Socially Responsible Investing
Last week on the blog we talked about being a good steward of your resources. One way to do this is to invest in a socially responsible way. But what does this mean? And can you even do this practically?
You’ve probably heard something along these lines before: Talk is cheap! Put your money where your mouth is.
This is the idea behind socially responsible investing. Maybe you want to invest in the S&P 500 but don’t want to own Wells Fargo stock because of their scandal creating fake bank accounts a few years ago. Or maybe there is a mutual fund you like but they own tobacco companies and you don’t want to support that.
Dilemmas like this are what brought about the field of socially responsible investing.
To alleviate any confusion, let me tell you that there are a LOT of names for this: Socially Responsible Investing (SRI), green investing, ethical investing, ESG Investing (environmental, social justice, and corporate governance), sustainable investing, impact investing, and many more. For consistency I’ll just refer to it as SRI.
There are a lot of reputable companies now offering SRI:
Vanguard now offers the Vanguard FTSE Social Index fund, which screens for social, human rights, and environmental criteria. They also have an international variety, the Vanguard Global ESG Select Stock Fund. Dimensional offers 8 mutual funds that evaluate companies based on greenhouse emissions, land use, water management, tobacco, and child labor among other factors.
The idea sounds great! If I can invest in companies that are only doing good in the world, or at least not doing as much bad as other companies, why wouldn’t I?
The big problem I have with these funds, and why I don’t invest many of my clients in them, is because “socially responsible” means something different to everyone.
You might have a big issue with companies that make weapons of war but not be as concerned with pollution. You might hate child labor but not have a strong opinion about tobacco.
Since everyone has a different idea of what is socially responsible, it is very difficult to find a fund that lines up with your exact way of thinking.
One argument you might bring up is that you could just pick stocks only from companies that have similar values to yours. The argument of investing in individual stocks versus mutual funds could be a whole other blog post! But I’ll summarize here by saying that it is very difficult to properly diversify your portfolio when you are investing in individual stocks. And it’s just not efficient to trade the number of stocks you would need to own to invest in a global, diversified manner.
My preferred investment approach is to diversify as much as possible. Own the whole (global) market, keep costs as low as possible, and take the great returns that the market gives us over the long term.
I do have very strong beliefs about being socially responsible. So how do I reconcile the fact that I invest in some companies that might go against my belief?
I take part of every dollar I earn and I give it to organizations that are fighting for the same things that I believe in. This is my way of targeting my impact and putting my money where my mouth is.
There is a lot to consider when putting together an investment plan, and you can see a lot of it is not mathematical. If you’re struggling with how to make an impact with your money, give me a call! I’d love to have this conversation with you.
