Socially conscious investing is booming. Whether you鈥檙e designating 401(k) contributions for the end of the year or planning next year鈥檚 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鈥檚 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鈥檛 know what the terms 鈥渆xpense ratio,鈥 鈥渁nnual return,鈥 鈥渕utual fund,鈥 or 鈥渆xchange traded fund鈥 mean, boost your financial literacy first, says Lisa Woll, chief executive officer of , a membership organization that promotes the advancement of sustainable investing. 鈥淧eople hear financial services terms and find them a little bit off-putting,鈥 she says. 鈥淕et to a level where you feel like, 鈥極h, this isn鈥檛 really that hard.鈥 鈥
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 鈥渢arget date鈥 funds, based on the year you plan to retire) and don鈥檛 look at it again. You can read that fund鈥檚 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 鈥攊迟蝉 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: , , , , , , and . Alternately, you can dig into a more detailed breakdown of each fund鈥檚 holdings. 鈥淲e try to simplify it down to a grade, but there's also a huge amount of detail,鈥 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鈥攁 field sometimes dubbed ESG investing (short for 鈥渆nvironmetnal, social, and governance鈥). Some ESG funds 鈥渄ivest鈥 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 to sustainable investing as you get started.
Whatever you do, say experts, don鈥檛 judge an investment's social good credentials solely by its name or marketing. Many sustainability-minded terms don鈥檛 yet have regulated definitions, and greenwashing is becoming more rampant as the field of ESG investing grows. For example, a 鈥渇ossil fuel-free鈥 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鈥檙e 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鈥檚 Retirement Plan?
Many employers鈥攅ven those with a social mission鈥攄o 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 ).
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鈥檚 helped is that the financial industry is increasingly recognizing that societal challenges like climate change pose risk to a company's bottom line profits鈥攁nd that investing with such issues in mind is a solid financial strategy. 鈥淭hese issues are increasingly seen as material to financial return,鈥 Woll says.
Take, for example, the . 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 . The fossil fuel free investor would have made more money鈥攎aking 17.2 percent profits鈥攐ver the same period.
In perusing your retirement plan, look beyond the default options to learn about what choices you have. If you鈥檙e not seeing the sustainable options you鈥檙e looking for, talk to your HR department or plan administrator. Also consider involving coworkers who feel similarly, or your firm鈥檚 sustainability team. Woll suggests, for example, hosting a conference call or lunch with an expert. Your company may already be thinking about these topics鈥攁nd it can take time to make changes鈥攂ut knowing there鈥檚 demand will help. Bring resources and solutions to the table. As You Sow鈥檚 and US SIF鈥檚 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鈥檚 management to study how climate change will affect the company鈥檚 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鈥檛 ignore it: Vote. But do research and form your own opinion, don鈥檛 just follow the company鈥檚 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鈥攕ome even automate the process (US SIF鈥檚 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鈥檛, 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 鈥淧ut Your Money Where Your Mouth Is.鈥濃 To receive our print magazine, become a member by .