Hey money friends!

Are any of you nerds into socially responsible investing? (A.k.a. sustainable investing, ESG investing, or impact investing?) I got this question from a reader recently…

“I want to start investing in more sustainable, equitable and ethical ways. 

I have it invested in TD’s E-series funds and bonds right now (60% stocks/index funds; 40% bonds), but I don’t know where or how to find index funds that would meet sustainability or ethical standards I am interested in as well as having a similar level of risk I am already taking on.

I suppose this is one of the ways I am trying to make an individual change to our world, by no longer investing in the businesses that are causing local or global harm (environmentally, socially, etc.)

– Fushia”

First off, I must say I really admire people like Fushia who think along these lines. The way we spend money (our budget) should align with our values… The way we earn money (our jobs) should align with our values… So it only makes sense that the way we grow money (our investments) should also be in line with our values. Right?

That being said — full disclosure — I don’t personally do any socially responsible investing. This might change one day, but for the time being I only invest in a total stock market index fund which includes every publicly traded company.

I’ll get into some of the pros and cons later on this strategy, but first, here’s more about what socially responsible investing is, and how someone might go about picking funds to invest in…

**Would love to hear input from the community on this one, too! Please drop comments if you’re knowledgeable around ESG – I’m no expert!**

What Is Socially Responsible Investing?

Basically, it’s investing your money in companies that align with your personal beliefs. Or at least ones that are trying their hardest to do so within their business.

The term “socially responsible” is pretty loose and covers a wide range of criteria. While there’s no specific set of principles (every investor has different beliefs and priorities), some of the main areas of concern include:

• Environmental impact: This includes stuff like using green/clean technology, using renewable energy, prioritizing sustainability, conserving resources wherever possible, minimizing waste, and promoting the same causes to their customers.
• Corporate governance: Examples in this area are companies that have diverse workforces and leadership, aren’t corrupt or heavily influenced by outside interests, make political contributions to support beliefs, and take corporate responsibility for their actions.
• Social responsibility: Companies providing good employee benefits, promoting workplace safety, diversity and inclusion, human rights and community development. Investors also might want to exclude entire industries they don’t feel produce responsible products (like firearms, alcohol or tobacco companies).

“ESG investing” is another term used, which stands for Environmental, Social, and Governance being these main areas of concern. The overall goal is to invest more money with companies that you feel meet your ESG criteria, and less (or nothing) with companies that don’t.

How to Build a Socially Responsible Investment Portfolio

Here comes the tricky part!

There are a few ways to approach sustainable investing, and they depend on how much involvement you want, how much risk you’re willing to take on, and what is really important to you.

First off, you can always build your own portfolio of individual companies to invest in. Or, pick a handful of companies that specifically interest you and dedicate a certain amount of your portfolio to invest in them.

For example, let’s say you have a specific interest in clean energy, and want to dedicate 10% of your investment portfolio to the biggest renewable energy companies in the world. You could research and find companies that you like (here are 10 big ones I just found) and purchase portions of individual stocks.

The downside to this method is of course that manually picking individual stocks is time consuming, not to mention risky. This is probably suited for people who enjoy researching and doing the legwork, as well as only want to dedicate a small portion of their investments to specific areas they are passionate about.

For passive investors — and this includes most of us FIRE peeps — investing in socially responsible mutual funds or index funds is an easier approach to sustainable investing.

Socially Responsible Mutual Funds (Actively Managed)

Instead of building your own portfolio, why not have professionals do all the legwork for you? There are a ton of mutual fund managers who do extensive due diligence to make sure companies are meeting specified ESG factors, so you just have to pick a mutual fund (or a few) that aligns with your goals.

A few well-known SRI mutual funds are:

• 1919 Socially Responsive Balanced Fund (SSIAX): This is a pretty broad, “balanced” fund that includes a mix of stocks (65%), bonds/fixed income (25%), and also 10% cash holdings.
• Vanguard ESG Select Stock Fund (VEIGX): This actively managed mutual fund includes about 40-50 global stocks that are both financially productive and meet the highest ESG practices.
• AB Sustainable Global Thematic Fund (ATEYX): The managers of this mutual fund use a “bottom-up” company analysis, typically holding 30-60 stocks of companies that have quality management and bigger exposure to ESG factors.
• Shelton Green Alpha Fund (NEXTX): This fund invests primarily in companies that the fund manager believes are leaders in managing environmental risks and opportunities, have above average growth potential, and are “reasonably valued.”

**Fair warning** Actively managed mutual funds typically have high management fees (~1-2%), upfront commissions (front load), and minimum investment amounts. This stuff can eat away at your profit over time! I realize the goal with sustainable investing is not all about making/saving money, but minimizing fees is important, which is why index funds might be a better fit for a new socially responsible investor. 👇👇👇

Socially Responsible ETFs and Index Funds (Passive & Robo Management)

Personally, if I were to start sustainable investing as part of my strategy, I would use broad ETFs and index funds. What I like about index funds is low fees, a lot of diversification, and generally better fund performance. The downside is that these funds seem to have much broader guidelines on ESG criteria.

Here are some common SRI funds that are passively managed or align to an index:

• Vanguard ESG US. Stock ETF (ESGV): This ETF holds about 1400 US stocks, so it’s quite diversified. It excludes public companies that don’t meet the UN’s global impact principles and companies with low diversity. This fund has performed the best in recent years compared to others of its kind. :)
• Vanguard ESG U.S. Corporate Bond ETF (VCEB): This fund specifically excludes bonds of companies that are involved in or generate lots of revenue from industries related to: adult entertainment, alcohol, gambling, tobacco, nuclear weapons, controversial weapons, conventional weapons, civilian firearms, nuclear power, genetically modified organisms, or thermal coal, oil, or gas.
• Vanguard ESG International ETF (VSGX): This is a huge fund… 3,000-4000 different *international only* stocks that exclude all the poorly rated ESG companies.
• iShares MSCI KLD 400 Social ETF (DSI): The MSCI KLD 400 Social Index is a cap-weighted index of 400 US securities with exposure to companies with “outstanding ESG ratings.” It excludes companies whose products have negative social or environmental impacts.
• Betterment SRI Funds (read more here): For fans of robo advisors, Betterment has developed some portfolios with sustainable investing methodology. Really interesting to read how they build their investment algorithms.
• Personal Capital Socially Responsible Investing (more info here): Personal Capital also offers sustainable investing options for those using their portfolio management service. They apply ESG metrics within your portfolio based on socially responsible standards they believe in.

**Also, check out this MASSIVE LIST of Sustainable Investment Mutual Funds and ETFs Chart from US|SIF (The Forum for Sustainable and Responsible Investment). There are 180+ funds in this chart to sort through, compare against one another, and learn about past performance and screening standards.

The Downsides of Socially Responsible Investing

Personally, I don’t have any ESG funds in my portfolio. As much as I want to be socially responsible (in all areas of my life!), I can’t see past the downsides when investing. I realize this is a pretty selfish view, and the more I research this ESG stuff the more I feel bad about not being a socially responsible investor. Perhaps I’ll make some changes in the future, but for now here’s why I’m sticking with total stock market investing…

• Ethics > Performance. My number one reason for investing is to achieve the best return possible in the simplest way possible. I feel dirty writing this, but excluding certain unethical companies limits my investment options, which limits my potential investment return.
• “Ethics” is very subjective. Due to every person having a different view on what’s right or wrong to invest in, it’s difficult to find a funds manager or an exact sustainable investing ETF that matches my personal views 100%. For example, I really liked the sound of Vanguard’s ESGV Index Fund… But when I looked at the specific companies inside the fund, there are several in there that I don’t personally want to invest in.
• It’s too easy for companies to tick the “socially responsible” checkbox. Many companies report the good things they do and hide the bad things. One example of this is my ex-employer… In 2020 they were recognized for the seventh straight year as one of “The World’s Most Ethical Companies” (or so their marketing department claims). BUT, when I worked there I witnessed first hand some unbelievably disgusting work practices, toxic environments, and even some illegal dealings! I believe many well known “ethical companies” are the same… they highlight their strengths publicly, but in reality can have bad practices behind the scenes.

Again, I realize these reasons are selfish and cynical. It doesn’t mean that I don’t want to be a socially responsible person, it’s just not how I want to invest my money right now in life.

Benefits of Socially Responsible Investing

Here are the main reasons sustainable investing is growing more and more popular.

• It benefits society at large!  Socially responsible investing allows you to financially support the companies you believe in and contribute to the change you want to see in the world.
• A personal protest against unethical companies.  Sustainable investing isn’t just about supporting the “good guys,” it’s also a boycott against the “bad guys.” It’s a nonviolent way to take a stand against the things you’re opposed to in this world.
• Aligning to your core values more. The FIRE movement is all about aligning more to your core values and living a life you are proud of. We encourage people to earn money and spend money according to their values… Sustainable investing is another way to align your existence with what you believe in.
• It feels good!  Money is emotional, and it’s connected to how well we sleep at night! Impact investing gives you peace of mind that your money is working toward not only providing yourself a richer life, but it’s also providing everyone else a richer life, too.

Should You Do More Socially Responsible Investing?

This is something every investor needs to decide for themselves.

Going back to Fushia’s original question **and keep in mind that I am NOT a financial advisor**, here is how I would respond…

First, I’d educate myself as much as possible about ethical investing. Probably the best resource I’ve found is US SIF. They’ve got free online courses for individual investors, fact sheets, trend reports, and seem to be a legitimate leader in shareholder advocacy.

Part of this learning should include evaluating the pros and cons of socially responsible investing and making sure you personally feel it’s the right strategy for you.

Next, determine the level of involvement you want to have on an ongoing basis. From the sounds of Fushia’s email, they would probably be best suited to choose some passive ESG funds similar to the TD e-series ones they have currently. There are a TON to choose from, but my advice would be to keep things simple, and start with broad, low-cost ETFs. I can’t recommend which funds specifically would be best, because the goal is to align them to your personal ethics.

As far as portfolio risk, each fund has individual risk ratings that should be reviewed carefully, but I’d recommend checking with a financial advisor (one who is also a fiduciary) to make sure long term retirement goals are still met with the chosen investments.

Lastly, I’d recommend doing a portfolio review and check in every so often. Values based investing is still a relatively new strategy, and new mutual funds with different criteria seem to be emerging continually.

*****

Whelp, even if you’re not a socially responsible investor, I hope you learned something new in this post. Would love to hear your thoughts!

Have a great week,

Joel