Recently on an episode of The Money Nerds podcast, I got the chance to sit down and talk with a total rockstar, Sarah Bengtsson, about sustainable investing.
This is something I’ve been curious about for a while, but honestly felt kind of confused when I started looking into it.
That’s where Sarah comes in.
If you prefer to listen (and I highly recommend you do) here’s the direct link to listen on Apple Podcasts.
She taught me so much about sustainable investing, specifically the basics and what we can do to invest our money in line with our values.
So here’s some of the basic terminology:
- ESG Funds
- Inclusionary and exclusionary
What does SRI mean?
SRI = Socially responsible investing
This is another term for green investing, social investing, or socially conscious investing. It’s an investing strategy focused on making conscious investing decisions (aligned with your values) and earning a return (this is investing after all). They do include companies working on clean energy, social justice initiatives, alternative technology, and environmental sustainability. The majority of SRI Funds avoid including companies that produce/sell addictive substances: gambling, alcohol, and tobacco industries.
SRI has two primary goals:
- Do good in the world
- Provide returns
What is an ESG Fund?
ESG= environmental, social and governmental
Like I’ve talked about a ton on this website and on the podcast, funds are simply a collection of stocks. When you invest in a fund, you are paying a one-time investment to purchase all of the stocks in one place. Funds are great because you are diversified in the number of companies you’re invested in and (in some cases) the industries invested in.
My understanding of ESG funds is that they are a collection of stocks that fit the values of environmental, social, or governmental agencies.
According to Vanguard– “This strategy doesn’t require the fund to rule out any company, industry, or country simply because it’s involved in a business activity that may be objectionable to some.”
A fund manager will look into companies that fit the criteria for the fund– maybe you don’t want to invest in fossil fuels, but are okay with investing in companies that are in the process of navigating transitioning from fossil fuels to sustainable resources. An ESG might include those companies.
But that doesn’t mean all the companies are in line with your values. As Sarah mentioned in this episode, it’s super important to start with your own personal values and try to invest based on those.
What does inclusionary vs exclusionary portfolio screening mean?
This terminology came up a couple times in our conversation.
Exclusionary is fairly easy to understand. In the example listed above, you might have tobacco, alcohol, and gambling industries automatically excluded from the fund. In some cases, you might even find gun manufacturers excluded.
Inclusionary funds include companies that have a higher ESG rating (more on that in a sec). The example I found on Vanguard’s website is a mining company that is super risky environmentally, but ranks highly on their management of environmental impacts of products/services.
The gray area of ESG Funds
And here is the gray area to this entire conversation.
The ESG ratings are incredibly subjective. What one person deems a problem, another person may not. The weights are really subjective and require judgment decisions. Another problem that comes up is “greenwashing.” Greenwashing is essentially when a company hypes up its initiatives through marketing but really isn’t truly reflective of its practices.
It’s a strange and weird dilemma that investors need to be aware of.
How to invest in ESG Funds?
The good news is that most investing platforms are getting on board with investor interests. The majority of the big investing platforms (Vanguard, Fidelity, Charles Schwabb, etc) allow you to research and investing in ESG Funds and ETFs (exchange-traded funds). It’s relatively easy to make one investment into a collection of companies that align with your personal values and provide a financial return.
This post is certainly not comprehensive. As my understanding and research expand, I will come back and update this post or create a new post(s).
Also, this post is not intended to give you financial advice. Please do your own research and consult with a professional when making your investing decisions.