulting firm WertWende, where he is jointly responsible for portfolio management and advises clients on sustainable investment and finance in general as an independent broker.