Financial Planning for Geeks

Put Your Money Where Your Values Are

- Investments

Do you want to align your investments with your values? If so, you’re not alone.

1829 illustration of people at an illicit gin joint.
But how can gin be evil?

According to the US Forum for Sustainable and Responsible Investment, 1 out of every 3 dollars under professional management in the US at the start of 2020 was invested in some kind of sustainable strategy. That amounted to $17.1 trillion dollars and was 42% higher than at the start of 2018.

But what IS sustainable investing? Let me give you a quick tour of the industry terminology. Sustainable investing is an umbrella category which includes Environmental, Social, and Governance (ESG) investing, Socially Responsible Investing (SRI), and impact investing. No one is using the terminology with much consistency and some just make up their own terms. There is also significant overlap between the categories, but I’m going to take a stab at definitions, anyway.

Let’s start with ESG investing, which evaluates the environmental, social, and governance practices of a company as material risks to that company. Material risks are defined as the ones which can actually cause financial harm to a company if they aren’t handled properly. For an oil company like Saudi Aramco, material risks might include environmental factors like greenhouse gas emissions or governance factors like lobbying and political spending. For a technology company like Microsoft, material risks might be more social, like diversity and accessibility problems, the privacy and security of customer data, and the impact of its products on customers. The better a company’s ESG practices with regard to its material risks, the higher an ESG score it will get.

SRI investing excludes or includes specific industries based on the values of investors. For example, there are SRI strategies for people who don’t want to invest in tobacco, weapons, fossil fuels, deforestation, or private prisons. There are also SRI strategies available for people who want to support companies with significant female leadership or which align with traditional Catholic values. You name it, it’s probably out there! You get to pick and choose which industries get into your portfolio.

Impact investing usually refers to informal, private investments, meaning those which are not offered broadly to the general public. You can support a specific community, a segment like small business, or a new industry by directing your spending to them or buying shares of a company (with crowdfunding, for example). Sometimes impact investing can refer to public investments, too; in this case, there is typically an emphasis on positive environmental and societal impacts. The line between public and private investing isn’t always clear, but public investments generally refer to broader public offerings of shares through a stock exchange, for example.

I read an article by a wise financial advisor who suggested that ESG evaluations look back in time, SRI focuses on action in the present, and impact investing influences the future. But when someone talks about “sustainable investing,” they might mean one of these three strategies or any combination of the three. I hope that clarifies the mud puddle a bit. 

Which strategy or strategies interest you? The definitions are only important if they get you thinking about what they mean for you. You don’t have to choose just one strategy, but I think it’s valuable to examine your goals for sustainable investing and go from there. Are you trying to support a particular community or withhold support from a particular industry, or both? Do you want to invest only in companies with strong (and material) social practices? Do you want to back companies with significant female leadership? I suggest you get clear on the issues and practices which are important for you, and then it’s time to act.

How can you get started with sustainable investing? If you’re working with an advisor to manage your investments, it’s fairly simple (if not easy). You can just reach out to your advisor and tell them you want to get into sustainable investing. Explain your goals and the kinds of organizations you want to support (or not), and talk strategy with them.

A couple of gotchas here: it seems some advisors are currently missing the boat when it comes to sustainable investing, meaning they don’t think many of their clients are interested. Cerulli Associates conducted a survey of financial advisors in 2020 and found that most advisors said only “a handful” of clients had even asked them about sustainable investing. But when Cerulli asked investors in US households, they found that 44% preferred to invest in a sustainable way. OK, maybe there’s a disconnect and clients just aren’t expressing their preferences…or maybe advisors just aren’t listening.

Second gotcha: there may be the occasional advisor who just isn’t informed about the returns investors are realizing from sustainable investing. They may think you have to give up returns in order to invest with your conscience. This just isn’t true, and you can find a study to demonstrate it here. In 2020, sustainable funds performed better than conventional funds in at least two ways: 43% of sustainable funds had returns in the top 25% of all funds, and three out of four sustainable funds had returns in the top half of all funds.

So if your advisor doesn’t listen or disagrees with you, feel free to insist with spirit. It’s their job to execute the strategy you want, and frankly, any advisor who doesn’t want to support your values probably doesn’t deserve your business.

What if you don’t have an advisor? Friends, there are so many options out there now. I’m sure you will be able to find low-cost mutual funds and ETFs to meet your every need. Let’s take a quick look at some of the resources which might help you get started with do-it-yourself sustainable investing.

1.       Morningstar: They provide what is fundamentally an ESG rating, represented as a scale of 1 to 5 globes. They are measuring the consolidated material ESG risks of the companies in each fund. If you look up a fund in the Morningstar search bar and go to the Portfolio tab, you’ll find the Sustainability Rating there.

2.       MSCI: They also provide ESG ratings, but they rate individual companies as well as funds. They measure how well companies are managing their material risks relative to their peer companies. These ratings include leader (AAA and AA), average (A, BBB, and BB), and laggard (B and CCC). To search for MSCI ratings click here.

3.       Bloomberg: They provide a list of ESG funds with performance measures and expense ratios. . Just note that the ratings in each ESG category are provided by the fund managers themselves, but this does give you information about the strategy of the fund so you can see if it matches your own.

A note about rating agencies and data aggregators in general: whichever resources you choose to use, take all of this information with a grain of salt, particularly when it comes to ESG ratings. They will evolve over time, of course, but right now large companies are able to report more ESG-related data and they tend to earn higher scores as a result. There is also bias inherent in any kind of rating system; for example, MIT Sloan has found that raters who give a company a positive rating in one category tend to give higher ratings to that company across the board. And of course if a fund manager is rating their own fund…well, you can finish this sentence for me. Just make sure you understand how companies and funds are rated and be sure it aligns with your criteria.

4.       As You Sow: This organization is set up to help you find appropriate SRI funds based on seven different values. Just click on a value and you can search for funds to support your goals, or look up your current funds to identify any which aren’t consistent with your values.

5.       Impact investing: I don’t have a unified resource for you when it comes to impact investing because there are so many ways to do this. What you choose may be hyper-local shopping at BIPOC-owned businesses, and/or it may include global crowdfunding for women-owned businesses in Ghana. Look online for relevant shopping options and top crowdfunding sites.

If you haven’t started already, I truly hope this helps you kick off your own sustainable investment program, whatever that means for you. There is so much information available out there that no one needs to accept a plain vanilla portfolio anymore. You have the power to support the businesses whose values align with your own and avoid supporting the ones that make you cringe. May the Schwartz be with you!

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Penny Farthing

I, Penny Farthing (non-wizarding name Kerry Read ), actually have a day job in the world of finance. This blog came into being because of my deep and abiding love for geeks and Personal Finance.