For an updated view, visit Quality Abundance.
There is a growing breed of investors who are more ethically focused, but get frustrated by lower returns and limited options. I wanted to find out if investing through Trine would offer a decent return, given the risk, while meeting ethical investment criteria. My conclusion is a qualified yes, it only fell short on one of my four key principles in my investment strategy and challenged me to add a fifth.
Ethical investors are generally motivated by one or more of the following:
- The desire to positively impact the world with their investments (Ethically/socially responsible investing)
- Searching for higher returns
- Looking to balance and diversify their portfolio further
I recently came across Trine (my referral link) as a mechanism for meeting these criteria.
My core investment strategy has four key principles to accumulate wealth:
- Start early – The earlier I start, the more the compound effect kicks in and improves my chances of “riding out” unfavourable market conditions.
- Diversify – I don’t have all my eggs in one basket. Diversifying across asset types, geographies and industries. There are some great index funds that do this for me.
- Reduce commissions and taxes – Probably the most strategic thing I actively do, utilising passive index funds within an ISA or Pension wrapper. Fees and taxes can significantly affect the return. By reducing commissions I calculated that I can add 50% to my Wealth (A 1% reduction in fees, over 40 years and 7% return. Tax efficiency gives a similar result. The sweet spot is using both)
- Re-balance – Selling some of what has done well, buying a little more of what has not done as well. Sell high, buy low. I am not great at this, which is why I like the services of companies like Scalable Capital.
I found that an investment through Trine can meet all of these principles except the third. It does of course meet a fifth principle, that of being ethically sound. I am not brave enough yet to include this as a key principle, yet. The opportunity cost are still too high, as there are too few ethical investment opportunities and channels available, for now. This is changing and Trine is part of that change. My hope and expectation is that in 2-5 years, I will be able to add a fifth core criteria. I have heard it said that every penny we spend (or invest) is a vote for what type of world we want to live in. The world certainly would be a better place if more people took this to heart.
I have included this exercise as part of my personal MBA, as I envisage a potential future where I help channel capital towards Circular Business Models, potentially helping either source and direct capital, or alternatively source the projects themselves, which seems to be under-served at the moment (likely in Africa, with my African roots and the untapped opportunities).
Investing through Trine – My trial run
During my trial run, there was only one active campaign, which was based in Kenya and looking to bring 1,300 solar home systems to rural households, with a “Risk A” categorisation. I imagine the limited investment options is largely driven by the need to find suitable projects that meet the criteria and are also of sufficient quality to be “Investment” grade.
As it is a developing and new investment mechanism or channel, it is important to build trust and expertise in identifying quality. The alternative would be to charge a higher rate to the beneficiary to cover the additional risk, which could become overly burdensome and limit the positive impact. Quality over quantity.
Investing through Trine – My assessment of the investment option available
The available project has an expected rate of 5.1% on a loan note, which is attractive by UK standards. It is similar to many corporate bond rates which seem to range between 3%-10%. Typically the riskier the repayment, the higher the rate. My initial thoughts were that 5.1% seemed low given the risk, but on reflection, I think “reasonable” is a more appropriate assessment, it certainly does not fall into the “attractive” category for me. From a strictly return, given the risk, perspective. But the point is that the return is far greater than more £s in my investment account.
The interest is paid in Euro, so I am exposed to GBP/EUR fluctuations which isn’t necessarily a bad thing, just something to be aware of. My portfolio is more globally diversified than most to align with my nomadic nature. The investment is subject to indirect currency risk in terms if the value of the local currency drops significantly, then the recipients may not be able to afford to pay the local currency equivalent.
The loan note is subject to withholding tax, which is already deducted before calculating the return. The gain will be subject to 30% capital gains tax, which if I interpret it correctly, reduces the expected return to 3.6%, something that could potentially be avoided if invested through an ISA in the UK. If I was allocating more capital, I would certainly look at this more closely, as it does not meet my third investment principle of being tax efficient and could be done without reducing the positive impact.
Investing through Trine – The investment process
The interface is beautiful and slick, while still clear and comprehensive. Clearly a lot of thought has gone into the design. I signed up with my Facebook profile (un-ticked friends list – I’m not sure why, I just try to limit unnecessary information), which was easy enough.
Step 1 – Understand the risks.
Step 1.1 – Everyday investor
The “everyday investor” is basically the categorisation that allows the crowd to become the crowd. A typical person can invest in asset types that were previously perceived to be too complex and risky. This meant that a wealthy group of individuals and groups had access to potentially more lucrative returns and restricted the growth of certain types of companies. That all has begun to change with the crowd. An everyday investor is limited to 10% of their investment portfolio into these perceived riskier types of investments. The idea being, that if they fail, the everyday investor could afford to take the financial hit.
I have emphasised “perceived”, as the recent history has shown us that market manipulation and volatility has resulted in a break-down of the risk-reward relationship. The project I am reviewing is targeting 1,300 homes, something easy to understand (compared to 90% of a bank’s operations?) and diversifying away a significant portion of the risk.
With crowdfunding, the investments are no longer limited to rich people (sophisticated investors) or institutions, which typically have return as their key focus. I have found that there is sometimes a poor correlation between being rich and being a sophisticated investor, but the regulators seem to be comfortable to use one as a proxy for the other.
One distinction, in my experience, is that the crowd seems to be more motivated by investing in the idea, than the notoriously unreliable profit and loss or cash-flow projections. Which in my view it is not an investment strategy, I “invested” in Tribe because I liked the ethos of the company and the product, I thought the world would be better with the company growing and I wanted to be a part of it. I effectively voted (with my capital) for it to grow. If I get a return that is a bonus.
Step 1.2 – Quiz
The quiz is a way to check that I understand the risks, knowing that it is too easy to tick the “I understand”. Truthfully, I did have to explore more on the Loan Note and I was encouraged to find the payment facilitator is Lemon Way, a company whose founder I had briefly met a couple of years ago.
Step 1.3 – Understand the risks
The investment carried three key risks. Firstly, that emerging markets which are seen as more volatile. Secondly, the company facilitating the project could fail, this particular company has had a successful track record to date. Thirdly, the currency risk, which is indirect in my understanding and probably subject to significantly different inflation rates which could offset some of the risk. Indirect, because it is not strictly the Euro to Kenyan Shilling fluctuation, as the interest is paid in Euro, but more that if the Euro appreciates significantly the households will not be able to afford to pay back the loan note.
Step 2 – Select amount
The one campaign option was based in Kenya. As a country Kenya seems to be more open than some other African countries to “enabling investment”, rather than direct aid, which can create a culture of dependency. When I explored finding projects previously, I found that getting funding in a country like the UK seemed doable, finding a deployment partner(s) slightly trickier and then finding suitable projects seems to be the trickiest part of the puzzle.
The amount selection defaults to EUR 500 and highlights the number of people served and tons of CO2 saved. I’m not sure how it is providing electricity for the first time and reducing tons, so there potentially is some double counting overlap. The alternative seems to be using kerosene. So solar is definitely healthier, has less impact and a social benefit. So perhaps a pedantic point to get hung up on, I was just making sure I was evaluating the investment with a critical mindset.
Interestingly there is a voucher/gift option, I really like this, with Amazon and earning more than I need to support a single household, I seldom value gifts. More stuff I don’t need (or want?). This is sort of investment is a great alternative.
For my trial, I tried Eur 30, but the investment needs to be divisible by Eur 25, so went for Eur 25, as this was for trial purposes. Which would impact 1 person and (or?) reduced 0.2 tons of CO2.
Step 3 – Account
I entered some more personal details. Not to be shared here. 🙂
Step 4 – Payment
They took the payment details, after reinforcing the loan details, highlighting that it was unsecured and that it needed to be fully funded for the investment to occur.
Step 5 – Invite
They give a referral option, where the referrer (me) and the recipient both get a voucher of Eur 10 to invest. I thought, why not? – Here is my referral link if you are interested.
Overall, I am not sure if this falls more into the category of an accountable charity donation than investment, probably both or somewhere in between. It is better than creating a dependency through some charitable aid. In my view and investment through Trine can make the world a better place, while still giving a reasonable return. Is it right for you? – That would depend on your personal circumstances, but if you are striving to be an ethically responsible investor, it is certainly worth investigating.
Some potentially useful links:
- Quality Abundance – Facebook Group
- Trine – Access to clean energy
- Trine – My referral link
- Abundance Investment – More UK Focused