Investing & Living your Values: Can you do both at once?
“Companies can be more successful when they address both their economic viability and their potential to drive transformative change in the world.”
The effects of unchecked capitalism can be felt far and wide across our country and planet. Some of those effects have been positive like personal freedom to own property, choose your own work and the opportunity to improve your station in life.
But many of the negative effects are coming to a head: by maximizing only profit for shareholders and not all stakeholders (including workers, communities & the environment), we are now facing a climate crisis and one of the greatest levels of wealth inequality in our history. Meanwhile, social inequities and injustices persist.
For those interested in making the world a better place and taking action to improve the living conditions for all, there are ways to help beyond just voting, shopping local and reducing your personal carbon footprint (all super important activities that we shouldn’t quit, btw).
We can also use our monetary resources to express our value and hopes for the world.
This blog post will address the following:
What does it actually mean to invest in a stock or bond?
What are some of the moral issues that investors have historically cared about?
What is Divestment?
Intro to ESG Investing (Environmental, Social, Governance)
Impact Investing
How common is it to invest with an ESG or Impact investing lens?
Does Tailored Financial Planning include ESG options among its recommended investment strategies?
What does it actually mean to invest in a stock or bond?
Just like when you purchase a product or service from a company, when you invest in that company’s stock or bond with any amount of money, you are participating in and benefitting from the activities of that company. So, one reasonable question to ask yourself is, who do I want my spending or investing dollars to support??
Classical Economics believes that the answer to this question shouldn’t matter— that people make decisions only by maximizing profit. But there are more and more investors today who care quite a bit about the activities they support, especially as it relates to the climate impact and social impact of those activities.
What are some of the moral issues that investors have historically cared about, and where is most of the focus today?
Here are some examples of the types of environmental or social issues that investors have cared about historically:
Mining operations (ex. blood diamonds in Africa in early 2000s)
Weapons manufacturers or Defense Companies
Tobacco Companies
Companies that use child labor (ex. shoe manufacturers in late 90s/early 2000s)
Today, many investors are concerned with the following:
Companies that are not good stewards of resources and the environment, including fossil fuel producers and major consumers (airlines, etc.)
Governments that don’t protect human rights
Companies that don’t fairly support their workers (Wal-Mart)
Companies that don’t prioritize diversity and inclusion policies in the workplace.
What is Divestment?
For many decades, investors who cared about whether their investments were supporting unethical or morally ambiguous companies had one strategy: divestment.
Divestment means to sell ownership in or avoid ownership altogether in the offending companies.
The main impact of divestment was that is brought public awareness to an issue when major institutions chose to divest. For example, many universities and pension funds divested from South Africa in the mid-80s in protest of Apartheid.
The latest research suggests that divestment does not economically hurt the companies being divested from, as they will find willing investors elsewhere. And evidence suggests that its financial impact on investees is unlikely to alter corporate behavior. As a result, many now believe that divestment is not an effective strategy to affect positive change (1.).
What is ESG Investing? (Environmental, Social, Governance)
The next evolution for investors seeking to make a difference with their dollars was to favor companies that scored well across a multitude of Environmental, Social & Governance factors that meant they were behaving “better” than other companies with lower scores. The following shows several categories that companies are scored on (2.):
The major drawback with ESG investing, despite its popularity, is that there is no central regulation requiring companies to adhere to a single reporting standard.
Companies are allowed to self-report their ESG metrics, and (not-surprisingly), many companies over-represent their actual commitments to these standards (a practice called “greenwashing”).
In addition, ESG depends upon third-party rating organizations to assess companies on their reported figures, but there is no single, unified standard or methodology behind ESG ratings. The SEC hopes to remedy this, but it could be many years in the making.
What is Impact Investing?
Impact investing is the practice of seeking investments that specifically optimize a goal other than profits. This might include investments in clean energy, education, or microfinance.
There are now many funds available to investors that invest for an environmental or social impact and engage in shareholder activism around the issues that are important to them. One example is investing in green bonds.
How common is it to invest with an ESG or Impact investing lens?
A recent report from the Global Sustainable Investment Alliance shares that there were over $30T invested in “sustainable” investments at the end of 2022. Europe accounts for over two-thirds of those assets, with the US representing about $286 B.
Although it is from a lower base, US investments in ESG increased by 27% a year from 2016-2021, but saw some outflows in 2022 and 2023. The main concerns recently are around performance, as ESG funds sometimes have higher fees, and, as mentioned above, the need for better standardization of tools and data.
“Roughly two-thirds of millennial and Gen Z investors said they were very concerned about environmental and social issues, while about two-thirds of investors age 58 and older said they were only somewhat or not at all concerned, the study found. Younger investors are even willing to tolerate lower returns in the pursuit of ESG goals. ”
Does Tailored Financial Planning (TFP) include ESG options among its recommended investment strategies?
Absolutely. I believe progress is never perfect, and certainly the industry needs to continue to improve to be more effective. But I believe that the more that individuals place their money, resources and voices behind causes that are important to them, like stopping climate change and addressing socially injustices, the better.
TFP partners with Betterment for Advisors to offer Climate Impact, Social Impact or a mix of both in the Broad Impact portfolios. We also perform our own research on socially responsible funds and strategies to recommend investments and build custom portfolios that align with our clients unique values and goals.
Full Disclosure: Nothing on this website should ever be considered to be advice, research or an invitation to buy or sell any securities. Please see the Disclaimer page for a full disclaimer.
Stacy Dervin, CFA, CFP® provides fee-only financial planning and investment management services in Eugene, Oregon. Tailored Financial Planning (TFP) serves clients as a fiduciary and never earns a commission of any kind. As a financial advisor, Stacy is on a mission to help Gen X and Gen Y be truly proactive about their financial futures.
NOTES
chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.unpri.org/download?ac=16109
https://www.adecesg.com/resources/faq/what-is-esg-investing/
https://www.investopedia.com/terms/i/impact-investing.asp
https://www.bankrate.com/investing/esg-investing-statistics/#about-investors
