Every time we contribute to stock mutual funds in our 401k or IRA, we’re investing in a little slice of the companies that are included that fund. These can be tech companies like Apple or Microsoft or automotive juggernauts like General Motors or Ford. With each retirement contribution you make, you’re essentially becoming a minority shareholder in these businesses.
But what if you don’t agree with the way things are being handled at one of these companies?
- Perhaps you care about a cleaner and greener future and one of the companies you’re investing in is a huge polluter.
- Or maybe you’re appalled by the way factory employees are being treated globally at one of your businesses.
- Possibly there is evidence of racial or gender discrimination happening within the four walls of a company you own a piece of.
- How can we invest for our family’s future and get the returns required to retire comfortably while still following our hearts?
Welcome to the world of Ethical Investing!
What is Ethical Investing?
According to Investopedia, Ethical Investing (or Socially Conscious Investing) is defined as “ … the practice of using one's ethical principles as the primary filter for the selection of securities investing.”
For the everyday guy investing for his retirement, this means choosing to invest in companies that align with your values and your principles. As an example, if you don’t want to invest in the tobacco, alcohol or gambling industries, your investment choices can be adjusted and you would no longer be supporting those types of companies.
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Is Ethical Investing “a thing” right now?
Socially conscious Millennials are helping to push this value-focused investment movement forward.
According to US Trust, Bank of America’s private wealth arm, “76 percent of millennials said they consider their investment decisions to be a way to express their social, political and environmental values, and 88 percent said that a company’s impact in these areas is an important consideration when they make investment decisions.”
Since Millennials make up around ¼ of the US population, it’s no wonder this wave of investing is on the rise.
Fueled by a passion for a better world amongst all age groups, Bloomberg reports that this industry has seen major growth as of late. In 2016, Sustainable Investments that meet environmental, social and corporate-governance standards increased by more than $2 Trillion in just two years.
How do I find Ethical companies to invest in?
Major news media outlets are producing lists like “The World’s Most Ethical Companies” or “Top 10 Investments You Can Feel Good About”. While these are great places to start, here are some organizations that have been focusing on ethical investing long before it was so popular.
Started in the 1970’s to bring about education and alternative investment options in opposition to the Vietnam War and the Apartheid in South Africa, Calvert is a leader in responsible investing.
This group specifically measures the performance of ethical companies. Companies like Vanguard use the FTSE4Good Index as a benchmark for their socially conscious investors.
Parnassus is a provider of investment options that must meet strict environmental, social and governance (ESG) criteria. Currently, they have 5 specific funds that make up their socially conscious portfolio.
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Will these socially conscious investments still provide a good return?
In short … it depends on what you’re socially conscious about.
CNBC sites that after diving through years of Morningstar data, there is “no significant performance drag” in comparison to traditional investing with one caveat …
“Funds designed to exclude stocks, such as the “sin” sectors — no tobacco, alcohol and guns — don't tend to measure up.”
If you’re more focused on energy efficiency and other green applications that promote a cleaner planet, you may be in better shape. In late 2017, the Financial Times reported that the four indices developed by FTSE Russell (which focus on companies with pollution reduction practices) have outperformed their benchmark, the FTSE Global All Cap Index. A greener planet can earn you more green evidently!
What’s My Take?
I’m currently investing in traditional index funds that cover the broad US and International markets with no specificity toward my ethics or my socially conscious interests. This is not because I’m heartless or money hungry. It’s because I wasn’t aware this was even “a thing” until earlier this year.
A friend of mine started a discussion around avoiding mutual funds that included gun manufacturers. The Parkland massacre in February was really emotionally impactful for her.
While I personally have no issue with legal and responsible gun ownership, I did understand her position. As father to two small kids, I felt very nervous sending my kids to school after that shooting.
My friend felt passionately that she did not want to be responsible for any more school shootings in our country. That’s her right and her money. She can do with it as she pleases.
Our conversation became an interesting self-examination opportunity for me. I’ve recently started to ask myself some questions:
- What do I believe in?
- What do I stand for?
- Are my investments currently in line with those beliefs?
- Am I willing to decrease my retirement earnings for the greater good of the world?
In the coming days, I’ll be answering these questions because I want to ensure my investments are lining up with my beliefs … regardless of the return.
I want to be a man that stands for something not only with my words, but through my actions. And I know, when our actions are supported by our money, the impact can be tenfold.
This article was originally published in STAND Magazine on September 18, 2018.
Great information about ethical investing. I first came across this term while investing with Betterment where they had option called – SRI Portfolio.
I think it’s a great idea and as more people get educated about the nuances of what’s inside a MF or ETF, people will begin to question their choices and where their money is invested.
I hope so. I do like seeing the companies performing “ethically” getting great returns too.
When my wife and I first started investing through a financial advisor at our local credit union, the choices we were given were “regular investing” or “socially conscious” investing. Not wanting to come across as horrible monsters, we of course took the latter choice. Not having even the faintest bit of knowledge regarding investing, we blindly dove in.
Fast forward a couple of years, and we have been watching seemingly everyone in the world making money hand over fist in a bull market, while our investment pile actually shrank! This was partly due to the quarterly fees pulled out by the advisor and partly due to whatever the investments were. Apparently they weren’t great.
We finally came to our senses and decided to start learning about investing, and eventually discovered the concept of FI. Our investment portfolio now consists of index funds in several sectors, but the bad taste associated with our “socially conscious” investment past remains.
I’m sure there are ways to still ride the wave of the market while acting in a socially responsible manner, and I would love to hear more about them!
One fund that I’ve investigated is VFTSX – lower expense ratio, tracks close to SP 500 and gives me all the good feelings of a socially conscious investor. https://investor.vanguard.com/mutual-funds/profile/VFTSX