Maybe you want to allocate your dollars towards combating climate change or fighting against racism and workplace inequity. Ethical investing provides a way to do just that. “The main concept behind this style of investing is the belief that you can achieve meaningful, measurable societal outcomes while also generating a healthy profit,” explains Manisha Thakor, a financial planner and consultant. It sounds great, right? Investing in companies with good values and still being able to retire comfortably? However, as any moral philosopher or fan of The Good Place would tell you, ethics – and ethical investing – is complex. “Ethical investing is a lot like love,” says Thakor. “Everyone has their own definition and approach to it.”
When it comes to ethical investing, the approach can be likened to dating. Consider what aligns with your values and priorities, just like with your partner (or in this case, your investment). Is it ideas related to gender, race, or the environment? In both love and investing, it’s important to remember that perfection isn’t the goal, but rather finding something that feels like a good fit.
To start thinking about ethical investing, it’s helpful to understand the acronym ESG, which stands for environmental, social, and governance. Thakor offers loose definitions for each:
– Environmental (E): This includes a company’s energy usage, waste management, pollution control, and treatment of animals.
– Social (S): This involves gender, diversity, inclusion, charitable donations, contributions to the community, and worker conditions.
– Governance (G): This generally means that companies avoid conflicts of interest, refrain from engaging in illegal practices, and are transparent in their accounting methods.
You may also come across other terms such as mission-related investments (MRIs), impact funds, socially responsible investing, or sustainable investing.
The first step in ethical investing is determining the causes you want your dollars to prioritize. Some investments are more straightforward, such as putting money into a fund focused on clean energy. However, even in such cases, there may be debates regarding whether nuclear energy falls under the definition of clean energy. It’s essential to thoroughly examine each investment’s specific mandate and strategy.
If you don’t have a large sum to invest, Thakor recommends using low-cost mutual funds or exchange-traded funds (ETFs) that either target a single issue you’re passionate about or have a broader focus. Although you’ll have less control over the specific funds, these options generally focus on companies working towards making the world a better place. When picking a fund, consider the investment fee, which ideally should be no higher than half a percent for mutual funds and ETFs. Fees can significantly impact your returns over time.
If you primarily invest through your workplace retirement account, it’s worth checking if ethical investment options are available. Workplace plans are typically vetted by employers, who have a fiduciary obligation to choose financially sound options for employees. However, some employers may hesitate to add ESG funds due to their limited track records. Thakor expects this to change in the coming years, leading to a surge in ESG assets. If your company doesn’t offer ethical investment options, reach out to your human resources department and express your interest in socially responsible investment options for your retirement plan. In an individual retirement account (IRA), you have more flexibility in choosing your investments. Thakor recommends starting with low-cost firms like Vanguard, Fidelity, Schwab, or Putnam, which have a solid reputation over the long term.
When it comes to the level of returns offered by ESG funds compared to other funds, Thakor notes that there is ongoing debate due to the wide variety of ethical investments available. However, if you take a broad, indexed approach, you diversify your risk significantly. To ensure you make a financially sound decision, use a calculator or online tools to calculate the returns you need to retire comfortably. Compare that with the performance of your ethical investments. It’s important to consider the long-term picture, as returns can vary over shorter periods. Only after a decade or more do you get a clearer idea of the return trends.
It’s crucial to set realistic expectations and recognize the limitations of the ethical investing industry, which is still evolving. Thakor likens it to online dating, where the reality of a person often doesn’t match the initial perception based on their profile. Holding a specific ESG fund example, Thakor cautions against judging its holdings without considering the weighting criteria and the fund’s objectives. She advises patience to those frustrated with the current limitations, as creative solutions will likely emerge as demand for socially responsible investments continues to grow.
While some believe ethical investing is merely a way to make ourselves feel better after damaging the planet, Thakor believes that increased demand for socially responsible investments will drive changes in business practices. However, she acknowledges that real, tangible progress might not be immediate. Nevertheless, being part of the generation that starts pushing in the right direction can bring a sense of fulfillment. For further information on ethical investing, Thakor recommends referring to GreenMoney Journal.
Editor’s Note: Fidelity and Schwab are financial supporters of NPR. This story’s podcast segment was produced by Andee Tagle.
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