Inspired by climate change talks in Paris, we discuss some (loosely) related ideas that you might be able to apply to your personal finances that will both help the environment and grow your wealth.
Certain industries operate at a higher negative cost to society and the environment than others. Many investors, in recent years, have placed greater emphasis on pursuing a more ethical and sustainable approach to where they allocate their capital.
This shift in investor behaviour has given rise to a variety of specialist ethical investment managers and ethical only superannuation products. Although these specialist providers provide one avenue for achieving an ethical mandate, we can at an investor level achieve much the same outcome by simply placing a restricted mandate on our investment selection. An example of industries and company activities typically excluded in an ethical mandate are as follows;
- Arms production
- Companies using palm oil
- Companies that undertake animal testing
The above industry and company traits are representative, although not exhaustive, of investments that for social and environmental reasons may cause ethical conflict.
Interestingly, industry dynamics have seen oil and commodity prices depressed and the tobacco industry’s growth is continually hampered by ever tightening government constraints. This has led to ethically mandated funds on average outperforming their peers over both the last ten years and one year period (1). Clearly doing the right thing can pay off as well!!
Debt recycling’s link to environmental sustainability might not extend much further than the word recycling, but any excuse to reinforce the merits of a debt recycling strategy is worth taking. Debt recycling is the process of converting your private debt into tax deductible investment debt.
Let’s say you have a mortgage and want to repay this a little quicker. A debt recycling strategy would see you draw down additional investment debt (on an interest only basis) and use this capital to invest in an income generating asset (i.e. an income orientated share portfolio or high yielding investment property).
You would then direct income generated from your investment property/portfolio back into your private debt, expediting private debt repayments and in time converting your private debt into investment debt. Reducing your private debt exposure may save many tens to hundreds of thousands of dollars in tax (as you can deduct the interest repayments on your investment debt).
The catch with debt recycling is you need to generate an investment return equal to or greater than the cost of financing and undertake slightly more complex debt structuring arrangements. For such an effective financial management strategy, there is a surprising low uptake of debt recycling strategies by retail consumers. This strategy is especially effective for high income earners whose higher marginal tax bracket makes private debt relatively more inefficient.
Recycling might not only help save the planet, but if incorporated into your debt management, will do wonders for your hip pocket.
1. Source: Responsible Investment Association Australasia, 2014 Responsible Investment Benchmark Report