187 comments

Socially Responsible Investing: Is It Also More Profitable?

Since the Dawn of Mustachianism in 2011, the same question has come up over and over again:

“MMM,

I see your point that index fund investing is the best option. But when you buy the index, you’re getting oil companies, factory farm slaughterhouses and a million other dirty stories.

How can I get the benefits of investing for early retirement without contributing to the decline of humanity?”

And in these nine years since then, the movement towards socially responsible investing has only grown. Public pension funds have started to “divest” from oil company stocks, and various social issues like human rights, child labor, climate change or corporate corruption have bubbled to the surface at different times.

All of this has led to the exploding new field of Socially Responsible Investing (SRI), and a growing array of new ways to do it.

So it seems that this is not just a passing trend – people just might be starting to care a bit more. And since capitalism is just an expression of human behavior, the nature of capitalism itself may be starting to change.

This leads us naturally to the question:

What can I do with my money to help fix the world? And even better, is there a way I can make money in the process of fixing it?

The answer is a good, solid “Probably.”

As long as you don’t get too hung up on getting every last detail perfect, because just like real life, investing is a haphazard and approximate and unpredictable thing. But by understanding the big picture, you can make slightly better decisions on average, which lead to slightly better results. And slightly better results, stacked up consistently over time, can lead to a much better life, or even a much better world.

This is true in all of the main areas we care about – personal wealth, fitness and health, even relationships and happiness. And while your money and investments are certainly not the most important thing in life, they are still worthy of a bit of easy and effective optimization.

So anyway, the first thing to understand with SRI is, “what problem am I trying to solve?”

The answer is, “You are trying to make your investing (especially index fund investing) have a better impact on the world.”

On its own, index fund investing is ridiculously simple. You just get an account at any brokerage like Vanguard, Etrade, Schwab or whatever, and dump all your money into one exchange-traded fund: VTI.

When you do this, you are buying a stake in 3500 companies at once(!), which is both impressive and overwhelming. How do you even know what you are holding?

Well, this is all public information, and easily available with a quick Google search. For example, here’s a list of the top 90 holdings in VTI (click for larger):

Top 90 holdings in Vanguard’s VTI Exchange Traded Fund

As you can see, the biggest chunk of money is allocated to today’s tech darlings, because this index fund is weighted according to market value, and these are the most valuable companies in the US today.

Through a convenient coincidence, the total value of the VTI fund happens to be just under $1 trillion dollars, which means you can just throw a decimal point after the ten billions digit of market value to get a percentage. In other words, about 4.7% of your money will go towards Apple stock, 4.4 towards Microsoft, and so on. Together, these top 90 companies are worth more than the remaining 3,410 companies combined, so these are what really drive your retirement account.

And within this list, you will see some of the usual suspects: Exxon and Chevron (oil), Philip Morris (tobacco), Raytheon and Lockheed (bombs), and so on.

But what about the less-usual suspects? For example, I happen to think that sugar, and especially sugar-packed beverages like Coke, is the biggest killer in the developed world – a major contributor to 2 million of the 2.8 million deaths each year in the US alone. Should I exclude that from my portfolio too?

And what about drug and insurance companies – aren’t they behind the political stalemate and high costs of the US healthcare system? Comcast funded some election disinformation campaigns here in my home town in the early 2010s, should I exclude them too? And if you’re part of a religion that is against charging interest on loans, or in favor of pasta and Pirate costumes, or against a spherical Earth, or any number of additional ornate rules, you may have still more preferences.

The higher your desire for perfection, the more difficult this exercise will become. However, if you are like me and you just want to get most of the desired result with minimal effort, you might simply have a look at the Vanguard fund called ESGV.

ESG stands for “Environmental, Social and Governance”, and in practice it just means “We have tried to avoid some of the shittier companies according to some fairly simple rules.”

And the result is this:

Vanguard’s ESGV Exchange traded fund (ETF) – top 90 holdings

The first thing you’ll notice is that it’s almost the same. In fact, the top five holdings – Apple, Microsoft, Amazon, Facebook, Alphabet (Google) and Netflix not far behind, collectively referred to as the FAANG stocks – are completely unchanged – and this means that there will be plenty of correlation between these funds.

It’s also the reason that the stock market as a whole has recovered so quickly from this COVID-era recession: small businesses like restaurants and hair salons have been destroyed by the shutdowns, but big companies that benefit from people staying at home and using computers and phones are making more money than ever. The stock market isn’t the whole economy, it’s just the publicly traded companies, which are the big ones.

But let’s look at the biggest differences between the normal index fund versus the social version.

The following large companies listed on the left are missing in the ESGV fund, in order of size. And to make up the difference, the stake in the companies on the right have been boosted up to take their place in your portfolio.

Main differences between VTI and ESGV (source: etfrc)

The omission of Berkshire Hathaway was a bit of a shocker, as it is run with solid ethical principles by Warren Buffett, one of the worlds most generous philanthropists. And in fact the modern day nerd-saint Bill Gates is on the Berkshire board of directors, another person whose work I follow and respect greatly.

(side note: Apparently the company fails on the “independent governance” category. And Buffett disputes this category, but in his characteristic way has decided to say, “Fuck it, I’ma just keep doing my own thing with my half-trillion dollar empire over here and you can have fun with your little committee” – I’m paraphrasing a bit but he totally did say that.)

Furthermore, both funds hold the factory meat king Tyson foods, while neither holds Roundup-happy Monsanto, because it was bought by the German conglomerate Bayer AG a while back. Nextera is a giant electric utility in the Southeastern US that claims to be the world’s largest generator of renewable energy. Some do-gooders are against nuclear power, while others (including me) think it’s the Bee’s Knees and we should keep advancing it. And all this just goes to show how nobody will agree 100% on what makes a good socially responsible fund.

But What About The Performance?

In the past, some investors were nervous about giving up oil companies in their portfolio, because while it was a dirty substance, it was also what made the world go round – which meant it was a cash cow.

Now, however, oil is on its way out as renewable energy and battery storage have crossed the cost parity threshold – meaning it’s cheaper to make power (and vehicles) that don’t use oil. In its place, technology is the new cash cow, and tech is heavily represented in the ESG funds. The result:

Traditional index fund (VTI) vs Socially Responsible equivalent (ESGV)

As you can see, the performance has been similar but the ESG fund has done significantly better in the (admittedly short) time since it was introduced at Vanguard.

Of course, we have no idea if this will continue, but the point is that at least our thesis is not a ridiculous one – environmentally sustainable companies do have an advantage, if the world gradually starts to care more about these things. And if you look at the share price of Tesla and other companies that surround it in electric transportation and energy storage, you will see that there are many trillions of dollars already lining up to benefit from this transition. And the very presence of so much investment money creates a self-fulfilling prophecy, as Tesla is now building or expanding five of the world’s largest factories on three continents simultaneously.

So What Should You Do? (and what I do myself)

Image
My latest home-brewed ebike project – this one can reach 42MPH / 67km/hr!

First of all, it helps to remember a fundamental piece of economics: your spending dollars will probably have a much bigger impact than your investment dollars. This is because you are sending a direct message to the world rather than an indirect one:

When you buy a new gasoline-powered Subaru (or a tank of gas for your existing guzzler) or a steak at the grocery store, or a plane ticket, you are telling those companies directly that consumers want more of these products, so they will produce more of them immediately.

When you buy shares in Exxon, you are only subtly raising the demand for those shares, which raises the average price, making it ever-so-slightly easier for Exxon to maybe issue more shares in the future. In other words, you are making it easier for them to access capital. But capital is only useful if there is demand for their products. And with oil there is a nearly constant surplus, which is why OPEC and other cartels need to work together to artificially restrict supply, just to keep prices up.

Plus, as a shareholder you are theoretically eligible to place votes and influence the future direction of companies – even companies that you don’t like. If you look up the field of “shareholder activism”, you’ll see this is a tradition that goes way back.

So I have tried to take a few simple steps on the consumer side myself, and I find it quite satisfying: Insulating the shit out of all of my properties, building a DIY solar electric array on one of them, and buying one electric car so far to eliminate local gas burning. And a few electric bikes including a super fast one I made myself.

Each one of these steps has provided a very high economic return, percentage-wise, but that still leaves a lot of money to account for, which brings us back to stock investing.

As someone who loves simplicity, I have done this:

  • Bought almost entirely VTI (or similar Vanguard funds) from 2000-2015
  • Started experimenting with Betterment in 2015, liked it, and have been adding a percentage of my ongoing savings to that account to that since then. (Note that Betterment now also offers a socially responsible portfolio option.)
  • Switched the dividend re-investing of my old Vanguard VTI over to Vanguard ESGV, to avoid “wash sales” in making the most of Betterment’s tax loss harvesting feature.
  • Bought some shares of Berkshire Hathaway separately, and also make a few sentimental investments in local businesses, including the MMM HQ Coworking space.

But you could choose to be more hardcore in your ESG/SRI investing:

  • Buy your own basket of stocks based on the index, but with different weighting based on your own values
  • Spend more money on other things that generate or save money (a bigger solar array on your house, better insulation, electric car, an ebike to reduce car trips, etc.)
  • Invest in local businesses of your choice, rental real estate, community solar projects, or other things which generate passive income – publicly traded stocks are just one of many ways to fund an early retirement!

Like most areas of life, investing is not something you have to do perfectly in order to succeed – even socially responsible investing. If you apply the 80/20 rule to get the big picture right, you have probably found the Sweet Spot and you can move on to the next area of life to optimize.

In the Comments:
What is your own investment strategy? Have you thought at all about this ESG / SRI stuff? Did this article bring anything new to the table?

  • Paul August 22, 2020, 1:25 pm

    I looked into this about 20 years ago and found that the socially responsible funds woefully under performed most other funds. I concluded that you were better off investing in the “sin” stocks, alcohol and tobacco companies. With your higher return you could then invest/donate in local efforts to improve your community.

    Currently, I mainly invest with Titan Invest. They are relatively new. Their philosophy is to examine the quarterly reports of the top hedge funds and then winnow the stocks down to 20. During the March downturn their loss was 22%, better than many. As of yesterday the YTD return is 23%.

    Reply
    • Mr. Money Mustache August 22, 2020, 1:55 pm

      Aha, that sounds like solid research back in the day… but 20 years ago was the collapse of the original dot com bubble and the start of this whole new tech-based economy that defines the flows of money today. Back in 2000, there was no replacement in sight for oil and today the transition is happening with insane speed and money involved. Tens of trillions of dollars are being spent and made on switching the energy supply alone.

      However, a standard investor in VTI will still capture all these gains – I’m not saying we should try to outsmart the market by predicting the future. Only that excluding oil and tobacco companies is quite possibly no longer a suicidal idea for the portfolio, if doing so is also important to one’s value system.

      Reply
      • Tom August 23, 2020, 1:25 am

        There is still no replacement in sight for oil. Fossil fuels continue to be the only way to push ships around (bunker oil), planes around (jet fuel), and move lots of freight in trucks and trains. Even after we shift all our cars to electric, our transportation sector is still very dirty. Even after we install many times more solar like Germany, our power sector is still very dirty. This is the great shame — that we have no real plan to get to zero harm, or even positively benefit the Earth. Our only plans are for ways to do less harm. During this life-altering pandemic, guess how much we reduced emissions vs 2019? ~8%, according to Bill Gates. We need to make and execute a plan to reduce emissions 100%.

        Reply
        • TomTX August 23, 2020, 11:08 am

          Germany’s power is cleaner than it has ever been – you should look at current numbers.

          In addition, the only reason it didn’t get cleaner faster is that Germany decided to prematurely retire their nuclear plants at the same time and thus ended up burning far more coal than otherwise.

          Reply
        • Matt August 23, 2020, 8:59 pm

          Even if 100% of all electricity and 100% of all transportation uses renewable energy, we will still need oil. All plastics, rubbers, synthetic insulations, fleeces, nylon, polyesters, etc. machinery oils, epoxies, adhesives, lubricants, detergents, asphalt for ROADS, shingle roofs, vinyl siding, cleaning products, cosmetics, and on and on require oil. Are we really going to get rid of roads? No? Then we still need oil and should stop villainizing these companies.

          And it is impossible to create half-decent steel, let alone aluminum, titanium, and other metals without coal both as a part of the alloy itself and as a fuel for the furnace. So coal isn’t about to go away either unless you want to go back to the stone age.

          I 100% support the transition to solar, wind, and nuclear electricity production and electric cars. But the hyperbolic moralizing is not based in reality and needs to stop. It is self-indulgent, pretentious, emotional, deeply immoral, and harmful to cause. If you want a villain to be a rebel against, try alcohol, tobacco, vaping, marijuana, fast food, chain restaurant, soda, junk food, TV, movie, fast fashion clothing, luxury car, air travel, “too big to fail” banks, and social media companies for starters.

          Reply
          • Mr. Money Mustache August 23, 2020, 9:18 pm

            I agree wholeheartedly with your industrial uses for oil.

            I think the reason the companies have earned a villi]ain’s reputation is because of their disinformation campaigns against climate change, covering up oil spills, and so on. It is always possible to conduct any business with good ethics and open honesty, or the same business with shitty morals, and the public will tend to judge accordingly.

            Reply
          • Zo August 24, 2020, 11:49 am

            I agree with your assessment that oil will continue to be a necessity for a while and that villainizing oil companies is hypocritical.

            However, technology is moving faster than your comments suggest. Some still mills are even becoming solar powered – meaning steel will be made without fossil fuels: https://www.lightsourcebp.com/2019/09/one-colorados-largest-solar-projects-moving-forward/

            Also, most modern steel-making operations use ARC furnaces which do not require coke (made from coal).

            Reply
        • Brian Bailey August 25, 2020, 4:40 am

          There is a lot of focus on renewables and batteries in reducing emissions. I support those efforts completely (I even run a small-scale solar/wind installation company).

          But these discussions often avoid or elide a more important part of the conversation. The most important change is not in the supply of electricity, it’s in the demand. This change cannot be brought about with tech; it requires a cultural shift. For example, MMM has been preaching for years about expanding one’s temperature comfort zone; if everyone were on his level, the use of A/C would probably drop 90%. That’s a lot of carbon not emitted, zero solar panels required.

          Getting emissions to zero will require everyone to use a lot less energy. That doesn’t have to be a bad thing. The law of diminishing returns applies to energy use, same as everything else. Most of our life-benefit derived from energy use probably comes from 10% of the usage, and some of the excess use is probably a net negative – such as when the body’s resilience to summertime temperatures is compromised by over reliance on A/C.

          Reply
          • Allie September 10, 2020, 2:43 pm

            I have been working on my resilience to heat and cold using breathwork and cold showers, practicing the wim hof method on a daily basis. My electrity bill is half from my friends living in similar apartments and I feel more oxygenated which is … you know… a breeze.

            Reply
          • Andrea September 23, 2020, 9:14 am

            Totally agree. I grew up in a house without A/C, our hottest months were probably July – August when temps could be 80-90 deg F and a handful of days outside of those months with 80 deg temps. It was hard July-August, especially with sleeping in the hot temps. But outside of that, totally fine. To this day, I try only to use AC in the hotter months, it really is what you get used to. I have sympathy for those in the southern U.S., but other than that, we can do without.

            In a weird way, I think it makes you more connected to what it used to be like to be “human”. I think we try to constantly be in a “comfort zone”, but sometimes this doesn’t make us happier/healthier.

            Reply
            • MKE September 24, 2020, 1:23 pm

              The purpose of the human metabolism is to regulate our temperature. When people live the car/desk/couch/bed lifestyle, in nothing but temperature and humidity controlled environments, it helps create the obesity epidemic. The purpose of eating changes to entertainment, not fuel. Look around and see the effects of driving over walking. Fat.

              Reply
          • Stephane Boisjoli September 28, 2020, 11:50 am

            Actually, we need to build better homes. There was a house constructed using the Passivhaus (Passive House) standard in cold, cold Saskatchewan prairies that used only a 1kWh heater to heat the house (in the fresh air intake). Meanwhile, my house has a 17.6 kW heater to keep the house warm in less cold Ottawa. We can substantially reduce our heating and cooling demands with better insulation.
            I’ve also noticed that my house, built with super thick (by today’s standards, it’s about 12 inches) bricks takes a long time to get hot on those hot summer days. These bricks are probably more useful as you go further south, and in Mexico, cement walls is the standard way to build walls. So if you’re in a hot climate, it may be cheaper to build thick cement walls than insulation.
            And yes, this augments the energy footprint of building a house, but houses (and their insulation) generally last for many decades, if not centuries…

            Reply
      • Fit DIY Dad August 23, 2020, 5:43 pm

        Since the socially responsive index only goes back two years and it ups the proportions of the biggest tech performers of late (e.g. APPL, AMZN, MSFT, FB, GOOGL, etc) during this frothy period it’s unlikely to continue to outperform, especially by such a big margin. I agree with Paul that it’ll underperform long term and when tech comes back down to earth stuff like defense, tobacco and REITs will start chugging away again. Not sure if they remove REITs, but low density housing and sprawl is massively “dirty” for the environment, but also a tasty investment. Removing entire sectors when it comes to investing seems silly to me if you’re looking to get decent returns long term. It’s going to be interesting when index returns work their way back to a more normal 5-7% range and then see how socially responsible holds up.

        I’m not a fan of index funds and prefer individual stocks, so watered down index funds seem even more absurd to me.

        To each their own :)

        Reply
      • Steve August 29, 2020, 1:50 am

        The poor returns in the early days of ethical funds were largely due to fund managers who didn’t know what they were doing. If they had simply invested in the Forbes 100 best companies to work for they would have beaten the market by an average of 4% per year!

        Reply
    • TomTX August 23, 2020, 11:13 am

      Paul,

      Until Vanguard got into the game, ESG funds were almost universally tiny with high expense ratios and typically run more often by social activists than financial people. Frankly, they weren’t worth investing in for most people.

      Vanguard completely changed all that.

      Have a look at VFTNX versus VFINX. Social responsible VFTNX outperforms on all equivalent timeframes. On the longest available (10 year) – it averages well over 1% better annual return.

      https://advisors.vanguard.com/investments/tools/compare/

      Note: “Since inception” is meaningless to compare since the inception dates are so far apart. I do wish Vanguard had a “Since inception of younger fund” option.

      Reply
    • Katie Camel September 12, 2020, 5:19 pm

      One quick look at the list of stocks that allegedly qualify as “socially responsible” leads me to believe that I’m fine investing as I’ve been investing, i.e., in VTSAX, QQQ, and several other mutual funds and individual stocks. Like MMM says, we’re all going to have our own set of E,S,G standards that reflect our values. Just like I accept that there will never be a politician (or human being) with whom I agree 100%, there will never be a publicly-traded company that fully meets my values and standards either. That’s okay.

      Paul’s got the right idea to take your investment profits or a share of your income and donate it to organizations who do great work. Another option is to contribute your own time by doing something every day to help make the world a better place. Me? I pick up trash every time I walk my dog (so several times a day most days of the week). I donate too to great organizations, but I don’t do that every day. :)

      Another way to look at investing in something like tobacco is that people will choose to consume those products regardless of whether or not we invest in Phillip Morris. We can’t control the actions of others. However, we are collectively paying the health care costs of those suffering the consequences of tobacco use. Is it wrong to profit off a company that is willingly encouraging and allowing people to destroy their bodies? I don’t know. But if we all have to pay for it in some way or another, why not earn money off it to help pay for the private insurance we’ll all have to cover once we’re no longer insured through our jobs?

      It seems there is no easy answer to the concept of socially responsible investing. Perhaps the greatest form of “socially responsible” investing is simply investing. By ensuring your own financial security, you’re helping generate a stronger society where you’re not dependent upon your neighbor and can likely help another in need.

      Reply
  • Sam August 22, 2020, 1:39 pm

    Really sharp thinking on using consumer dollars to send a direct message.

    I was afraid you were going to slide into saying eliminating socially undesirable companies could produce as good or better investment results. It won’t, barring unpredictable chance over the short run. If you want to make money and people use using Round-Up, then buy Bayer. But don’t buy Round-Uo at the store, and battle your HOA or town when they use it.

    Reply
  • Ross Williams August 22, 2020, 1:41 pm

    One way to.increase your pact is to look for a socially responsible fund manager. The Green Century Find, for instance was founded by and funds a group of lenvironmental and public interest advocacy organizations. So even the management fees you pay have impact. There are other investment funds associated with non-profits.

    Reply
    • dave August 23, 2020, 9:26 am

      The Green Century Fund has expenses at or above 1%. Simply too expensive, imo, to be competitive over a long run versus a broad market index fund from Vanguard, Fidelity, etc.

      Better to invest in a low cost broad market index fund, and with the thousands and thousands saved put that money into charities of one’s choosing.

      Reply
  • Cleona August 22, 2020, 1:43 pm

    I enjoyed reading your particular take on it – especially paraphrasing Warren Buffet. I think SRI funds have had significant inflows especially in Europe. They have done well with a tech bias, as you said. Thematic funds are also very interesting- focused on renewables, water, etc.

    Lobbying the government for more climate friendly policies is really important too. There will always be a market for non Esg shares so systemic change is needed.

    I recently made a video about this topic as all the language around it can be confusing…even for financial advisers. Glad we are talking about it and you have made a tilt towards ESG.

    Reply
  • Jon August 22, 2020, 1:59 pm

    I like the idea of investing in local small businesses. Any suggestions on how to get into that?

    Reply
    • Debbie M August 22, 2020, 10:16 pm

      That’s also one of my questions. Also how do we invest in community solar projects? And what other things generate passive income? I have no idea!

      Actually, one idea–my local food coop was looking for investors when it did a renovation and again when it opened a second location. (As a member, I got news about that.)

      Most of my investing is in index funds plus a few dividend-growth stocks. (And owning my own house and having skills.) But most of my spending, well, technically it goes to real estate taxes, but for the rest I try to buy used and look for local, small companies, coops, credit unions, that kind of thing, when I can.

      I almost think a company can’t get big enough to become public without cutting way more corners behind the scenes than I am comfortable with. (I do know there are some exceptions. Well, I hope.) But why should just the scumbags get a profit from their stocks? I’ve decided that owning their stocks is win-win. If they stay successful, I get some of the money. And if they go down in flames, the world is better off.

      Reply
    • Rich & Resilient Living August 23, 2020, 6:20 am

      Local investing opportunities are still challenging to find, but definitely worth pursuing for financial as well as other returns. In his new book Put Your Money Where Your Life Is (https://michaelhshuman.com/?page_id=9) Michael Shuman predicts local investing funds will become much more commonplace in 20 years or so. In the meantime, we have t0 put more effort into finding these opportunities. That book of Michael’s is the latest contribution to this local investing conversation and is definitely worth checking out for ideas and inspiration. His earlier book Local Dollars, Local Sense is also insightful.

      Of course there’s Amy Cortese’s book Locavesting (https://www.locavesting.com/the-book/) and her companion website https://www.locavesting.com, which while she’s no longer adding new info to it is still chock full of helpful resources.

      Another thing to check is to see if there is a Slow Money chapter (https://slowmoney.org/local-groups) in your area (or consider starting one). Evolving out of the Slow Food movement Slow Money directs investing to local foodsheds supporting farmers and other local food producers.

      In the updated 2018 edition of Your Money or Your Life Vicki Robin references her involvement with the
      Local Investing Opportunities Network (LION https://l2020.org/economic-localization/lion/). Consider starting such a group in your community – although, this can admittedly be a heavy lift. I’ve been working on it in my town for a number of years. if you are so inclined to learn more about this here is a how to guide for establishing local investment funds written by Michael Shuman, Amy Cortese, and others https://media2-production.mightynetworks.com/asset/8103230/200109_Community_Investment_Funds_Final.pdf.

      You can also check out the crowdfunding site https://investibule.co/ to see if there are any businesses from your area raising funds. This is very risky start up investing so definitely go visit in person, ask lots of questions, do your due diligence, and don’t invest more than you could afford to lose.

      Debbie M’s mention of lending money to a local food coop is a common example of how people get started in this realm. Local investing is a high priority for me so I’ve done a good bit of research into it (some of which I share on my blog). If you want to reply to my comment and let me know where you live I can tell you if there are any particular examples I know of in your area.

      Reply
      • Guillaume August 31, 2020, 1:27 am

        How would slow money work? I’d love to start such a thing in my country. People borrow money to local formers, ok, what’s next? What does the farmer give back? When? At which rate?

        Reply
        • allegra September 10, 2020, 2:51 pm

          @Debbie thank you for the treasure trove of resources
          @guillaume In my country, France, we have Bluebees for investing in organic agriculture, Lita.co for social and environemental companies (ESS), Wiseed has exciting medical innovation and circular economy midsize local companies to invest in.

          Reply
  • Josh Robertson August 22, 2020, 2:05 pm

    A while back I wanted to invest in vftax, but I noticed that it too holds Facebook, Amazon, Microsoft, Alphabet, etc. Any ‘socially responsible’ fund that has holdings in the giant tech companies isn’t worthy of the label.

    Reply
    • Mr. Money Mustache August 22, 2020, 2:14 pm

      Really!?

      I guess this just serves as another illustration of “everyone has a different definition of a good socially responsible company”. And my software engineering career was mostly in a big tech company of yesteryear – Cisco Systems (which is still pretty gigantic), so I saw it all from the inside. Cisco was an exceptionally good company that treated employees and community with super high standards.

      Nowadays, I personally think that Google is even better – they have done a huge amount of good for the world and it is one of the best companies ever to exist. So much support for scientific research, energy efficiency, new technologies, communication tools that help society – many of them done by subsidiaries just so they can subsidize them without investors complaining.

      Yes they sell advertising to pay the bills, but even that is pretty well managed.

      And then Microsoft is pretty good these days, Amazon is neutral, and Facebook has always kinda sucked.

      But of course this is just my set of opinions. Some people think the very idea of a big company is a bad thing, and others go even further and think that the idea of being wealthy enough to retire young is immoral. I’m pretty centrist in this spectrum of economic views.

      Reply
      • Josh Robertson August 22, 2020, 3:20 pm

        “Facebook has always kinda sucked.”

        I see we’ve found common ground!

        Reply
      • Scott August 23, 2020, 12:28 am

        MMM, always wondered which tech company you were with! Been following your blog for 6 years now, got an early retirement package from Cisco in 2011 (age 53) and have been living first in Mexico and now in Italy… Yes, I got to enjoy the covid meltdown here instead of there, and am glad for it. Absolutely agree with your comments about our former employer, I was in Bldg 10 in SJ for 7 years in Int’l Tax/Trade. While I sympathize with Josh’s negative views of some of these companies, it would be pretty much impossible to invest in an index fund if you didn’t just try to weed out the shittiest, as you said, Big Oil and Tobacco. YET… even there, I couldn’t help but notice the fairly remarkable efforts being made by BP and Shell to move into green energy (both European companies under greater investor and govt pressures) as opposed to Exxon-Mobil-Chevron (of course, Americans). Wouldn’t it be cool if VG had an Index Fund design feature, offering a dropdown click-to-select/unselect feature??? Anyway, this is a subject near and dear to us; I’ve had all stock holdings in VTI (VTSAX before it) since 2014, and my wife has all of hers in VFTAX, and she has outperformed me on both upside and downside for all of that time! Not by much, but as you say, every little bit matters…but it taught me to adjust my thinking about ESG not performing as well. Anyway, loved your thoughts on direct demand as well; this is something we practice with a vengeance.

        Reply
      • Jonathan August 23, 2020, 7:05 am

        MMM, I don’t see how you can justify Amazon, G or F as neutral. These are “church of the consumer sucka” companies. Amazon sells junk directly. G and F sell ads, of which the vast majority are to sell the consumer lifestyle. N is the “church of couch potato.” Of FAANG the only one who might qualify as responsible would be Apple. They don’t sell ads (… but app store, so they do). They actually fight for privacy. They (in theory) try to have their stuff last a long time (comparatively). I say this owning only one apple product — a (very old, but still working!) ipod 3g touch — because its what the 2009 fit’s stereo will talk to. No, wait, two. I have a magic trackpad as well.

        The ethical variants smells more like virtue signaling or greenwashing than anything else. In the US market, stock values get judged largely on growth. Growth means more of whatever the company does. Not “does a good job at enough.” Not “finding ways to do what you do, but more efficiently.” No, judged on strictly “more.” More consumer sales. More disposable plastic junk imported from literal 3rd world slave or child labor. More eyeballs to sell advertising and damn whatever the negative effects of that are. More eyeballs because they won’t stand up to the bully-in-chief (or his disinformation lieutenants) when he’s out of control and on a rant because it might impact precious growth and revenue.

        It strikes me as largely a waste of my time and effort. Thus, VTI.

        Reply
        • Chuck August 23, 2020, 1:24 pm

          Apple is an *irresponsible* company. I was working at one of their suppliers many years back and had the first hand experience witnessing Apple engineers stealing other’s technologies. Shame on Apple’s engineers’ lack of business ethics and competence.
          Since then, like MMM says, I vote with my actions. I have personally stopped buying any Apple product. At the same, as their indirect shareholder (I hold ETFs containing Apple), I watch gleefully, when everyone is crazily buying Apple’s products. I feel happy either way.

          Reply
          • TKR August 24, 2020, 6:13 am

            This of course neglects to mentio Apple’s labor relations in China are bordering on the atrocious. And do not bring into the discussion how the rare metals are sources for the chips. So, nope, Apples is certainly not an “ethical” company by any stretch of the imagination. I agree, VTI as anything is is pointless virtue signalling. Best to spend your dollars with companies you feel fit your moral outlook.

            Reply
        • Stephane Boisjoli September 28, 2020, 12:09 pm

          It’s like MM said, there’s different criteria. Amazon, Google and Microsoft have investment a lot into generating green energy for their data centres (not sure if FB has).
          Google, FB are huge spies and hold a lot of consumer data, which we’re basically at their mercy (and they can hand it over to the US government at anytime, even if you’re not a US citizen).
          Amazon has kinda crushed the online market, with only maybe Ebay and Aliexpress coming close to that kind of power.
          I don’t criticize Amazon becaause it sells junk:Every store does now, that’s what the customer wants..
          Apple markets itself as a luxury brand, brainwashing their customer, and locking them into their ecosystem making paying way more for some things that are certainly not worth it. (Side note also that because iPads are glued, they are harder to recycle since opening them is near impossible).
          All those companies completely dump the responsibility of recycling on the local governments, which at some point needs to stop.
          And these companies, like all others, which is not going to stop soon, are trying to make more money through sales, regardless if the people need it or not.

          Reply
      • Miles September 13, 2020, 12:04 am

        Amazon and Google have both very publicly supported rent-seeking legislation in recent memory. Whatever else they do, if they’re spending tens of thousands of dollars securing their profits by making competition more difficult, rather than by creating something valuable, they’re hurting everyone else in doing so.

        Reply
    • Josh Robertson August 22, 2020, 2:21 pm

      Facebook in particular is a tribal cesspool of misinformation and has profited from our division. More generally, these companies misuse our data and do not honor our privacy. They’re anti-competitive, and many have argued that monopoly power is at the root of our cultural and social woes. See Matt Stoller’s book Goliath (Matt recently interviewed Dave Dayen, author of Monopolized, and the two had some interesting things to say about Warren Buffett: https://mattstoller.substack.com/p/warren-buffett-americas-folksiest).

      Reply
      • Jack Marxer August 24, 2020, 8:43 am

        Glad to see you mention this article about Buffett and I hope that MMM and others read it and consider the harm that monopolies are doing.

        Reply
      • Stephane Boisjoli September 28, 2020, 12:11 pm

        I’m not going to say Facebook is great, but it is basically having to become a government’s social services, without the resources of one. Figuring out what articles are trash and which are good is a time consuming thing, and while computers can help a lot at this, it’s likely it will screw it up. They have been making great strides at trying to fix the misinformation being passed around, but the bottom line is human beings like to pass around trash information that fits their bias.

        Reply
  • donal August 22, 2020, 2:34 pm

    Mr Stache,
    Long time reader including nearly all of the comments on your blog. I bow the fuck down to your wisdom and tenacity with regards to getting free from the slavish money driven society which surrounds us. You and the fellow mustaches here made me have more confidence in my already frugal habits.

    And here is the but. I don’t admire folks like Bill Gates and Buffet. Sure they are savvy businessmen but the hubris.. because they have all the money they know how to best restructure the planet with their philanthropy. That really pisses me off. The whole problem with ethical investing is you first need an ethics. That is the domain of religion not economics. I don’t like the esg crowd because they can’t define good. At least I’m not going to let them do that for me. What they choose to restrict today could change tomorrow. It reminds me of the cancel culture thing going on at the minute. Neither of these are religions I ascribe to.

    I do like Elon Musk and the Tesla thing – it’s really hard not to. But he has the same problem with the hubris; except his solution is not to try save the planet but rather get the hell out to Mars.

    For my part I want to be ethical to the people around me and the planet. That means cycling and buying as little stuff as possible. Localism as much as I can manage.

    I like the way you have folks like lurker here pop up from time to time (lurkers gonna lurk) with ‘permaculture anyone?’ That seems to make a lot of sense but can lead you right down a luddites path as well which I’m trying hard to avoid.

    The only way to be ethical with your money is not to spend it. If we can all learn to stop supporting this consumerist machine and become producers again I think we would be better off and the wealthy amongst us are then free to roam this earth gifting our time and skills to others who don’t enjoy the same freedom. Getting financially independent is about first learning how not to be a slave. The advanced boys and girls in the class also learn how not to be a master. Having more money than you need so you can engage in philanthropy is a sin of pride. Charisma is exquisite manipulation and money is the sandpit of the soul.

    Your comments about maybe getting better returns from esg as well sound very unlike you as well. You know about passive investment and not trying to pick stocks. If you are in the greed business (as we all have to be until we are FI) then there is no pulling punches. So at the risk of swinging a face punch at the master:

    Take two groups of stocks A and B. B is restricted to only the ‘good’ companies. A is the whole lot. B is a subset of A. Why the hell do you think you could win (ie. get better returns) from passive investing in the B universe? Your smart enough to start picking stocks now?

    Anyways I hope this was not too ranty I’m after a gin and tonic here (home distilled gin, cheapest tonic I could find). Happy to take a face punch back if you thing I’m barking up the wrong tree.

    Your sincere fan,
    Dónal

    Reply
    • MAD Wealth August 25, 2020, 9:10 pm

      I’d agree that Buffet and Gates have lost touch with reality a bit. Their visions were different back in the day, but now they tend to pontificate as to how people should act. If you want to learn the many nuances of investing reading up on Buffet’s analytic style, and pragmatism are a great starting point. If you want to learn how to run a business to be ruthlessly successful then look no further than Gates as well. So absolutely give respect where its due.

      I don’t know if could trust Bill so much anymore. He has vast connections and investments in the pharmaceutical industry. His campaign through the pandemic with his vaccines and chip solutions seems rather Orwellian. Would it be considered an SRI or ESG investment if his vaccine killed thousands of people? What about the fact you cannot bring a lawsuit against vaccine companies, is that socially responsible? Plus he was pretty driven to annihilate his competitors and run the Microsoft monopoly across the globe. That doesn’t seem to co-exist with SRI.

      Also, Bill resigned from Berkshire’s board in March so you should probably update the article. https://www.businessinsider.com/bill-gates-steps-down-microsoft-berkshire-hathaway-boards-2020-3

      ESG investing can be a slippery slope and I can piggyback by giving moreexamples below. The criteria differ drastically. Public ESG investing is based upon the corporate code of ethics, principles, industry, etc… It does not necessarily mean the company has an actual social mission which is often a few leaves sticking out from their big tree. In the private space, aka alternative investments, there are a plethora of small companies with stated SRI/ESG missions. Their focus is generally the problem sects of society are trying to solve. The list is exhaustive but includes all the tenets you’d expect such as:

      Diversity
      Low Income Housing
      Gender Issues
      Etc..

      These companies tend to have a better impact at the local level, but that does not guarantee financial success.

      Thanks in advance MMM for showcasing the definition is varied, and pointing out even funds dedicated towards SRI/ESG can seem conflicting. I’ll play devils advocate a bit more myself. Vanguards ETF holds shares of Uber. Would one say their reluctance to classify drivers as employees is socially responsible? How about it’s holdings of fertilizer companies such as CF and Scotts Miracle Grow which sell to big mono-agribusiness that many despise. These organizations feed millions of people a year. Which aspect is more desirable? What about the aforementioned socially responsible utility provider that offers solar, wind, etc..If the wind turbines kill thousands of birds is that environmentally responsible? Lastly, the fund holds shares in timber companies. But cutting down trees is bad for the environment. Yet we all live in housing made from wood while using paper products endlessly. Just because the company has a land management policy is it all of a sudden “OK” to cut down trees? What if we don’t cut down trees but the cost of housing goes up which impacts low-income people, is that socially responsible?

      Who’s to say either sides opinion is correct? Should that opinion be forced upon others?

      As we see there is often no clear cut answer. How people spend their money has the most direct impact is absolutely true.

      The beauty of capitalism :)

      Reply
    • Philippa Waterman August 26, 2020, 3:31 am

      Ethics is absolutely not the domain of religion!! Religion is about control of people, notably of women (faith is something different to religion). Ethics are your own moral principles and should guide how you treat people and the society you live in. There is not a single set of ethics that we all need to abide by, hence why there are different ways to invest ethically – just find one that works for you.

      Reply
      • Chris September 11, 2020, 6:28 pm

        Per Merriam Webster, ethics is “the discipline dealing with what is good and bad and with moral duty and obligation”, and “a set of moral principles : a theory or system of moral values”. Philosophers today do indeed believe in the centrality of Kantian deontology, “an ethical theory that the morality of an action should be based on whether that action itself is right or wrong under a series of rules, rather than based on the consequences of the action. It is sometimes described as duty-, obligation-, or rule-based ethics.” Further more, this is not a set of rules that any individual defines for themselves as they see fit. They are rules that are universal. Applicable everywhere, at all times, to everyone. There IS indeed a set of ethics that we ALL need to abide by as Kant demonstrated philosophically. The use of the term “ethical investing” is a rather loose and malleable term. For example, not investing in tobacco companies because they produce cigarettes, aka cancer sticks, is not an ethical position in the strict sense (they are not murdering people, even though people will die if they persist in the habit). Now, if those same tobacco companies were to lie about the safety of their product, then not investing in them would be an ethical position (lying, taken to its extreme position, would destroy the concept of trust).

        Reply
      • Isaac November 19, 2020, 11:46 pm

        I agree whole heartedly that our choices should be guided by ethics, or what is the right thing, but I can’t agree that morals should vary from person to person. Using this blog as an example, it would be like driving a like to the store instead of biking (me being in my 20’s with perfect heath and a working bike) being the right thing for me. I know that you could me holes in my analogy all day if you really wanted to, if you care to understand what I’m trying to say, I think it does a good job. What I’m trying to say is that what is right (biking instead of driving for routine trip to the store) doesn’t change from person to person. There is an absolute truth, though we (me) don’t understand all of it.
        By all means do what you think the right thing is. I applaud people like you. I just think that a philosophy of moral relativism can and does lead to anger when people share an honest opinion.

        Reply
  • Jenn August 22, 2020, 2:43 pm

    Thanks for this. It has been bothering me a lot lately and I’m relieved I’m not the only one. I’m really not ok with supporting Big Meat. I also wish Facebook wasn’t held in ESVG.

    I for one would love it if you could continue this type of post. The clock is ticking, typed as I look out the window to a smoke-filled Colorado sky. This will just get worse, and what good will all of our saved money do us when it’s too late?

    Reply
    • Mr. Money Mustache August 22, 2020, 3:26 pm

      Thanks Jenn! I try to keep things light around here, focusing on the Carrot of a prestigious and sexy early retirement, rather than the Stick of environmental destruction. It’s just better marketing because we Humans are more motivated by self-interest.. plus it’s more fun to read, and serves the same purpose in the end. And, we will accomplish a lot more with outrageous optimism than we will with fear and simple restrictions on our lifestyles.

      Colorado is indeed smoky as hell this month, due to the relentless forest fires. But another point of optimism on your concept of the ticking clock: the current round of people alive on Earth would probably do pretty well even if we kept careening into global heating, because it’s a slow process.

      And the “rich” world can afford to deal with the consequences, even though it’s a huge waste of money because just switching to clean energy and cutting waste MAKES you money rather than costing anything.

      It’s the NEXT generations and the agriculture-based areas still living in poverty that would be really screwed.

      But I am increasingly optimistic that we got this!

      Reply
      • Ellen August 23, 2020, 10:58 am

        Perhaps there is an easy way to back out companies you don’t want included in an ESG index fund. This a flipped version of MMM’s approach to buying shares of BRK as it is not in his preferred ESG fund. If you buy $100k of an ESG that includes 4.4% of FB and you wish to not own FB shares, then short shares equivalent to $4,400. At that point, you technically own $0 in FB. By shorting FB, you take on some risk. In exchange for that significant risk, you send a direct but very tiny anti-FB signal as other investors monitor % of shares shorted. All in all, you’d be way better off spending your time and money taking actions to push FB towards better behavior.

        Reply
      • Mirella August 23, 2020, 2:23 pm

        I so appreciate your optimism, care for the earth and good common sense. I was one of the annoying people who wrote to you on this topic and it’s great to hear your perspective. I came to a similar conclusion to you re spending having more of an impact than investing but it’s great there are better ESG options these days.

        Reply
  • Mike August 22, 2020, 2:57 pm

    I looked into Vanguard’s ESGV and can’t seem answer a few questions:
    1. ESGV has about 1/3 of the stocks of the Total Market index (it’s not because of social screens)
    2. ESGV is based on the FTSE USA All Cap Choice Index
    https://research.ftserussell.com/Analytics/Factsheets/Home/DownloadSingleIssue?issueName=FGCUSAC&IsManual=false
    3. FTSE Choice Index screens on FTSE USA All Cap Index (no “regular” index) to exclude certain stocks as discussed above
    4. FTSE “Regular” Index is what screens about 1/3 of the Total Market index
    https://research.ftserussell.com/Analytics/Factsheets/Home/DownloadSingleIssue?issueName=ACUSA&IsManual=false

    But how does the FTSE “Regular” Index get rid of 2/3 of the Total Market Index? What is their criteria?

    It still tracks the Total Market really closely…

    And BTW, Vanguard offers a global version of ESGV (non-US) also based on a FTSE Index. And Vanguard is going to offer ESG bonds soon…

    Reply
  • Matt August 22, 2020, 3:08 pm

    Lol. Apple is still in both? Using Chinese labor because there ar exes if any labor laws over there. Socially responsible? Yeah right. Facebook using your personal information without your consent? Yeah right. Google censoring videos on YouTube that isn’t in line with their far left agenda? Socially responsible? Yeah right. What a joke. It’s socially responsible to invest in coal and oil because renewable energy will never be on demand. The sun isn’t out 24/7, and the wind doesn’t blow all
    The time. There needs to be a hybrid. Renewable is good but so is traditional energy production because we need electricity when it’s dark and no wind. VTI seems to be the most socially responsible fund in the end anyway.

    Reply
    • Mr. Money Mustache August 22, 2020, 3:37 pm

      Ever heard of energy storage Matt? It will soon be one of the world’s largest industries, and it also drastically reduces blackouts and lowers electricity costs by increasing the reliability of the grid.

      https://electrek.co/2020/06/17/tesla-massive-megapack-projec-replaces-gas-peaker-plant/

      We can also create baseload generation with other clean sources, but fossil fuel power plants have no profitable place in today’s energy mix, which is why we have almost completely stopped building them in the US. 20% of our current power supply is now already renewable, 40% worldwide, and almost 100% of new supply being added is renewable.

      Finally, hahaha on the “far left” comment. Is Bernie Sanders running Google now?

      Reply
    • Nordland August 22, 2020, 10:02 pm

      I back these statements almost 100%. Definition of “socially responsible company” is very broad and not really well defined. And we can continue on – is importing foreign labor to displace US workers “socially responsible”? This is what most of big tech does in attempt to cut the wages and increase the profits etc. And I agree – censorship of alternative opinions by big tech/social media is disgusting and pathetic at the same time. I think every business that makes fair profit in capitalist economy and gives people their daily bread is “socially responsible”, otherwise intents of “greens” to destroy big oil and other traditional energy are very irresponsible, because they would lead to millions jobs being destroyed and lost and people ending up in poverty because of a) loss of jobs b) higher energy costs.

      Reply
    • Stephane Boisjoli September 28, 2020, 12:20 pm

      Why do people think renewable energy is just solar and wind? There’s water, which in Canada, is so reliable it’s the basis of most of our energy. We even call the electricity bill the “hydro bill”. And there’s also biogas, something we’re not using a lot but probably could be (from sewage waste, farm organic waste products, residential organic waste, and probably others I don’t know of).
      Stockpiling green electrical energy has received tons and tons of investment funds and so there’s a number of things being tried – just remains to see what is best (which may vary from region to region).
      Also, Facebook’s been trash a number of times for that but they keep improving, and it does provide some social good too. No company is going to be angelic, they have to profit and they have limited means.

      Reply
  • Catprog August 22, 2020, 3:16 pm

    For me I am not a fan of expanding nuclear. But existing well maintained nuclear is a good thing.

    Reply
    • Mr. Money Mustache August 22, 2020, 3:31 pm

      Have you seen the Inside Bill’s Brain documentary? It has a peek into more recent nuclear power plant designs that eliminate all of the problems associated with the old ones. And they run on the spent fuel of the old ones – no need for new refinement and production of uranium!

      Reply
      • Catprog August 22, 2020, 4:07 pm

        For context I am from Australia. (We would have to start a nuclear power industry almost from scratch.)

        While I have not seen the documentary it does sound like it fixes one of the three main problems I see with expanding nuclear though.

        1)How long it takes to build a plant
        2)Cost of building a nuclear plant
        3)Peak Uranium(Which is why running on spent fuel is a good thing.)

        Reply
        • Mr. Money Mustache August 22, 2020, 4:14 pm

          It fixes all three of those, as well as the generation of waste – because it does the opposite of generating waste!

          Newer generation plants are smaller, massively safer, cheaper, and because of these things there would be less red tape in constructing them. Right now the delays from permitting (and the related increase in financing costs) are the biggest reason nuclear plants are expensive.

          Look at this little cutie – not only would I not mind that in my back yard, I’d be perfectly happy LIVING inside of it! https://www.popularmechanics.com/science/a31045491/smallest-nuclear-plant-oklo-aurora/

          Reply
          • Andreas Hermansson August 24, 2020, 4:37 am

            Nice! I guess this is like the 50´s? I remember seing concept art (Fallout games anyone?) from actual car manufacturers where they hoped that “future cars” would run with its own little reactor.

            Yes and here it is: https://en.wikipedia.org/wiki/Ford_Nucleon
            “The Ford Nucleon is a concept car developed by Ford in 1957 designed as a future nuclear-powered car, one of a handful of such designs during the 1950s and ’60s.”

            WOW! I guess you could hook it up to your house and power everything.
            Elon is just so behind the times :)

            Reply
          • Karlh August 25, 2020, 12:04 pm

            This type of modular nuclear reactor is an outgrowth of research at ID National Labs many years ago. The initial concept was for a modular reactor design that could be flown in to remote locations for military and other purposes. The application is really tremendous, in that small communities could have reliable, cheap, electric power without any of the long term carbon emissions.

            Overall, I still maintain a number of equities including Nextera, which has performed well. I did sell off the last of my big oil in the last few years, and have purchased other alternatives like Brookfield Energy Partners (hopefully with time we will see some performance here). Overall I am glad to have gotten out of oil when I did, as it and coal are in a funk I don’t think they will get out of soon.

            I think my problem with these Karma Funds is that they do tend to under perform versus the more generic ETFs, and as many of the comments point out, everyone has a beef with one company or another… my last MegaCorp was HON, and I still have a good amount of their stock, performing well. Yes they are a defense contractor, and yes they are a major supplier of technology to Oil Majors (UOP, a Honeywell Company), but I am not ready to sell that one because it was my livelihood for a while… bad on me.

            Reply
      • TomTX August 23, 2020, 11:18 am

        New nuclear plants in the USA have several major issues:

        1) They take far too long to construct – you could have wind, solar or geothermal online years sooner

        2) They’re far too expensive

        3) Nobody in the USA seems to be capable of building them remotely close to on time or on budget, blowing schedules by years and budget by billions of dollars – 2 out of the 4 modern AP1000 reactor builds in the USA have failed as a project and been cancelled after wasting billions of dollars. The other two are limping along.

        Maybe some of the small modular reactor guys can figure out how to do it right, but we’re still years away from any real capacity.

        In the meantime, I heartily recommend installing as much wind, solar and geothermal as we can! Cheap, proven, easy and extremely modular.

        Reply
      • Court August 23, 2020, 8:21 pm

        This docu series should be required viewing for all.

        Reply
      • KaLynn August 24, 2020, 10:58 am

        I was also going to suggest your readers watch the Inside Bill’s Brain documentary and depending on location, go on a free tour of the Bill and Melinda Gates Foundation in Seattle. I have immense respect for how they identify areas of greatest need and methodically find solutions to make a difference. Sometimes living in the cushy US of A we forget how many children around the world die of diarrheal diseases every year.

        Reply
  • BC Kowalski August 22, 2020, 3:17 pm

    Wow that’s really interesting – I’m sure I’m like many when I thought socially responsible investing would be leaving some money on the table. Good to know that’s not the case, and that in fact those funds are somewhat outperforming the main index!

    I also agree that voting with your dollar is more impactful – or with your pedals. Oil companies aren’t very popular, especially on the left; yet my bicycle is always one of the few at the farmers market, vastly outnumbered by the number of cars. Hmm…

    Reply
  • R Urban August 22, 2020, 3:18 pm

    Good article. When are you going to do a post about how you built out your electric bicycle?

    Reply
  • Mama Bear Finance August 22, 2020, 3:23 pm

    I’ve studied the ESG funds in 2016 and found that it was underperforming the total market index based on historical data at the time. It’s refreshing to see that it has now outperformed the VG World fund – hopefully this trend will continue. I agree with you that the barometer for ESG is a personal one which makes it very difficult to analyze especially when it comes to profitability, expected rate of return, etc. Plus, our sentiments are ever evolving! Thanks for this insightful post. You’ve brought to light a very interesting subject to think about.

    Reply
  • Gwen August 22, 2020, 3:34 pm

    I do the vast majority of my investing through my work retirement accounts, so for now I’m fairly limited in what I can invest in. However, my employer just sent out a survey about what people look for, so I’m guessing I’ll see something come along in the next year or so. Right now I’m doing more in my sphere of control – riding my bike instead of car trips, reducing my consumption and participating in the secondhand market as much as possible.

    Reply
  • Gareth August 22, 2020, 3:45 pm

    And how about the potential of direct indexing for socially responsible investing? Anyone can then invest in the whole market, but then choose to not invest in the particular companies that they deem to not be socially responsible.

    Although then there’s the temptation for an investor to start getting a little too selective (beyond just ethics/social responsibility) and they’re then on the slippery slope to active investing…

    Reply
  • Bill Muffo August 22, 2020, 4:09 pm

    Wind …. GE stock… it’s been beaten to a pulp with COVID 19… Long term bet….

    Reply
    • TomTX August 23, 2020, 11:20 am

      Bill,

      Wind power was already beaten up with the Trump Tariffs raising material and component costs significantly.

      Reply
    • Chris I August 27, 2020, 9:38 pm

      GE does a lot more than just wind power.

      Reply
    • Stephane Boisjoli September 28, 2020, 12:21 pm

      Wind turbines are still being installed all over. Very competitive energy actually…

      Reply
  • Lewis Kuhlman August 22, 2020, 5:27 pm

    Betterment offers SRI. Select an existing goal, and click on the Portfolio Analysis. Click “Edit” under Portfolio Strategy. Then select Socially Responsible Investing. This only a few years old, but I was grateful they created the option.

    Reply
  • Scott Blasiman August 22, 2020, 7:45 pm

    I am very happy to see this post. In the last two months I have spent a lot of time reading. My own diverse basket of 70 stocks has shown very strong correlation with the market. After many big brokerages have eliminated trading fees and now offer fractional shares it is not too difficult to designate a basket of stocks you want to invest in. Two things were really bothering me. That with vtsax I was still paying a fee to have 27% of my money in 10 holdings that I could easily buy. The second was that I didnt need to invest in Exxon, Raytheon and Phillip Morris to be wildly successful in investing.

    It took some work though and its definitely not for everyone.

    Reply
    • Jose August 30, 2020, 5:06 pm

      Do you mind sharing the list? Thanks so much

      Reply
  • Chris August 22, 2020, 9:44 pm

    The approach Jenni and I have tried to take is a bit easier, if less ideal than an ESG fund:

    We stick to investing in large broad market indexes (VTI / VTSAX for example).

    We funnel a representative percentage of earnings from companies we don’t want to support back towards causes that are opposite or opposed to the specific industries we’d rather not be involved in.

    For example, if you favor nuclear power like you mentioned MMM but dislike coal, you can take a chunk of earnings out, represented by the coal company weight in your index fund, and invest in nuclear companies or donate to causes that oppose coal / support nuclear.

    This way you can be a little more direct with the specific things/industries/causes you want to support and oppose.

    And of course, if you’re donating, the best way to do that is through a Donor-Advised Fund (DAF) which you can hold stock investments in and then make the donations from with some tax advantages. :)

    Have you looked into a DAF, MMM?

    Reply
    • Court August 23, 2020, 8:22 pm

      Love this thought process Chris!

      Reply
  • Frank August 23, 2020, 2:04 am

    Hello.
    Is there an UK ETF anyone would recommend that does the equivalent for people in the uk? I’m not surprised you love bill gates, I’ve just listened to a podcasts where he is interviewed for the economist. I love how balanced and measured he is in his views and opinions as well as calmly analysing a problem and suggesting solutions

    Reply
    • Sam August 23, 2020, 6:23 am

      Yes, Vanguard has the ESG Developed World fund and the SRI European fund, both of which are available to UK investors.

      Reply
    • Martin August 24, 2020, 2:22 am

      I am in the UK and I invest in funds based all over the world. I use Fidelity and it’s very easy. However, the monthly charge is quite expensive unless you set up a “regular saver plan”, though this is easy to do and you can add as little as £50 a month. I found a list of the most ethical funds by joining Ethical Consumer.

      Reply
  • Laura August 23, 2020, 7:09 am

    I’ve continued down a similar path to what I outlined in my presentation at Camp Mustache. It’s exciting and inspiring to see more and more truly sustainable and even regenerative investing opportunities outside of the stock market becoming available to non-accredited investors. This path of mine takes a drastic departure from the MMM approach of investing in index funds, but crosses over in the area of local investing, emphasizing generative spending such as solar arrays, and actions such as riding bikes vs. driving cars and building social capital.

    Like me, a very small, yet growing number of people are learning about self-directed retirement accounts and getting excited about the ability to direct their money away from Wall Street and closer to Main Street. The Next Egg (https://www.thenextegg.org/) has proven to be a useful resource for those of us pioneering this redirection of retirement dollars towards things like cooperatively owned businesses, local investing, and so many other innovative impact investments.

    This path to financial independence won’t resonate with many of your readers, but I’m single with no children and have a strong foundation in permaculture and many non-monetary forms of wealth as well so I’m willing to be an early pioneer species in this terrain.

    Very happy to see you write this post and to learn you’ve added some ESG/SRI funds as well as local investing to your portfolio in addition to the solar arrays and all of the other money saving and simultaneously environmentally conscious things you’ve been doing over the years. It even prompted me to finally comment on your website, which despite being a longtime reader of, I don’t think I’d ever done before (which is why I made the mistake in a reply to a comment up above of listing my blog name instead of my first name. I hadn’t read all the way down to the bottom to the Leave a Reply box – sorry about that.)

    Reply
  • The Expostriate August 23, 2020, 7:32 am

    Several years ago, I completed my master focusing on corporate ESG performance and financial performance. I can say that if you use ESG KPIs that are materially relevant to a company’s business/industry, you can certainly select companies that outperform. Unfortunately, many funds (ETF and otherwise) really don’t use this information in their selections. Many just need a company to check the box “Releases yearly sustainability report”. Those reports very wildly in quality and information. Some do not report any KPIs that are relevant to their business. Sadly, this so-called “greenwashing” is not uncommon.

    Unfortunately, many funds, financial institutions, etc. seem to to be OK with this. Even with evidence of more elaborate, but still easily implementable, investment selection processes producing outperformance, they don’t seem to care. I’ve been told by many in interviews, that their investors just want to know that the company is considering ESG issues, which is why their primary, if not solitary, exclusion factor is whether the company releases that report. As such, I recommend doing your own research and selecting your own stocks based on ESG, according to your own goals and knowledge. That is what I’ll be doing.

    Reply
  • freddy smidlap August 23, 2020, 8:28 am

    i really think leadership and culture matter. our largest holding, shopify ($SHOP), has a tremendous leader in tobi lutke AND they seem to genuinely care about their employees and customers. i think the glassdoor employer ratings have some value and motley fool stock advisor where i get investing ideas always gives that a mention in the business case. all that being said you can have more impact rich than you can “less-rich.”

    Reply
  • Laura August 23, 2020, 8:37 am

    I’m currently invested in SWPPX and SWTSX (Schwab’s S&P 500 Index and Total Stock Market Index), on a set-it-and-forget-it basis where I buy more each paycheck. Based on this article, I was going to switch some of that to automatic investing in ESGV, and was pleased to see the performance is better. However, the expense ratio jumps from 0.02% and 0.03% for the Schwab index funds to 0.12% for the ESGV. That’s still lower than the 0.2% recommended as “typical” for a passive index fund, but it’s much higher than the 0.02%/0.03%! Thoughts?

    Reply
    • Court August 23, 2020, 9:01 pm

      0.12% is still insanely low :)

      Reply
  • Kevin August 23, 2020, 8:59 am

    Fees are important too – ESGV charges 0.12%, which is pretty high for Vanguard, while VTI is a nice tasty 3 basis points. I’ll stick with VTI and just vote with my wallet.

    Reply
    • TomTX August 23, 2020, 11:23 am

      Have a look at Vanguard’s S&P500 ESG mutual fund, VFTNX and compare against the straight S&P500 VFINX (these have the longest history)

      https://advisors.vanguard.com/investments/tools/compare/

      On the 10-year timeframe, you’re talking about saving 9 basis points per year in expenses, but ignoring the 125 basis points higher return.

      Reply
      • Kevin August 23, 2020, 1:16 pm

        OK, but is past performance indicative of future results? What else can you see in your crystal ball? ;)

        Let’s call a spade a spade: this is stock picking. I’ll focus on what I can control, which is owning the broadest possible basket of equities at the lowest possible cost, and not worry a whit about whether TSLA outperforms XOM.

        Reply
  • Ron Cameron August 23, 2020, 9:14 am

    When you say it’s cheaper to make vehicles that don’t use oil, I can only assume you’re including the massive government incentives? I haven’t seen any electric vehicles come close in price to their similar gas counterparts.

    As for SRI, I love the idea but I think we need to remember that anytime we put a restriction on what a fund manager can do it will hinder performance over time. IF the fund’s goal is “Make Maximum Money”, restricting investments in oil companies…or foreign companies…or companies that start with the letter “T” means non-optimum results. It doesn’t make the fund or restriction bad, it just means it’s now by definition handicapped. I think most of us can have the greatest impact by controlling and directing our purchases with businesses we really believe in “but that’s hard!” so it’s business as usual instead.

    Reply
    • Stephane Boisjoli September 28, 2020, 12:26 pm

      Not sure about cheaper to produce, but in the long run, cheaper cost of ownership, for sure. Consumer Reports just released a report saying they cost have the maintenance (I’m surprised it’s even that high, since there’s very little to do besides brakes and tires). And in most places, the energy is much cheaper – here in Ottawa it’s around 3x-5x cheaper to drive electric than gas.
      Used ~100k electric cars, because they cost so much less for energy, often pay for themselves with the savings from the energy. And for long trips, rent or borrow a car, presuming you can’t find any fast chargers to do the trip.

      Reply
  • Tim August 23, 2020, 9:43 am

    MMM,

    If the problem we are trying to solve is making the world a better place by exerting influence on corporations, then the question is: how do we most effectively exert influence. There are several Sustainable investing approaches

    1. Negative/Exclusionary Screens – Removing specific companies or industries not aligned with investors mission or values
    2. Positive/Integration/Broad market – Evaluating companies along ESG measures and weighting portfolios to increase exposure to best-in-class companies
    3. Impact Investing – Targeting specific social or environmental outcomes alongside financial returns

    Your definition of ESG corresponds with the Exclusion approach. Do you think you will exert more influence by punishing bad behavior by excluding companies or by rewarding good behavior by purchasing an extra helping (overweight) companies with good behavior?

    MSCI, Sustainalytics, and other companies have developed ESG rating systems based on measurable criteria.  Here’s the link to the MSCI ratings: https://www.msci.com/esg-ratings

    Facebook has a MSCI ESG BBB rating and Microsoft has a AAA rating. The Integration method overweights Microsoft and underweights Facebook.  Blackrock(ticker: ESGU), Fidelity(ticker: FITLX)  and others have built ETFs and mutual funds based on the MSCI ESG index.  They have low fees and are designed to track the broad market index by keeping the sector weightings the same.

    When you invest in a ESG fund, you are signaling to the fund company how you want your shares voted at the annual meeting.  IMO this is how real change is going to happen.  I’m convinced that by taking a seat at the table and becoming an (indirect) activist investor is a better approach than not purchasing shares of a company that I object to.

    Reply
  • dave August 23, 2020, 9:54 am

    We just happen to be in a period where socially responsible companies are doing very well, driven by a handful of go-go companies.

    This will end, and another batch of companies will drive the market’s return. No one knows when that will happen, we only know it will.

    Any tilt away from broad, market weighted index funds adds risk that is not compensated. A socially responsible fund will over the long run, lag at greater risk.

    Better to invest in broad market weighted indexes at very low cost. Every time.

    Reply
    • Kevin August 23, 2020, 1:28 pm

      What he said ^^^

      Reply
  • TomTX August 23, 2020, 11:04 am

    Heh. We had this discussion in the forum back in September 2019:

    https://forum.mrmoneymustache.com/investor-alley/are-index-funds-unethical/msg2464669/#msg2464669

    Note that the ESG mutual fund at Vanguard has a longer history, so you can look up charting going back 10 years. VFTNX vs VFINX.

    When I did the analysis, the ESG version beat the standard version of the fund for 1, 3, 5 and 10 year returns. On the 10 year, ESG on average had about 1% higher return per year.

    I’m totally swapped over to Vanguard ESG, other than what I can’t move out of my employer’s retirement program.

    Reply
  • Leif Kristjansen August 23, 2020, 1:07 pm

    Oh man I just released a huge article to n SRI investing.

    I researched the pants off it and it’s roughly the same returns according to a lot of super reputable sources. Even if it’s a tiny bit worse you’re saving the world :p

    Plus there is a ton of money moving into it via millennials and gen z so it should grow faster than evil companies :)

    Reply
  • mike August 23, 2020, 1:30 pm

    It’s interesting to see your post on the same day as this Rolling Stones article: https://www.rollingstone.com/politics/politics-features/retirement-private-equity-trump-administration-wall-street-1047576/ talking about new rules that may impede the ability to invest in ESGs through a 401k (and some other highly questionable and potentially detrimental changes).

    Reply
  • Cerealspiller August 23, 2020, 1:32 pm

    So if we believe in the premise that how we SPEND our money has a much greater impact than how we INVEST our money, the strategy seems simple:

    1) Invest to maximize our returns. By making more money, we can then…

    2) Spend more money on things that advance our value system

    Easy peasy.

    Reply
  • DavidC August 23, 2020, 1:37 pm

    I always love your perspective on everything MMM, but I am wondering if your thoughts here are tinted by a confirmation bias. Is it possible that you wish for ESG to have a higher return and therefore, you found a limited data set that supports that? I think its quite possible that the the reason ESG funds have slightly out performed the broader market over the past two years could be due to the drastic under performance of oil stocks due to both, a massive drop in oil demand from Covid-19 and the oil price war between OPEC and Russia. If you look at sector specific funds, the energy sector really has been one of the worst performers over the very short timeline you used. Check out VDE, which is still down over 50% since Covid-19, while most of the other sectors have mostly or fully recovered.

    Also as others have mentioned in the comments, I have also read that there is some evidence that seems to suggest (but obviously doesn’t prove) that vice stocks, particularly alcohol and tobacco stocks, outperform the broader market in the long term. I’m not saying I buy into that idea. It could certainly be true that ESG stocks and funds out perform their non-ESG companions. All I am saying is that there seems to be conflicting (perhaps anecdotal) evidence supporting either position, so I am in the camp of “I don’t know”.

    Besides that, I 100% buy into your point of view that “your spending dollars will probably have a much bigger impact than your investment dollars”. I try to be fully informed (as much as possible) about where my spending dollars are going and worry less about my investments, letting them do their thing on their own.

    Reply
  • Kruidigmeisje August 23, 2020, 2:10 pm

    My investments have been ESG mainly (incl a hefty management fee), as I am lucky enough to bank with one of the few banks that banked sustainably 25 years ago (ASN). Plus a local peet2peer platform since 10 years.
    Still made it in decent time to FI, just as soon left home (hurrah since 1 apr 20). So it is working decent enough, I would say.
    Now I can spend my time doing what I-me-myself want. Which in my case is trying to figure out what the finance industry could be doing to get us out of this CO2 mess, and advocate for that. Even become a paid gig, but we will see.
    And cycling. Just finished a 4 week trip.

    Reply
  • Max August 23, 2020, 3:25 pm

    You mentioned “shareholder activism” and the ability to have an impact on a company from the inside. What do you think about something like this: https://www.greengovernance.org

    Basically the idea is to hold the same exact stocks as e.g. VTI, but specifically vote for green policies.

    Reply
  • hannah August 23, 2020, 3:44 pm

    Enjoyed reading this article. I am now interested in ESGV. I currently don’t have Betterment, but will look into it and maybe put a little amount to try it. However, my active 401K accounts from work and traditional IRA accounts are invested in either VTI or VOO, and I continue to add to these accounts or it may have dividend reinvestments. Will it be possible to select ETFs in Betterment that are not VTI or VOO so that it doesn’t have a wash sale issue? Or does anyone have a suggestion on how to deal with these? Thanks1

    Reply
  • Drew Resnick August 23, 2020, 3:50 pm

    Long time fan here! I was wondering if you had any thoughts about the argument that market efficiency negates any value that SSI would have on determining share prices. In this case, the argument is that there are too many professional financial analysts doing share purchasing decisions based on free cash flow modeling, ratio analysis, etc. such that this brings shares to an efficient price where there is no arbitrage available for those who would want to take advantage of the mispricing due to SSI-based investors.

    In other words, the argument is that your decision to invest based on SSI would ultimately have no effect on share prices due the no-arbitrage price not including this adjustment. This has been my argument, at least, as to why I stick to traditional indexing. As you say in the article, your product purchasing decisions DO matter very much, but your investment decisions do not have any effect on corporate governance, in my opinion.

    Reply
  • Carlos August 23, 2020, 5:52 pm

    Me too. I got into ESGV late last year largely to divest from fossil fuels. I don’t like them for environmental reasons and I also think they will underperform the market. You know something is up when oil fields are installing solar to more economically extract oil.

    There was a podcast on the murkiness of ESG. I’m hoping that more money pouring in will help clarify the meaning. https://www.greentechmedia.com/articles/read/the-wild-world-of-esg-investing

    Reply
  • Suchot August 23, 2020, 7:01 pm

    I put more focus into buying mindfully – I think it’s so important. The other type of socially-responsible investing I do is lend money through Kiva. It’s an org that provides micro-loans to individuals or small businesses around the world that might not normally qualify for them for various reasons. There are all sorts of parameters you can sort for when looking for a loan to contribute to. For example for me, I prefer to contribute to veggie crops as opposed to animals for farming loans. You can choose a female-led business or a male-led business, etc.

    Reply
    • Mandee August 24, 2020, 10:10 am

      Yes! I’ve been using Kiva for years. It’s such a great way to connect with people throughout the world and make sure the money I’m giving is going to a cause or person I want.

      Reply
  • James August 23, 2020, 7:13 pm

    I’ve been using ESG/SRI funds for a few years, trying to emphasize exposure to the E factor (low carbon intensity, greener tech) while also trying to avoid exposure to certain companies. Last year I switched to SUSL for my US exposure because it excludes certain large caps (such as Facebook), plus some BRK.B shares, and the rest of my core portfolio is ESML, VSGX, plus a few tech funds and individual stocks.

    I’m also doing what I can as a consumer to send direct messages. I’ve been relying mostly on bikes and public transit for 15 years for my daily transportation, I’m a vegetarian because of the lower environmental impact (I also try to focus my buying on local produce for similar reasons), and I wear other people’s discarded clothes (sold in thrift shops) for environmental and social reasons.

    Reply
  • Nicole Casey August 23, 2020, 7:25 pm

    That’s cool and all but….what is with that bike?!? MMM has a full squish e-mtb in the pack now? I need details on this ride and if you take it out on the singletrack.

    Reply
    • Mr. Money Mustache August 23, 2020, 9:21 pm

      This new bike is so much fun! But I don’t use it on the trails – I consider those a holy ground that must be respected by only traveling with muscle power.

      However, the full suspension, hardcore tires and strong disc brakes make it an excellent street motorcycle for high speed travel around town (and to and from nearby Boulder at carlike speeds). Lots of airtime and easy cutting across fields and gravel and gnarly abandoned parking lots!

      Reply
      • Quez August 25, 2020, 5:39 am

        When will you do a post about THIS BIKE?

        Reply
      • Mike Spangler August 28, 2020, 4:10 pm

        I hope you have a motorcycle license for that bike. You are way over the limits for unlicensed operation.

        Reply
        • Mr. Money Mustache August 31, 2020, 7:54 pm

          I do have a motorcycle license and lots of training for both on and off-road motorbikes. But even so, I am strongly against the current e-bike speed limits. They are super lightweight vehicles and extremely safe (i.e less likely to harm pedestrians and other cyclists), compared to any type of car or truck. And incredibly eco-friendly. Therefore we should change the rules to encourage them as much as possible. Faster ebikes mean larger car-free commutes become possible.

          If anything, we should change the manufacturing rules for CARS so they automatically cannot exceed 25MPH when on any residential or high-density city streets, and can never exceed 95MPH in ANY situation.

          So my making, riding, and promoting faster ebikes is my form of civil disobedience and advocating for change.

          Reply
          • Ms Blaise September 1, 2020, 7:06 pm

            hear! hear! I love bike riding as a form of civil disobedience.

            Reply
  • Schuyler August 23, 2020, 7:53 pm

    Hey MMM –

    I recently bought some ICLN – a clean energy ETF. Thought you’d like to know about it if you don’t already. It’s been outperforming the index considerably since I bought.

    Reply
  • Court August 23, 2020, 8:00 pm

    As you highlighted, the fact that Berkshire and NextEra are omitted from this list is MIND BOGGLING to me. As a former NEE employee, I can say with 100% confidence that it should definitely be on this SGI list as it is North America’s LEADER in power generated from the wind and sun. I was assuming it would end up moving higher up on the list, so a complete shocker to me! It is the only single stock I own and I am a proud owner of it. If the largest renewable energy gets the hack, I don’t know have the confidence in those making these criteria selections for these SGI funds so I’ll be sticking with the general VTSAX index until I see an SGI fund that actually is aligned with my values. I love that SGI funds are picking up steam but really wish there was a true SGI fund out there…

    Reply
  • uti August 23, 2020, 10:40 pm

    Does anyone know what the difference is between VFTAX and VFTNX. They are both socially responsible domestic mutual funds focusing on large and mid-cap stocks. One has an ER of .14% and the other .12%. What’s the difference?!?!? Anyone out there know? Thanks!

    Reply
    • Arkansas Kate August 28, 2020, 12:17 pm

      Ooh, ooh, I know! …Despite not currently being the target buyer of either. (I’m at the beginning of my FI journey.) VFTAX is their “Admiral Shares” ETF with a minimum buy-in of $3000, and VFTNX is their “Institutional Shares” version, which nets you a slightly lower expense ratio for your generous minimum investment of five MILLION dollars. The no-minimum versions of their ETFs are labeled “Investor Shares”, and it looks like this one, VFTSX, is not available to new investors at the moment… :(

      Reply
  • Teri Babcock August 23, 2020, 11:02 pm

    First of all, it helps to remember a fundamental piece of economics: your spending dollars will probably have a much bigger impact than your investment dollars. This is because you are sending a direct message to the world rather than an indirect one:

    So glad you explained this. I tried to explain this back in the ’99/00, to people who thought that their investing in green mutual finds (which were performing awesomely because they were tech heavy and it was prior to the tech meltdown) would ultimately destroy the bad companies share price and then their business, while still supporting said companies with their lifestyle.
    People just couldn’t understand that share price had no effect on the companies operational cash flow, and that if they wanted to ‘put their money where there mouth was’ it meant making inconvenient or uncomfortable lifestyle choices to not support that business model.

    Reply
  • Liam August 24, 2020, 12:20 am

    Let’s Fund did a study on this and found that it’s typically better to invest in the market and then use the gains to donate to effective charities: https://lets-fund.org/impact-investing

    Reply
  • PB August 24, 2020, 12:47 am

    MMM – I’m a long time reader and fan, and recently retired at the age of 43 from a job in investment management thanks partly to the virus called mustachianism that was unleashed in my head. I was pumped to see the headline to this post, and I 100% believe as you put it, that “the nature of capitalism itself may be starting to change”. I hope to be part of that change in the not-too-distant future via some ideas I have, but in the meantime I tweet about the topic occasionally at @GrowSustain.

    Given that I’m such a MMM fan, I hate to say anything critical of your post, but I think there is one really big problem with what you are advocating — putting money into ESGV, or any passive ESG product, will have ZERO impact, at least as they are currently structured. In fact I believe it may have a net negative impact.

    A couple points:
    1. For one to index, you must believe that even if most people index it won’t impact stock valuations. You happily free-ride on active managers setting the price. (FWIW I think that indexation has gotten too big, and is now impacting stock valuations, but I’ll save that argument for another day). If you believe indexing doesn’t affect stock prices, then you can’t argue that buying a different index that excludes a few industries will now start to impact the price of the excluded companies (and thus the companies cost of capital) or somehow impact how those companies behave. It’s in direct contradiction.
    2. You mention how shareholders voting can create change. I’d argue that proxy voting at asset management firms, but in particular at the passive asset managers who have less money to spend on these sorts of activities and thus historically have tended to outsource voting decisions to proxy vote advisors like ISS, has been an afterthought for many years and has contributed to the widening wealth gap and decreased the general amount of oversight placed on corporate management teams(which enables more bad behavior). In the ‘60’s the average CEO was paid 40x their average worker. Today it’s 300x! From a Morningstar study on corp governance voting done in 2019: “Five of the 10 largest fund families—Vanguard, BlackRock, American Funds, T. Rowe Price, and DFA Funds offered by Dimensional Fund Advisors—voted against more than 88% of ESG-related shareholder resolutions.” Note that Vanguards ESG funds don’t vote any differently from their non ESG funds – so here you probably have a net negative impact with your money.
    3. Any passive index only cares about one thing – liquidity of underlying stocks. They own a ton of stocks because if you want to be the low price leader, you have to make it up in scale! This makes it nearly impossible to really focus on the top ESG firms. They can’t be concentrated. So yes, ESGV doesn’t own Exxon, but to offset that they own 10bps more of Coca-Cola than in VTI. Within most industries outside of energy, they will still own the companies that score poorly on ESG metrics… they will just own less of them than they do for the same stock in VTI.

    So what should one do? MMM says in the article that “ your spending dollars will probably have a much bigger impact than your investment dollars. This is because you are sending a direct message to the world rather than an indirect one.” I say, why not send a direct message with your investment dollars as well? Why not man-up (or woman-up) a little and actually consider spending some pocket change to have some real impact?

    I know this is heresy in this community, but if you want to impact things, why not pay the PRINCELY sum of $5-7 per $1000 invested per year(actively managed ESG funds used to be quite overpriced, but you can now find some very good ones at 55bps expense ratio’s), and employ an actively managed ESG fund to work on your behalf? If you invest in a fund at one of the firms that truly put ESG front and center, then for that MASSIVE out of pocket expense, you will get the following:
    1. A portfolio of something more like 50-100 stocks. If you think impact comes from not owning (divesting) stocks with poor ESG scores then you will actually accomplish that here. And if you think that the stocks of companies that take better care of their employees, and treat the environment better, and have better corporate governance will outperform in the long run, then you’ll get more bang for your buck as well in terms of outperformance by concentrating in the best companies.
    2. Not only that, they will vote much more aggressively on proxy votes than Vanguard ever will. It’s unlikely these firms will outsource to the proxy advisor firms because proxy voting is core to their value add.
    3. More importantly, some of these firms will actually do the hard work of making proposals to have new topics voted on at the AGM’s. Points 2 and 3 here will bring back some sorely missing oversight on today’s corporate management teams.
    4. Lastly, a more nuanced form of impact, but one that shouldn’t be underestimated, is that your hard working portfolio manager will actually meet with these companies managements and ask hard questions – how are you working to reduce your carbon footprint, how can you justify paying yourself 300x your average worker’s pay, what are you doing to have a net positive impact on your community, how might all of these things translate into our company earning more/less money in the future than it otherwise would? The more money this portfolio manager manages, or the greater % of the company he/she owns via their fund, the more managements will have to listen to them. This is a great example of how IMPACT can actually SCALE with size! Passive funds don’t talk to managements!

    Reply
  • Stubblestache August 24, 2020, 1:45 am

    There’s and important technical factor which I didn’t see mentioned which is significant for ESG/socially responsible investors.

    Typically, if a company wants to issue ESG/socially responsible investing, it has to allow an ESG auditor in to look at the use of proceeds and the deal, so that the auditor can give their stamp of approval and everyone can see things are actually above board and socially responsible.

    What this means is that ESG debt issuance heavily favours companies that are already in a good solid position, financially and operationally, because they’re going to have to report in substantially more granularity to auditors and investors than a company issuing regular, conventional debt.

    To put it simply, it is much harder (though of course not impossible) for an ESG/socially responsible debt issuer to hide skeletons in their balance sheet and take investors by surprise with billions of dollars of hidden or missing liabilities, like happened with Wirecard in Germany this year.

    This + the push almost unilaterally globally for more social responsibility from companies, means ESG is a very strong prospect from a pure investment point of view. It’s also nice to be doing something decent from an investor standpoint!

    Reply
  • Barbara August 24, 2020, 2:38 am

    He all
    Lately I found this company: https://yova.ch/en/
    They specialized in investing in a better world aka sustainability.
    I like how they do it since I do not want to do all the research myself.
    I understand that spending money (consuming) has more power. Since I am there already on a very good path, I also like to look at the investing one.

    Reply

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