Why Should I Invest in a Socially or Environmentally Responsible Way?

Investing
Written By Georgina Muri, Certified Financial Trainer

This post is part 4 in a series on responsible investing coming out this month. In this series, we’ll break down the basics and help you learn about socially and environmentally responsible investments and how you can take part no matter your level or how much you have to invest. For the purpose of this series. I’ll be using the term responsible investing as a catch-all to include all of the strategies under this general umbrella such as SRI, ESG, and impact investing.

If you’ve read the past three posts, or even just heard about socially or environmentally responsible investing you might be thinking one or more of the following things: 

  • Why should I be investing sustainably? I don’t want to lose money! 

  • I don’t want to spend tons of time researching my investments. I don’t care if I invest in (INSERT COMPANY NAME HERE) even if they do have some practices that I don’t agree with. 

  • I don’t have enough money to make an impact, so why bother? 

  • I’ve noticed that a lot of ESG or SRI funds include companies that I don’t want to invest in. I saw that (INSERT COMPANY NAME HERE) does/ did (X THING) that I don’t agree with. But they are included in my ESG fund! How can I trust that ESG or SRI investments are actually making a difference? 

There are strong arguments against each of these points (and also some arguments for them). 

No one is promising that ESG or SRI investing will solve all of the problems currently facing our planet and society. However, there are many reasons to believe that it does move the needle forward in a number of ways such as normalizing better corporate behavior on all ESG topics, increasing reporting transparency, and encouraging new proposals that push companies to become more equitable and conscious. There are also many considerations, conversations, and debates across the responsible investing space about the ultimate benefits or drawbacks of a responsible investment strategy ongoing which I’ll touch on in this post.

Here are some answers to the above questions:

Why should I be investing sustainably? I don’t want to lose money! 

There are never any guarantees that you or anyone else will not lose money when you invest.  Investing is by nature a risk regardless of what you are invested in.

When ESG and SRI funds started becoming more popular, many people started talking about how funds focused on environmental or social good would see below market rate returns. But that has shown not only to often be wrong, but the opposite has been true over the last few years!

ESG funds work to reduce risk on environmental, social, and governance issues. That risk reduction can actually benefit all kinds of investors, not just those who are interested in investing to make a difference.

There are a number of reports, studies, and analyses showing that ESG and SRI investments can actually outperform the market, especially in the long run. Here are a few examples: 

The takeaway from many of these reports is that the question isn’t why to invest in ESG or SRI but why not? 

This conversation can be more nuanced if you are pursuing impact investing or mission-related thematic investing strategies that often require additional research and less market diversification. Having a less diverse investment portfolio can impact returns for better or for worse increasing your risk. If you’re not convinced that impact is important, but still want more consistent returns ESG investing might be right for you.

I don’t want to spend tons of time researching my investments. I don’t care if I invest in (INSERT COMPANY NAME HERE) even if they do have some practices that I don’t agree with. 

It's always good to understand your investments whether they are ESG funds or just standard ETFs. That said, ESG and SRI funds are not focused on solving social or environmental challenges. They are primarily focused on reducing risk in a portfolio as a whole based on the challenges that are facing our world, such as climate change. While some believe that ESG funds in fact do not have any impact, or are as a former Blackrock exec put it “a deadly distraction,” (If you want to read his entire critique of sustainable investing you can find it here): https://medium.com/@sosofancy/the-secret-diary-of-a-sustainable-investor-part-1-70b6987fa139)  

Regardless of what you believe in or what is important to you personally, reducing risk as an investor is (in almost all cases) a good thing. 

Here’s an example: Scientific research has shown that the increasing emissions of fossil fuels in our atmosphere have resulted in changing weather patterns and extreme weather events. By continuing to invest in companies that produce fossil fuels, an investor might risk losing money if the company is a) required to reduce its emissions and pivot its operations 2) if their emissions are taxed 3) if the resources the company relies on are disappearing (such as oil) 4) if people stop using their produce (such as coal). 

Ultimately, even if you don’t care about climate change or investing in fossil fuels, you might not want to be exposed to these risks.

I don’t have enough money to make an impact, so why bother? 

Making an impact is not necessarily only quantifiable by the amount of money you have or that you invest. Even if it’s not about the impact, you might still want to consider ESG or SRI investments. But if what you want is to have a measurable impact, you might want to consider other approaches that are not necessarily capital intensive. 

For example: One of the most impactful strategies for many impact investors is a process called proxy voting. As a shareholder in any company, (even if you only own 1 share) you get a vote, much like voting in national elections. You can have a say in what the company does and its strategy, and you can sign on to proposals that you believe in. 

If you invested in a mutual fund or ETF that doesn’t let you do the proxy voting yourself, there will be a representative who votes on the funds’ behalf, and you can track how that representative has been voting. (Here’s a great place to look up the votes: https://www.proxymonitor.org/)

If you own more than $2k of one company’s stock, or even more than that, there are additional ways that you can participate to influence the company’s direction from the inside.

There is an annual meeting for each company in which they send out information about the company’s financials, business practices over the last year and focus moving forward. You can vote “by proxy” in an online ballot (or if you own enough of the company’s shares) join the shareholder meeting. 

Some areas that get voted on can include reviewing hiring and promotion practices to ensure that they align with DEI, disclosing information about a company’s impact on the environment, or reviewing their political contributions. 

Here are some other  great tools and primers to learn more about proxy voting and shareholder advocacy: 

https://www.proxypreview.org/ 

https://www.goodcapitalinvestmentgroup.com/learn/what-is-shareholder-advocacy

https://www.asyousow.org/

I’ve noticed that a lot of ESG or SRI funds include companies that I don’t want to invest in. I saw that (COMPANY NAME HERE) does/ did (X THING) that I don’t agree with. But they are included in my ESG fund! How can I trust that ESG or SRI investments are actually making a difference? 

As mentioned above, ESG and SRI funds are primarily concerned with risk- i.e. they do not measure the impact of the fund and report it to investors, instead, they track material (read relevant) information that affects an investor’s return. There are numerous frameworks that measure ESG requirements, and many brokers and investors create their own or use different criteria, which can water down the overall impact of ESG. 

There are some frameworks and standards that are used more frequently or are more robust such as GRI, GRESB, or SASB (https://www.gobyinc.com/esg-solutions/the-esg-reporting-matrix/) but there are no regulatory requirements that ensure that frameworks are used by everyone. While the field is focusing on streamlining that process and creating more rigorous and comparable reporting standards, we’re not there yet. 

What this means is that companies can call their performance ESG aligned or their investment fund SRI or ESG even if they don’t meet shared standards, which could result in fake or overstated reporting, or not actually doing as well as intended. This is often called greenwashing or impact washing. ESG can even be used as a marketing tool to distract from other issues within a company and focus on some positive reporting instead. 

In order to really understand what you’re investing in, and whether it’s making a difference, make sure you know if the fund is aligning their reporting with industry-accepted standards, read the funds methodology, and take the time to look through impact reports and annual reports. Or if you’re concerned about companies in your fund and want to limit what you invest in further, look for ETFs that are sector-specific and focus on thematic or impact investments where the impact is rigorously measured and reported and investments are only made in companies working to make a measurable and clear difference by supporting underfunded programs, projects, and businesses or driving capital into local communities. 

Here are a few sites like the below that can help you understand what’s out there and focus on funds or investments that work for you:

Some investors even take an opposite approach to responsible investing, which is to invest in companies with particularly bad track records of pollution or supply chain mismanagement and bring other investors to the table to force shareholder resolutions or proxy votes on issues that could transform the company’s strategy. 

At the end of the day, ESG, SRI, Impact, and any other type of responsible investing are an important step to driving investment dollars to companies that are doing better but alone are not enough to solve our current challenges. Responsible investing will not solve the climate crisis or dissolve the wealth gap. It is important to remember that this is one step that you can take in making a difference, and focusing your attention on advocacy, using your vote, and staying involved in your community are all free and have power. 

We need to redesign the way we view a company’s performance and develop rigorous policies that have the power to require companies to report on and meet standards that make a real difference in the environment, society, and corporate governance practices. 

Georgina Muri, Certified Financial Trainer
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