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Using P2P Lending For Your ESG Investments Is Responsible And Profitable
P2P lending is far better than ESG funds if you want both great returns as well as to truly support better causes while you invest.
ESG means “Environmental, social and corporate governance”. Basically, it's supposed to be about businesses being socially, ethically and ecologically responsible.
Some investment funds look to offer you competitive returns while focusing your money on investments that do well on ESG.
The problem is, it's a big joke and it's not even funny
The first issue is, as anyone who reads the financial pages regularly knows, ESG has become a box-ticking exercise. Businesses check certain boxes in order to be labelled as being good at ESG.
The second issue is that investment providers offering what they call “ESG funds” invest your money in almost all the same things that non-ESG funds do.
A quick look at a so-called green robo-advisor's ESG funds showed me again today that you'll be investing in weapons manufacturers, tobacco companies and oil companies. The make-up of the companies in the funds really isn't noticeably different to other funds. This is not a one-off, but par for the course.
You're not even helping the good ESG companies
The third issue is far more subtle and it's completely overlooked by financial journalists and financial advisors. And that is: when you buy share funds, the direct benefit for the companies you and other investors are buying into is negligible to zero.
This is because you're normally buying existing shares from other investors and not from the companies themselves. Those companies already made their money from those shares when they sold them the first time, just before they became available on the secondary market – the stock exchange.
Now, the only beneficiaries of your investment are typically yourself, the investors you're buying from, and the middlemen making the deal possible. So, even if the companies you're buying shares in were really good at ESG, you wouldn't be helping them directly, because you're not giving them any money. At the same time, you're not usually helping the ones that are bad at it either. Basically, it's ESG neutral.
While that is oversimplifying it just a little bit – I'm thinking rights issues for example – it isn't by very much.
So, perversely, there's a case to say that the best thing share-fund investors can do to support ESG is to look to earn the highest returns possible from investing in any companies, including those with poor ESG and low reputations, and then use the higher profits you've made to contribute to good causes. This way, at least you're passing some of the rewards from the bad companies into nicer areas.
There's a much better option and it's called P2P lending
Most people should invest a good proportion of your money in shares for the long term, but P2P lending is an equally excellent medium- to long-term investment. Sorry, I don't want to sound like a salesperson for P2P lending, but there's no point investing in something rubbish because it's better at ESG; it still has to perform well.
What's more, the money you put into good ESG options in P2P lending usually goes directly to support those businesses in their efforts. That's because most of the time you are lending directly and not buying from other investors.
Ecologically better P2P lending
In terms of being better for the planet, you have some P2P lending companies that offer lending against renewable energy projects, such as Downing Crowd, Folk2Folk and Relendex. There's also Abundance, GrowthFunders and Triodos Bank, although we at 4thWay have little information on them.
Socially better P2P lending
Some peer-to-peer lending companies seem to do really well at taking their responsibilities to borrowers seriously, while not neglecting their investors. This to me is the most important social side in money lending. Among those are Proplend*, CapitalStackers* and I think also Assetz Capital.
I think that most P2P lending companies offer borrowers better support, service and terms, so you're helping to get individuals and small businesses out from under the banks. That's partly why P2P lending is also called “social lending”.
In other cases, you're able to specifically lend to care-home operators, retirement homes, nurseries or local regeneration projects. Again, I'm thinking of Assetz Capital and Proplend*. If you make sure you're lending in a proportion of these sorts of loans, I think you're likely doing far more direct good than in your stock-market investments.
Picking individual loans based largely on ESG factors is going to be difficult, probably. But remember that you're helping local businesses when you spread your money widely and invest in many other loans, such as your pub on the corner. In terms of investing with responsibility, this is probably more worthwhile than buying existing shares in a conglomerate from another investor.
Independent opinion: 4thWay will help you to identify your options and narrow down your choices. We suggest what you could do, but we won't tell you what to do or where to lend; the decision is yours. We are responsible for the accuracy and quality of the information we provide, but not for any decision you make based on it. The material is for general information and education purposes only.
We are not financial, legal or tax advisors, which means that we don't offer advice or recommendations based on your circumstances and goals.
The opinions expressed are those of the author(s) and not held by 4thWay. 4thWay is not regulated by ESMA or the FCA. All the specialists and researchers who conduct research and write articles for 4thWay are subject to 4thWay's Editorial Code of Practice. For more, please see 4thWay's terms and conditions.
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