Socially conscious investing is booming. Whether you’re designating 401(k) contributions for the end of the year or planning next year’s savings, it's a good time to consider ways to achieve your financial goals while backing sustainable and responsible business practices. As crises like climate change, biodiversity loss, and inequality force corporations to adapt, both your bottom line and the world’s can benefit from investing in companies ahead of the curve. Below are some questions to consider as you get started.
What Am I Invested In?
If you don’t know what the terms “expense ratio,” “annual return,” “mutual fund,” or “exchange traded fund” mean, boost your financial literacy first, says Lisa Woll, chief executive officer of US SIF: The Forum for Sustainable and Responsible Investment, a membership organization that promotes the advancement of sustainable investing. “People hear financial services terms and find them a little bit off-putting,” she says. “Get to a level where you feel like, ‘Oh, this isn't really that hard.’ ”
Then investigate what you already own. In employer-sponsored retirement plans, many people select a default investment fund at sign-up (sometimes these are called “target date” funds, based on the year you plan to retire) and don’t look at it again. You can read that fund’s prospectus, which offers a detailed breakdown of its investing approach, performance, and top holdings.
But even easier, you can use the databases compiled by the corporate accountability and shareholder advocacy nonprofit As You Sow—its Invest Your Values website offers several invaluable search tools for weighing the ethical and financial performance of up to 3,000 funds, updated monthly. Using the site, you can look up a simple letter grade for each fund as related to seven common issues of concern: climate change, deforestation, militarism, mass incarceration, gender equality, tobacco, and guns. Alternately, you can dig into a more detailed breakdown of each fund’s holdings. “We try to simplify it down to a grade, but there's also a huge amount of detail,” says As You Sow chief executive officer Andrew Behar.
How Can I Do Better?
Major investment platforms now offer many mutual funds, ETFs, index funds, and other investing options for everyday investors who want their money to reflect their values—a field sometimes dubbed ESG investing (short for “environmetnal, social, and governance”). Some ESG funds “divest” by entirely avoiding certain damaging industries. Other kinds of ESG funds proactively put money in companies that are doing better than their peers on given metrics, such as carbon emissions or gender diversity in leadership positions. Some use a combination of both approaches or specialize in more sustaianble sectors, such as renewable energy. You might check out US SIF’s useful guide to sustainable investing as you get started.
Whatever you do, say experts, don’t judge an investment's social good credentials solely by its name or marketing. Many sustainability-minded terms don’t yet have regulated definitions, and greenwashing is becoming more rampant as the field of ESG investing grows. For example, a “fossil fuel-free” fund may exclude coal producers but not coal-fired electric utilities. You may be fine with that, but you should at least know what you’re getting.
Last, remember that any standard advice about personal finance and investing still holds with sustainable investing: Make sure you understand and are comfortable with any risks, fees, and other terms you are assuming.
What If There Are No Options In My Company's Retirement Plan?
Many employers—even those with a social mission—do not yet include values-based investing options in retirement plans they offer workers. Woll recalls, for example, a cancer doctor who was horrified to learn tobacco stocks were part of her hospital-sponsored portfolio (the doctor went on to start an organization called Tobacco Free Portfolios).
Proposed new regulations from the U.S. Labor Department may soon make it easier for employers to consider social and environmental criteria in the default investment options they offer in 401(k) plans. What’s helped is that the financial industry is increasingly recognizing that societal challenges like climate change pose risk to a company's bottom line profits—and that investing with such issues in mind is a solid financial strategy. “These issues are increasingly seen as material to financial return,” Woll says.
Take, for example, the S&P 500 stock market index. Over the last 5 years as of October 2021, the average annual return was 16.4 percent. But if companies that own fossil fuel reserves are removed from this index, you get the S&P 500 Fossil Fuel Free Index. The fossil fuel free investor would have made more money—making 17.2 percent profits—over the same period.
In perusing your retirement plan, look beyond the default options to learn about what choices you have. If you’re not seeing the sustainable options you’re looking for, talk to your HR department or plan administrator. Also consider involving coworkers who feel similarly, or your firm’s sustainability team. Woll suggests, for example, hosting a conference call or lunch with an expert. Your company may already be thinking about these topics—and it can take time to make changes—but knowing there’s demand will help. Bring resources and solutions to the table. As You Sow’s Employee Action Guide and US SIF’s Retirement page include guides and sample letters for both employees and employers.
What If I Own Individual Stocks?
When you buy stock in a public company, you have the opportunity to vote on annual shareholder resolutions. With these votes, stockholders can come together to convince a company to change its policies, says Behar. More than 400 resolutions involving environmental, social, and governance issues were filed last year to a wide range of corporations. For example, a resolution might ask a firm’s management to study how climate change will affect the company’s operations or measure its carbon footprint.
If you own shares in a company and receive notice of a proxy ballot in the mail or online, don’t ignore it: Vote. But do research and form your own opinion, don’t just follow the company’s recommendation, which may appear on the ballot.
I Am Overwhelmed By All This
If you have a small amount of money to invest or are just beginning, it may be help to turn to a growing number of services and apps that make it extremely simple to invest based on both your values and financial goals—some even automate the process (US SIF’s guide lists a few examples of apps on page 4).
If you are seeking individualized advice, look for a financial adviser who understands your goals and rationale for sustainable investing. All advisers today should be able to answer basic questions about the topic of ESG investing, says Woll, and if they can’t, she suggests you look for someone else. With any planners or advisers (human or computer) you use, make sure you undertand and are comfortable with any fees, account minimums, and risks as well.
This story originally ran in the Winter 2021 issue as “Put Your Money Where Your Mouth Is.” To receive our print magazine, become a member by making a donation today.