How Living Sustainably can Precipitate Financial Independence
Freedom is one of those abstract and elusive ideas which, in the English language, evokes some of the most profound feelings of awe and wonder.
Encapsulated in that single term are ideas of democracy, aspiration, and equality under the rule of law. Running within its veins is the principle that governments exist to facilitate our individual choices and the pursuits which we set our minds towards.
The common law system of the Anglosphere, unlike civil law in some European democracies, is based on the idea that constraints to human freedom should be by exception, rather than by default, and that there is some intrinsic virtue in a society in which individuals are free to collaborate, exchange and give voluntarily without hindrance or coercion from the state.
But freedom has never equated to an unconstrained anarchy or disorder. Over the centuries, Westerns civilisation has been so influenced by Judeo-Christian ideas of human nature and identity, that there has always been a legitimate case for the constraint of individual freedoms where it serves a greater ideal, such as peace, stability and the protection of human life.
Built in to the idea of freedom, is the assumption that there exists an implicit social contract among all individuals of a nation, and indeed — in a certain sense — among the entire population of the world, which binds those who have died and those who are currently alive, to those who are yet to be born. We have a self-evident obligation to pass on the glorious inheritance of our cultural heritage to future generations, fully intact.
The threat to freedom from climate change
It has become evident — beyond doubt to all but the most stubborn — that part of that inheritance which is under threat is a diverse natural environment and a stable ecosystem. As the IPCC consistently reports, despite signs of progress in many areas, global carbon emissions are continuing to rise, as are global temperatures, and we are at considerable risk of exceeding the 1.5-degree target for maximum warming. Exceeding this 1.5-degree rise in global temperatures would ‘exacerbate extreme weather, rising sea levels, and diminishing Arctic sea ice, coral bleaching, and loss of ecosystems, among other impacts’¹
Graph: IPCC Special Report (Global Warming of 1.5 ºC), October 2018
While a huge amount of responsibility lies with governments across the world to mitigate these risks and reduce the emissions of greenhouse gasses, it is also the case that individuals bear considerable responsibility to take steps to reduce our individual negative impact on the environment.
Some of the most effective ways in which many are trying to reduce our impact on the environment include:
Reducing emissions from personal transport by driving and flying less
Reducing the consumption of meat
Reducing food waste
Insulating homes
Purchasing low-emissions vehicles
Purchasing ‘micro-generators’ such as domestic solar panels
Let’s hold that thought and return to the idea of freedom.
One of the concerns about climate change is that it reduces freedom: both individually and for society more broadly. If the weather is less predictable and low-altitude settlements uninhabitable and farming more difficult, then prices will rise, choices will be limited and prosperity will be impacted for all. Indeed one of the most surprising observations from Project Drawdown (which I consider to be one of the best studies on realistic ways to reduce global emissions), is that almost all of the solutions we will need to take globally actually result in a net profit for those who invest in them. Climate change is a problem for the economy!
This takes me on to the second dimension to this article which I have been following now for a few years: it’s the idea of personal Financial Independence.
Financial Independence — or Financial Independence Retire Early (FIRE) refers to the global movement of those committed to achieving independence from the need to work to earn a living well before the standard retirement age.
While I have absolutely no interest in retiring (according to the traditional sense) anytime much before I die, I do see huge benefits in becoming financially independent as early as possible. By separating the link between generating an income and choosing how to spend one’s time, we can invest that most precious resource in the direction which most closely aligns with our values, without having to worry about the financial impact.
That path to Financial Independence is not easy, but it is simple to understand. It involves three things:
Live frugally to minimize your expenses
Increase your income to maximize your personal profit margin
Invest the difference in diversified index funds and real-estate
When the passive income generated from your investment portfolio is equal to your required living expenses, you have attained FIRE. Typically this will mean a portfolio size of at least 25x your annual living expenses, based on a 4% withdrawal rate.
I want to write about my views on Financial Independence in a later post, so I’ll park those three steps here for the time being, but here’s the key point: each of those steps has a symbiotic relationship with a more environmentally friendly lifestyle.
In other words, it is entirely possible to align the interests of ecological and environmental sustainability with an ambitious journey towards personal financial independence. Indeed they provide mutual help and motivation for each other!
Living frugally can support a climate-friendly lifestyle
Let’s return to the list I gave above about steps we can take to reduce our impact on the climate. They all (at least can) involve a reduction in expense.
Flying and using a car regularly are very expensive forms of transport
Meat is typically an expensive source of protein over nuts, grains, seeds and beans
You pay for the food you waste
Insulating your home properly will reduce your energy costs
Low-emission vehicles reduce the costs associated with buying fuel and also save on road tax
Purchasing solar panels for your home can reduce your energy bills
Of course, the incentives to reduce costs are not always aligned with the incentives to avoid a carbon footprint — that’s why I support a carbon tax as a market-based solution to climate change. However, these are areas to focus on if you are passionate about both climate change and achieving Financial Independence.
Increasing your income can support a climate-friendly lifestyle
One of the great features of the free market, as opposed to economies based on collective ownership, is that the way to satisfy our material desires is to offer something of value to society. In a regulated system of voluntary exchange and private ownership, the way to achieve many of our own ambitions is to create value which can be exchanged.
Human nature is what it is. Unlike the socialist economies of the Soviet Union or communist China, in the West, we have accepted the Judeo-Christian idea that self-interest derives from our status as fallen beings. It is not a feature determined by the economic system in which we operate, but a problem deeply rooted in the human condition.
The wisdom in the free market then, is that, while the illegitimate forms of wealth acquisition are outlawed (theft, extortion, bribery, corruption, etc), the stability of the economy is underpinned by the unwavering motive of self-advancement.
Now, that’s a good point to pause.
Although we are each motivated largely by our immediate human needs, we also have our own individual passions and interests. We have a sense of justice and an innate moral compass which competes against our other desires for our focus and attention.
The more value you offer the more you earn, and there’s no reason to suggest that cannot also be the case when tackling climate change
For many of us, climate change is one of those issues.
While I believe the vast majority of gainful work in a free country is indeed beneficial for society — from serving food and cleaning floors to designing products and managing finances — there are some jobs that offer more immediate and critical value with regards to tackling climate change.
In a system of free exchange, the more value you offer the more you earn, and there’s no reason to suggest that cannot also be the case when tackling climate change.
Seek to become the best in your field. Combine areas of knowledge and expertise to deliver real value for your business. Find ways to innovate and change your business practices to both deliver greater value for your customers and move towards more sustainable practices, because the two can support each other.
For me, that’s why I became a local Councillor in Southampton in the UK, alongside my day job in engineering— to make a difference and improve the city in which I live.
And when it comes to FIRE, there’s no harm in killing two [metaphorical] birds with one stone.
Investing effectively can support a climate-friendly lifestyle
On the road to Financial Independence, the final step is to invest the difference between your income and expenses in low-cost well-diversified index funds. This provides the best chances of maximizing returns in the long-run and providing resilience against market events which could hurt particular companies or sectors. By investing in every sector in every part of the world (as many index funds do), you are investing in the global market rather than any particular sector.
So how can that be used to accelerate our journey to ecological sustainability?
The answer — in a whole host of ways.
Socially responsible index funds (i.e. “Ethical funds”)
The most immediate step would be to buy index funds that invest in a ‘socially responsible’ way. For example, I use Vanguard for most of my investments. Vanguard offers a number of Socially Responsible Investment (SRI) funds which avoid investments that participate in unethical practices.
Here’s how Vanguard describes SRI funds:
The funds exclude investments based on eight criteria: involvement in the anti-personnel mines, chemical or biological weapons, cluster munitions or nuclear weapons industries; contravention of human rights or labour standards; involvement in environmentally detrimental activities; or involvement in corruption.
Impact funds
These are funds which, unlike “ethical funds”, invest in companies that have an especially positive effect on the world. They use a process known as ‘positive screening’ involving the explicit selection of companies that have a disproportionate impact on improving the environment.
Typically, such funds comprise companies that make use of recyclable materials or deliver clean energy. By investing in such companies you can put your money to work for the planet and allow your savings to fund growth in sustainable development, as well as offer the potential to turn a profit.
Impact investing can be done in two different ways. It can be impact-first investing whereby the investor is willing to accept a lower return in exchange for greater impact — and potentially incurring greater risk. Alternatively, impact investing can be finance-first meaning that the investor recognizes that sustainability is a growing industry and thereby seeks to invest in impact funds with the expectation that they will deliver the greatest returns.
Both options are beneficial for sustainable development. Both options deliver additional resources for high-impact organizations and increase the incentives for further investment.
I have found the incentive of increasing my contribution towards tackling climate change to be a significant source of motivation
Environmentally-friendly companies will be sustainable long term. Sustainable growth requires a sustainable economy and environment.
In a climate (sorry for the pun!) of clean growth and renewable energy, many investors are banking on the continued performance of environmentally-friendly companies outpacing average market growth and are investing accordingly.
While I still prefer to take a more diversified approach primarily through SRI funds, I think such impact funds have a huge role to play in the portfolio of the prudent FIRE investor.
When it’s hard to reduce my expenditure and hard to solve the challenges we face in Southampton, I have found the incentive of increasing my contribution towards tackling climate change to be a significant source of motivation to keep investing a big chunk of my income in a responsible way on the journey to Financial Independence.
I hope you do too!
References
[1] www.ipcc.ch/site/assets/uploads/2018/11/pr_181008_P48_spm_en.pdf
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions
