Many people pursuing a more socially responsible path to financial security turn to SRI index funds to make more socially and environmentally conscious investment decisions, but are SRI index funds, non-indexed SRI or ESG mutual funds, and ETFs (exchange traded funds) the best choice? In this article, I’ll share why you might want to dig deeper when considering investing in ESG (environmental, social, governance) or SRI funds.
What is Socially Responsible Investing?
According to the Forum for Sustainable and Responsible Investment, socially responsible investing is an “investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact. Often SRI offerings avoid companies that derive profit from such things as fossil fuels, firearms, and tobacco.”
Another way to think about it is that ESG funds include companies with strong environmental, social, and governance practices, as well as solid financial performance. SRI funds on the other hand tend to be funds that exclude harmful industries. For example, the Adasina Social Justice All Cap Global ETF is a SRI fund that promotes social justice. It does so not by including companies focused on ending racial injustice (probably because to my knowledge there aren’t any on the NYSE or NASDAQ), but excluding those companies that profit from private prisons, immigrant detention, surveillance, for profit colleges, and occupied territories.
ESG & SRI Index Funds Can Do Better
This is a good start, but those filters, used by most ESG & SRI options still keep your money in companies that prioritize shareholders and profits over people and planet. For example, as of August 2021 the top ten holdings in Vanguard’s FTSE Social Index Fund Investor Shares (VFTSX) were as follows:
Apple Inc.
Microsoft Corp.
Amazon.com Inc.
Alphabet Inc.
Facebook Inc.
Tesla Inc.
NVIDIA Corp.
JPMorgan Chase & Co.
Visa Inc.
UnitedHealth Group Inc.
ESG & SRI Funds Still Support the Problems, Not the Solutions
None of these companies follow business practices that I want my money to support. They all create product lines and marketing strategies that strongly encourage consumerism. Most of us on the path to financial independence (FI) are trying to reduce our consumption recognizing how much more fulfilling life can be when we are NOT keeping up with the Joneses. I don’t want to invest in companies that persuade others to buy more stuff and be less happy.
The number one company, Apple, makes use of precious natural resources that have been extracted from our planet to create products that often become obsolete within a matter of years. Many people then throw these obsolete products in the regular trash so they end up in landfills despite the electronics recycling offered by many municipalities, not to mention all that initial packaging that was thrown away first.
Financial institutions like JP Morgan Chase represent another industry I prefer not to support. These businesses continually prove themselves unworthy of our trust and rely on predatory practices to generate profits. Plus, if you’ve divested from the fossil fuels industry, but are invested in JP Morgan Chase, Bank of America, and Wells Fargo then your money is still supporting fossil fuels as major financial instituions like these are currently the largest funders of coal, oil, and gas.
The Elephant in the SRI Room – Greenwashing
I go back and forth in my thinking about whether investing in SRI & ESG funds is a good thing. On the one hand at the very least they send a message to some of the most harmful industries that people don’t want to support them and are finding alternatives. On the other though, money invested in these funds is still backing things like single use plastics, unhealthy food and beverages, predatory lending practices, and profit over all other considerations.
I’m not alone either in this line of thinking. A recent study in the U.K. by Quilter found that greenwashing is the biggest concern for 44% of ESG investors.
U.S.A. Today published a scathing article penned by former BlackRock CIO for Sustainable Investing Tariq Fancy. In it he called out ESG and SRI investing stating –
“In truth, sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community.”
Former Timberland COO and member of Sustainability Inc. Kenneth Pucker has voiced similar concerns. In this Harvard Business Review article he outlined the following problems with sustainable investing:
- Unhelpful definitions of “sustainable.”
- Unreliable ratings.
- Lack of comparability
- Challenges in assessing the success of socially responsible investing.
- Difficulty of scaling up truly effective impact investing.
Shareholder Advocacy
One under tapped lever that can be used by anyone who owns stock in a publicly-traded company to express concerns over environmental, social, and governance practices is shareholder advocacy. As I outlined in this earlier post, shareholder advocacy is when someone attempts to use their rights as a shareholder to provoke change within or for the corporation. While those of us invested in SRI funds cannot flex this muscle as forcefully as someone who purchased stock directly in the company, we can express our concerns and suggestions to our fund managers.
A more dramatic example of shareholder activism took place in May 2021 when activist hedge fund Engine no. 1 successfully (and most unexpectedly) installed 3 directors on the board of Exxon. This happened as a result of Engine No. 1’s months long campaign to garner the powerful support of fellow Exxon shareholders BlackRock, Vanguard and State Street and persuade them to vote against Exxon’s leadership.
Truly Socially Responsible Investing Occurs Off Wall Street
The companies included in SRI index funds and other ESG mutual funds may have met the criteria of doing less harm, but they don’t meet the standard of doing any real good. To truly find opportunities to invest in the solutions and not the causes of our social and environmental problems we have to look outside the stock market.
Most people have no idea about this, but there are actually more and more opportunities to invest in assets off Wall Street that provide a financial return as well as a social and/or environmental return. I’ve spent the last seven years researching them and compiled all that I’ve learned into a pay what you want Beginner’s Guide to Regenerative Investing. If you want to really start aligning your money with your values, but have no idea where to start this guide is for you.
What do you think about this?
Is anybody else turned off by the fact that so many mainstream companies that push consumerism and extractive practices are represented in the more common SRI offerings? Have you found SRI options that invest in companies or businesses that are more “socially responsible” than those in the typical SRI offerings? If so, please let us know by posting a comment below.
Personal Disclaimer – About 30% of my retirement investments are currently in TIAA’s Social Choice Funds.
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7 Comments
Cristy Abbott
June 19, 2018 at 2:29 amI have no finances. Does that make me independent or dependent. I havent had monetary exchange of more than $200 since maybe Nov 2016.
I have lived in exchange for services rendered. For some time I produced the food I ate, in community, we made it possible for several artist to live, laugh and create.
I dont know if I was playing or working for most of the time I was in that capacity.
When I think of Financial Independence, I think, that sounds like work, hard work, for someone else, for some thing else. For some one elses profit.
When I see a bird flying free, eating another bird, I think that is freedom. When I see another bird dancing in a puddle on the ground, I think that is freedom. When I hear my friends say Financial Independence, I think they care not about this kind of freedom. Free to drink, eat and sleep on our planet for no exchange, other than thier capacity to survive.
We humans have no right to this expectation, in my opinion, because of Financial anything/everything. Our exchanges are un natural, destructive and consumptive of natural resources, for which finances create.
And there is Microsoft, Intel and Apple in my possession… So I fail to honor this opinion of my own… Blaming my hoodwinked, lemming habits on these choices.
Dare I unplug and live wild… So un American…
3pfi
June 19, 2018 at 4:14 pmThanks for joining the conversation, Christy. You bring up very good points, a number of which I hope to delve deeper into in future posts. The truly financial freedom of which you speak outside of our current or any I guess financial system is something I do think a good bit about. I’m an active member of my wonderful local time bank and in general do as much as I can sharing, trading, and salvaging to operate outside of the money economy I’ve read and been inspired by books about moneyless living highlighing the adventures of the likes of Daniel Suelo and Mark Boyle. I however, came to learn about these moneyless living options after having accumulated a modestly positive net worth.
For medical and other personal reasons I have decided NOT to give away these monies I’ve saved and pursue the moneyless version of financial freedom, but to try and steward these funds in a way that encourages regenerative practices. I think the ideal of what I aspire to now is a modified version of the vision for financial permaculture outlined by Eric Toensmeier. While many exchanges of currency can lead to destructive outcomes for people and the environment, I also believe that currency (or energy as I prefer to think of it) exchanges can have positive outcomes, for example when a talented permaculturist is paid to share her knowledge with others.
I appreciate and greatly respect your perspective and am grateful to you for commenting, which has prodded me to now state something that should be made clear to readers of this blog – While the option of living that moneyless version of financial freedom is an option some people are choosing to pursue, that is NOT the version this blog will focus on. I intend to look to Daniel Suelo, Mark Boyle, and others for ideas and suggestions to include in future posts. I created this blog though, to work with the baseline presumption that I (and other readers) want to keep (and likely increase) their net worths in ways that have a positive impact on people and the planet (and the presumption that there are currency exchanges that can happen causing less or no harm to people or the planet).
Should you choose to do the unAmerican thing of unplugging and living wild I will be inspired by your adventures as well….
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