How sustainable are p2p investments?

A friend and I recently chatted about p2p investments and about how to invest into something sustainable. By sustainability she meant mostly the ethical and ecological aspirations of sustainable investments. This got me thinking about how sustainable – both as in having long term stability and a positive ethical and/or ecological effect – crowdlending and crowdinvesting can be.

Basically, I think there are three layers of sutainability to be considered.


1 Long term stability of the p2p investment market

The important question here is: are we investing our money in a market that has potential for continued growth and long term stability?

There will always be private persons and companies that need to or want to borrow money. Also, there will always be private and institutional investors that are looking for an attractive return on profit. So, the basic fabric of lending money and receiving interest in return can be considered as strong and lasting.

The alternative finance market is growing quickly since more and more people realize that they don’t need banks anymore to do the investing for them. The internet and digitalization make for easy access to investment service providers like Mintos, Bondora or Envestio and crowdlending is becoming more and more mainstream.

The publication “THE 4TH EUROPEAN ALTERNATIVE FINANCE BENCHMARKING REPORT” from the Cambridge Centre for Alternative Finance gives a good indication of where the market is headed.

Bottomline is that despite rapid growth in the past there is still huge potential for further growth. In 2017, the UK alternative finance market alone was about twice as big as in Continental Europe. Crowdlending has a longer tradition in the UK and the rest of Europe is now catching up. This shows how much potential there still is: Continental Europa has about 10 times the population of Great Britain.

Another comparison: in the UK the per capita investment in the alternative finance market is about 107€. In Germany it is 7.2€ – that’s roughly 15 times less. Culture and the openess to try something new play a big role here. Germans are very conservative when it comes to investing their savings and consider the stock market as extremely risky, let alone p2p investments. They rather loose 2% to inflation year by year than to take a small risk to make some profit.

Last number that I quote from the Cambridge report: only 29% of the listed consumer loans in 2017 were successfully funded by investors. The report concludes that this might be reflective of insufficient investment.

2 Sustainability of your investment strategy

As attractive as a high return on investment is, it almost always means higher risk. I also often find myself tempted to invest more of my funds on e.g. Envestio or Crowdestor because the returns are so high there. But in the end I reduce my diversification and expose myself to a higher risk of of marketplace default. Each person has a different tolerance to risk and the investment strategy is therefore very individual. I think it’s important to take some time every few months or so to check if the investment portfolio still fits to my goals in terms of profit and overall risk.

Diversification over many loan shares, investment projects and marketplaces is key to reduce the risk. However, this should also be done with open eyes since diversification doesn’t always mean a lower risk. There are new investment platforms emerging almost on a weekly basis that want to have their share of the pie.

In my opinion, it doesn’t make sense to blindly invest into these newcomers (at least no large amounts) since it is completely unclear if they’ll last or not. This is not a healthy and informed way of diversification. At some point, top dogs like Mintos will probably divide the market amongst each other and many small marketplaces will vanish.

If there’s sufficient data on loan performance available – like I explain in this article in the case of Bondora – an informed decision about balancing risk and profit can be made. This is unfortunately quite unique to Bondora but Mintos also offers some statistical data from which the performance of the loan originators can be judged.

3 Investing into sustainable projects

Investments into consumer loans, real estate or business loans bring sustainable returns but don’t really create sustainability from an ethical and ecological point of view. It’s basically impossible to go into this direction by investing into consumer loans (e.g. buying a car is not exactly eco-friendly) but business loans can be a first step.

For example, Envestio sometimes offers investment projects in the field of wind energy, biomass and wood pellet production. Since you’d still put your money into established industries here, it is worth it to look further, for projects that create sustainability somewhere else, particularly in the third world.

There are platforms like Ecoligo and bettervest which let private investors fund solar power projects in the third world, mostly in Africa and South America. By installing solar panels on schools, universities or supermarkets, affordable electricity becomes available for local communities, businesses and families. Excess electrical power can be sold on the electricity market which helps to generate income.

The returns on investment are around 5 to 6% with loan durations of several years. A nice side effect of investing into these projects is that you can “improve” your carbon footprint. Every 1000€ invested help to save about 0.6 tons of CO2 per year.

The average yearly CO2 emission per capita in Germany is 11 tons ……. so, you’ll just need to invest 18.000€ to save your soul 😉

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