Investment Returns
Ethical Investing - OR Responsible Investing, ESG factors or Sustainable Investing
Helping our clients to understand that their investments are doing good is important to us at Moneyworks. Research shows that investing ethically can increase returns.
We are using the terminology ‘Ethical Investing’ as a catch-all phrase for ‘investing to do good – and avoiding the bad and nasties’.
Other words used to describe this type of investing are ‘Responsible’, ‘Sustainable’, ‘Green’, ‘ESG’ as compared to ‘ethical’ investing, with some organisations having concerns about the implications of the word ‘ethical’.[1] While we understand these concerns (one persons ‘ethics’ may be different to another persons ‘ethics’), we consider that the ‘ethical investing’ terminology sums up the goals of doing good and avoiding the bad.
However, as the world evolves and the understanding of what is ‘good’ and what is ‘bad’ changes, the acceptable types of investment and approaches to investments will continually change.
Ethical Investing is a new approach to investing and provides a stark contrast to the Milton Friedman doctrine that has reigned since the early 1970’s that ‘the purpose of a corporation is to make profits for the shareholders’. This approach gained popularity and has seen swings away from organisations caring about all stakeholders (eg employees, community, environment) to focusing in the power of the dollar and profit.
We have been monitoring our investment managers since 2018 to ensure that they incorporate ethical investment concerns in their approaches to investment, but since mid 2020 we have undertaken a major project to upskill ourselves, integrate independent research into our client reporting and carry out extensive deep dive analysis into our existing fund managers, and new fund managers to understand their approach to ethical investing.
Over the last two years, money has flowed into ‘ethically’ branded investment solutions around the world, but we are aware that there is a lot of room for green-washing (or brown-washing, or other ‘washing’), so wanted to make sure that we did this work properly. ‘Washing’ means that an organisation claims to be doing something, but when a deep analysis is carried out, it is found that the claim is just a label, and that the actual situation under the hood does not match the claim.
There have been a large number of instances of ‘washing’ (we have outlined a few later in this information), and we wanted to make sure that if we were holding ourselves out to provide an ethical investment solution, that our offering was truly true to label.
[1] ESG is Environmental, Social and Governance concerns.
Investment returns and interest rates do matter
To achieve your retirement savings goals, and to get through retirement, you need to understand how investment returns work.
It is important to know how to compare the assumptions in any articles that you are looking at, and make sure that you are comparing like with like.
Inflation means that your money will be worth less and buy less in the future, as prices go up each year. Taxes reduce the return to you as you legally have to pay taxes. For many of the investments that you will use to get you to and through retirement, you will have to pay fees. It is important that you understand what your returns are after these three items.
For our clients, Moneyworks advisers always talk in after tax, fees, and inflation returns when we are doing our retirement savings analyses, and working out how long their money will last them. These returns range from 1.00% to 2.50% - and each return will be personal to each client as it will depend on their tax rate when they are earning and then when they are no longer earning.
The second step is to understand how much different an extra 1.00% (after tax, fees and inflation) return can make to how long your money will last for.
The table below shows you how much difference 1.00% per annum will make if you have $50,000 invested for 30 years.
| After tax, fees and inflation return | Amount you will have in 30 years, if you invest $50,000 |
|---|---|
| 0.00% pa | $50,000 |
| 1.00% pa | $67,392 |
| 2.00% pa | $90,568 |
| 3.00% pa | $121,636 |
| 4.00% pa | $162,170 |
Assumptions: $50,000 invested for 30 years with these after tax, fees and inflation returns, compounding.
The third step is to understand how much additional risk you have to take to get those returns.
For example, if you currently invest in a term deposit for 3.50% - there are no fees payable, but if your tax rate is 33.00% - your after tax return is 2.35%. Inflation is currently around 2.00%. Therefore, a term deposit will give you an after tax, fees and inflation return of 0.35% - not even on this table. (If your tax rate is 17.50% - the after tax, fees and inflation return is 0.68%).
What this means is that you will have to save more money to provide for your retirement as your money won’t be working for you, than if you get extra returns from your investments.
On the other hand, to get a return of 4.00% after tax, fees and inflation, the total actual return that you would need to get (at a 33.00% tax rate) is actually 10.80% (on average each year). This is a very aggressive and high risk profile – we only have one or two clients that fit into this category.
If you are a Balanced investor, then you should be looking at a return after tax, fees and inflation of around 2.50% pa.
Moneyworks NZ Ltd
P: 0800 225 621
E: contact@moneyworks.co.nz
P O Box 1003, Cambridge 3450
Licensed Financial Advice Provider - FSP 15281
Regulatory Information: Moneyworks is a Licensed Financial Advice Provider (FSP15281), and AML Reporting Entity and is supervised by the Financial Markets Authority.