How we spend our money matters, and so does how we invest it. Our money can fuel the exploitation of children abroad or buy them a new pair of shoes. Our investments force companies to consider their environmental, social, and political impact. As consumers, we influence which companies thrive; as investors we decide which companies survive.
Up until today, I was happy to invest in a fund that tracked the entire market– a proven method that has rewarded investors with high returns. However, recent events, including Greta Thunberg’s moving speeches, have convinced me to take a second look and figure out how I can invest in a more socially responsible way.
What Is Socially Responsible Investing?
One method of socially responsible investment puts money towards ethical causes; for example, investing in companies that are engaged in clean energy, environmental sustainability, and social justice. Alternately, one might seek to avoid investing in companies that are known to exploit workers, harm the environment, or sell destructive products (think tobacco, alcohol, and casinos). There are funds designed specifically for these purposes.
Two terms for these types of funds are often used interchangeably: SRI (socially responsible investing) and ESG (environmental, social, and governmental). Just like “regular” investing, you can invest in individual companies or via a mutual fund or ETF.
Understanding Mutual Funds as Socially Responsible Investment Vehicles
What Companies Are You Investing In?
Many investors put money into mutual funds, which are a compilation of investments from a lot of different companies. They tend to be a favorite way to invest because they are highly diversified. However, it’s important to know what companies make up your mutual fund.
In some recent sloppy journalism, Washington Free Beacon accused Senator Warren of ‘investing in private prisons’ because she had some money invested in Vanguard Target Retirement 2025 fund (which includes private prison stock among its holdings). While the claim is technically true, this is inevitable for anyone buying into these types of funds, which is the significant majority of us.
According to Vanguard’s How America Saves 2019 report, 77% of retirement plan participants at Vanguard invested in a target-date fund like Warren. A Fidelity report in 2018 found that 68% of millennials have 100% of their assets invested in a target date fund. That means most of us are investing in private prisons and other questionable operations in our 401ks and other retirement accounts.
It can be difficult to diversify effectively while remaining aware of the ethics behind every company you are investing in. Luckily, there are funds that do most of the leg work for us.
What Are The Socially Responsible Alternatives?
In a perfect world we would be able to filter every company into black and white “ethical/unethical” categories, but it often isn’t that easy. Attempting to tackle all morally questionable investments can become a murky prospect. Instead, funds generally have at least one focus. Here are 6 examples of focuses of different SRI funds:
- Corporate governance
- Environmental impact
- Workplace practices
- Product safety and impact
- Human rights, including indigenous peoples’ rights
- Community impact
While it may be difficult to cobble together a 100% guilt-free fund, doing something is better than not doing anything at all.
Environment, Social, and Governance Funds (ESG)
Environment, Social, and Governance (ESG) funds screen the types of companies that make up the fund. These funds are focused on three categories, and have more than $12 trillion invested in 870 funds.
The Talmud instructs followers to diversify. Sharia law forbids investing in companies with high levels of debt. Many religious texts have strict rules against alcohol, gambling, and pornography. Faith-based funds exist to create investments for people who want to align their money with their beliefs.
There are funds for Catholics, Protestants, Muslims, Mennonites, and other belief systems. Even if you don’t subscribe to the same core beliefs, you may agree with the resulting ethical and monetary principles.
Interestingly, the traits of one Quran-based fund (AMAGX) has attracted many non-muslims. There are financial benefits of investing in companies with low debt in a crisis, and investors get the added benefit of avoiding morally questionable funds. Overall, 40-45% of investors in the fund are non-muslim.
Becoming A Socially Responsible Investor
Supposing you agree with all of this, and you want to be a more socially responsible investor, the real question is: how?
There are multiple ways to go about investing your money responsibly, from using a robo-advisor to choosing funds to buy yourself.
One easy way to get started investing is to let the robots do it for you. In exchange for slightly higher fees, robo-advisors will manage your investments for you– and many have socially responsible portfolios available.
|Minimum Investment||Fees per year||Socially Responsible Investment options|
|Wealthfront||$500||0.25%||You can create an exclusion list to avoid individual companies that you do not wish to invest in, or use pre-existing opt-out categories such as gambling or tobacco.|
Digital plan: 0.25%
Premium plan: 0.40%
|Betterment uses SRI based ETF’s for investing|
|Ellevest||None||0.25% of the total amount you invest.||Ellevest Impact Portfolios add investments focused on making a positive impact for women|
If you are unsure how to get started with investing in the first place, let alone the difficulty of manually investing in socially responsible funds, robo-advisors are a great way to get started.
Do It Yourself
Just like regular investing, you can have your financial planner invest for you, a robo-advisor take over, or you can do it yourself. Doing it yourself may take some time to learn the ropes, but it will save you on fees down the line.
Since I prefer DIY investing, I looked into socially responsible funds myself.
An Investigation of An Example Fund
Vanguard FTSE Social Index Fund Admiral Shares (VFTAX)
The VFTAX is a very new fund with an inception date of Feb 07, 2019 and a minimum investment of $3,000. It is based off of VFTSX, an ESG fund which was started in 2018 but is now closed to new investors.
Projections show that if the fund had been around for the last 10 years, it would have consistently outperformed the index. Of course, we have had great market returns in that time and past performance does not necessarily mean future growth. However, it is a comfort that investors would not have lost out on money by investing in a socially-minded fund.
There are also two ETFs to consider:
- Both are screened for ESG criteria
- Excludes stocks in adult entertainment, alcohol and tobacco, weapons, fossil fuels, gambling, and nuclear power.
- Excludes stocks that do not meet certain standards of U.N. global principles.
- Excludes stock of companies that do not meet diversity criteria.
Whether you use Vanguard, Fidelity, Charles Schwab, or another broker for your investments, do the research to figure out what funds are available to you at low fees. Some other funds to consider include:
Arguments Against Socially Responsible Investing
Unfortunately, it’s not all sugar, spice, and everything nice. Many people argue that socially responsible investing is a farce. They posit that it is impossible to have a ‘morally perfect’ fund. If corrupted corporations can get away with exploitation as long as they recycle, for instance, why even bother?
What is Under The Hood?
What does corporate social responsibility mean, and how can we measure it? Activities that might seem okay to some investors may be a red flag for others, and some argue that it is impossible to separate the “good” from the “bad.” Who are the fund managers to decide what constitutes something being ‘moral’?
Social Responsibility Measurements
Companies are given scores based off of their ESG impact, which is then reviewed by an independent committee of experts from the investment community, NGOs, unions, other companies, and academia.
The scores are based off of a data model using 300 Indicators across 14 Themes and 3 Pillars, and is called the FTSE4Good index.
Morningstar Sustainability Rating
One significant development for sustainable investing was Morningstar’s development of a sustainability rating. It assesses the ESG impact of approximately 20,000 mutual funds and ETFs. The score is based on the underlying companies’ disclosure, preparedness and overall performance.
Points are subtracted if there are ESG violations such as discrimination lawsuits, oil spills, or other issues. These scores may be the deciding factor when investors choose between two funds that have similar performance. The rating nudges socially responsible investing towards the mainstream, bringing something that used to be “niche” into the spotlight.
While the FTSE4Good and Morningstar Sustainability Rating might not be flawless, their existence proves that quantifiable efforts are being made to measure what makes a “good” investment.
For Every "Good" Investment, There Is A Bad Consequence
In one MarketWatch article, the author argues that with every “good” investment, there are bad consequences, and vice versa. “Green energy is great!” he writes, “No pollution or global warming. This must be socially responsible investing. Except if you love birds and don’t want them to be massacred by windmills.”
His argument highlights the struggles we go through on a consistent basis. People ask if it’s worth recycling if most of it ends up in a dump anyway. They wonder if charging electric cars is actually more harmful to the environment than fuel in the tank. What do we do about the unexpected side-effects of our attempts at sustainability?
These are valid questions to ask and we can try to make the best balance possible. However, it’s absurd to throw out socially responsible investing altogether simply because a balance is difficult to find. As we iterate new sustainable solutions, we continue to progress.
There Is No "Perfect" Fund
A commenter on a Bogleheads thread called Are socially responsible funds just another marketing ploy? notes the importance of checking the underlying investments in a fund.
Depending on how strict the fund is, your holdings may not differ much from a non-ethically-minded fund. Consider this comparison between these two Vanguard funds: ESG VFTAX vs. non-ESG VTSAX:
Month-end 10 largest holdings (26.20% of total assets) as of 08/31/2019.
1. Microsoft Corp.
2. Apple Inc.
3. Alphabet Inc.
4. Facebook Inc.
5. JP Morgan Chase & Co.
6. Johnson & Johnson
7. Visa Inc.
8. Procter & Gamble Co.
9. Mastercard Inc.
10. Home Depot Inc.
Month-end 10 largest holdings (17.81% of total assets) as of 08/31/2019.
1. Microsoft Corp.
2. Apple Inc.
3. Amazon.com Inc
4. Facebook Inc.
5. Berkshire Hathaway Inc
6. Alphabet Inc A
7. Alphabet Inc Class C
8. Johnson & Johnson
9. JP Morgan Chase & Co.
10. Visa Inc.
Overall, the funds look very similar, but there is heavier scrutiny on companies held in VFTAX. If you object to investing in the behemoths of the market, you may want to look into stricter funds.
I absolutely agree that we should do our due diligence and check the underlying funds. I don’t agree with the conclusion that because the definition of “socially responsible” varies from person-to-person that it’s not worth trying at all.
Just Donate To Charity
Those who are wary of socially responsible investing suggest that it’s better to invest as normal, but donate to a charity of your choice. That way you control where your money is going in other ways, if not in your portfolio.
Turning a blind eye to the ways our money moves the market and paying ‘penance’ later seems short-sighted to me. Why not do both?
The Individual Doesn't Matter
Some people argue that individuals can’t make a big difference. They say it is up to the corporations and government standards to hold companies accountable. While I agree that companies should be held accountable, I see power in the way that individuals can affect the market.
As individuals, we consume the products that these companies generate and line their pockets when we invest. We can make a significant impact when we make intentional choices about where we put our money.
In fact, investors are currently challenging the companies most responsible for greenhouse gas emissions. Over 370 investors with over $35 trillion in assets are currently putting pressure on the companies to adhere to the Paris Agreement.
Does Socially Responsible Investing Pay Off?
It is a false dichotomy to assume that you invest without regard to sustainability and make higher returns, or invest in ‘socially responsible’ ways and automatically take a hit. Studies have shown that there isn’t a demonstrable difference between the returns of an ESG fund versus a non-ESG counterpart.
Ultimately, every fund is different, and it is up to the investor to evaluate the risk, underlying companies, and fees associated with each fund.
Investing Responsibly For The Common Good
Growing interest in socially responsible investing means we have more tools than ever to change the way we invest . With the advent of indices that track social good, portfolios built around sustainability and social justice, and robo-advisors that automatically invest for us, it has never been easier to invest responsibly.
As more investors that demand corporate responsibility, the higher the standards will be. Collectively, where we put our money makes a difference. We have the power to influence environmental sustainability, climate change, and our own communities.
As Greta urged, everything needs to change (including our investment portfolios!) and it has to start today.
What about you?
What are your thoughts about Socially Responsible Investing?
Have you made moves to invest using an ESG fund?
What is holding you back?