Last Updated on June 6, 2022
In my day to day I try to make choices that align with my sustainable values: I shop local, buy used whenever possible, walk and bike as much as I can to save gas, and generally avoid supporting companies that are actively contributing to great environmental or ethical harm.
However, when I started investing for my retirement, I felt a sense of dissonance between these decisions and where my money was going to grow in the stock market, supporting companies or sectors I disagreed with. To come to terms with this, I did some research on how to make my investing align with my values.
Sustainable investing has gained traction in the last ten years. — It’s also known as socially responsible investing (SRI); environmental, social and corporate governance investing (ESG); values-based investing or ethical investing. — This kind of investing was once considered unprofitable, with funds having high management fees and lower returns, but there is a much larger selection on the market today and ESG funds are making their way into the mainstream.
Personal finance is, as it is named, extremely personal and I am by no means a financial advisor. But if you are also wanting to take a more active role in your investments, here are the main questions I had starting out and some information I found helpful when looking for investments I felt good about.
Some terms to be familiar with:
Standard Brokerage Account: Also called a non-retirement account, a brokerage account holds financial assets, but has no tax advantage.
401K: Retirement fund sponsored by an employer, with a match to a certain amount
Ira/Roth Ira: Individual retirement accounts. The biggest distinction from a standard brokerage account is that retirement accounts often have tax advantages built in.
Expense Ratio: The cost in fees of owning an investment.
Index Fund: An index fund is a pooled fund that acts like a basket that holds many stocks and tracks a specific “index.” For example, the S&P 500 tracks the top 500 companies in the US. Both mutual funds and ETFs are index funds.
ETF: Stands for exchange traded funds and can be exchanged and traded like a company stock. These are usually passively managed, and have somewhat lower expense ratios. They are traded throughout the day like normal stocks.
Mutual Fund: Mutual funds are generally more actively managed, have somewhat higher expense ratios because of this and are just traded once per day.
What should I or should I not not be investing in?
There are many factors to consider when looking for socially responsible investments, and at the end of the day they are quite personal. Each person’s portfolio will look different, with different financial goals, ethos and sustainability focuses.
Do you care most about what you are not investing in, for example fossil fuels? Or do you actively want to support something with your investments, like your local community or green energy? These are good things to think about before you start looking for investments.
Some funds use exclusionary tactics, booting out companies from a certain sector, like fossil fuels. For example, SPDR® MSCI EAFE Fossil Fuel Reserves Free ETF opts out of fossil fuel holdings, or companies invested in fossil fuels.
Conversely, some funds use inclusionary methods, specifically targeting specific impacts or values. For example, QCLN – First Trust NASDAQ Clean Edge Green Energy invests in green energy companies.
Do socially responsible funds perform as well as others?
There has long been a sentiment that values-based investments are synonymous with a hit to financial gains, but this doesn’t seem to be true, though it’s hard to say for certain. According to several studies, there is evidence that SRI funds can perform as well or better than standard investments. This 2015 study analyzes the findings of 2200 studies on the performance of ESG funds and concludes that there is evidence of a business case for ESG investing. However, other studies haven’t found a strong correlation. This 2015 meta analysis of global SRI funds found no benefit or cost to including SRI funds in your investment portfolio.
It is argued that sustainable investments can be considered more secure in the long haul, as they are more protected from environmental, governmental or social risks and perform well in volatile markets. For example, SRI funds outperformed conventional funds during the pandemic. This academic study offers one explanation that “when owners have long-run strategic interests in and commitments to the firm, such as a corporate owner, markets price these characteristics positively when evaluating the impact of COVID-19 cases.”
It is important to keep in mind that ESG investment performance is a hard thing to quantify, as studies use different criteria to assess what is actually ethical or sustainable. This paper delves into the issue of “divergence of ESG ratings,” where funds are assessed on different criteria or metrics. A fund may be given a good rating by one party, but a bad rating by another depending on what factors they’re looking at.
How do I find sustainable investments?
This depends on how much support you are looking for, and will involve some research and vetting.
One option is to open an investment account yourself: if you feel confident in your knowledge of the stock market, opening a brokerage account and choosing your own investments can be a good way to go, and can give you the most agency in deciding what your money is invested in. Below are two tools to help you get a sense of what funds are invested in.
Fossil Free Funds: Allows you to search funds and see how much they are invested in fossil fuels. For example, SPDR® S&P 500 Fossil Fuel Rsrv Free ETF has fossil free in the name but scores a D on the Fossil Free funds rating due to investments in coal and fossil fuels.
As You Sow: Works similarly to Fossil Free Funds but has options to filter by other issues like deforestation free funds, prison free funds, gender equality funds, and weapons free funds.
You could also try out a robo advisor: If you want more support and guidance, there are platforms like Betterment and Wealthfront (US) or Wealthsimple (CA) that help simplify your role in this process and offer ESG and SRI funds. Betterment has three SRI portfolios based on Climate Impact, Social Impact, or Broad Impact. Wealthfront has risk-based SRI options available, with more room to handpick and modify your portfolio. Wealthsimple provides SRI funds with the top 25% of carbon emitters cut from the funds, and with boards of at least 25% women.
For the most support, you could hire a financial advisor. While financial advisors have higher fees than a robo advisor, they can help you create an investing portfolio that matches your values.
How do I do this in my 401k?
Unfortunately, funds in a 401k are pre-set by the company, so it is harder to choose what funds you invest in. This New York Times article, “How to Get Socially Conscious Funds Into Your 401(k),” provides interesting insights into how to advocate for ESG 401k funds within your workplace.
Key Takeaways for Sustainable Investing
- Get clear about your values and what is most important to either include or exclude from your investment portfolio.
- Sustainable investing can be profitable and more stable in volatile markets.
- Like any sustainability decision, sustainable investing requires research and vetting, and you have to look out for greenwashing.