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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.

And 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?

Previous Post:
  • Martin August 24, 2020, 2:38 am

    I joined Ethical Consumer (https://www.ethicalconsumer.org) to find their lists of ethical investment funds and fossil free investment funds. They rate funds (and everything else you can imagine) on a strict set of criteria.

    I have put all my investment money into a selection of these funds. Sure, I won’t make the absolute, 100% most amount of money possible, and my choices are limited, but it’s more important to me to do my best to not fund companies that are unethical.

    Having said that, most of the funds I’ve invested in have gone up by over 4% in the 3 months since I started investing, and have been outperforming their benchmarks for a long time.

    Reply
  • Ruth Mottram August 24, 2020, 2:47 am

    My Danish pension fund is mutually owned by apparently very ethically minded members – they have an entire page on the ethical choices that we as members have made over the years.

    https://mppension.dk/ansvarlighed/sadan-arbejder-vi/ (IN danish but google translate works).

    As a result of divesting from fossil fuel stocks the last couple of years the fund has been one of Denmark’s top performers, especially after oil stocks crashed this year.

    So apparently this stuff works

    Reply
  • Mo August 24, 2020, 7:33 am

    Hi MMM,
    First time making a comment here, have been reading the blog for about 2 years and absolutely love it! Thanks for sharing all you wisdom, from bikes to stocks!
    My question is if an ETF like VTSAX (or VTI) has stock in the top companies, won’t the ESGV eventually become the new VTSAX when oil companies and such wither away and die? If we just stay in VTSAX it seems those greener companies will rise to the top once the rest of the world realizes we need to be more sustainable.
    Mo

    Reply
  • Vilx- August 24, 2020, 7:54 am

    Ethical investing? Huh, what an interesting combination of words. I’ve never really understood how any investing can be ethical in principle. And I’ve tried, I’ve really tried. But what it has always inevitably boiled down to is this: an investor is reaping the benefits without putting in any work. At all. This is basically the textbook definition of the word “parasite”. Money doesn’t come from nowhere (well, except when a government just prints it, but that’s generally agreed to be a very bad idea). Every dollar, euro, pound, etc. everywhere has been produced by someone’s blood sweat and tears. And an investor just… takes a part of it. For no reason at all except a shady deal where he managed to hoodwink someone into giving a part of the fruits of their labor away for nothing in return. And somehow, as a society, we have normalized this. And even worse – the way the system is set up, it’s exponential (a property often talked about in this very blog). This means that the richer you are, the faster you keep getting even richer. That’s… just wrong, isn’t it? I keep trying to wrap my head around this, but just can’t get past these basic stumbling points.

    Reply
    • Vilx- August 24, 2020, 7:56 am

      Mind you, I haven’t been able to come up with a better system. No matter which way I try, everything just… sucks – in one way or another. But this current “investing” system doesn’t seem right either.

      Reply
      • Marie August 24, 2020, 3:33 pm

        Hi Vilx,

        I agree and the global pandemic has made this abundantly clear. For example, UPS stock is at an all time high. I sit back and collect dividends from my bedroom as a direct result of essential workers risking their lives to sort and deliver packages. What can we do except bow out of the system?

        Reply
    • Matt M. August 25, 2020, 6:27 pm

      Vilx – I respectfully disagree. Investors are part owners of the businesses they invest in. (This is not a shady deal. When you buy stock, you are a shareholder – part owner of the company). Nobody forces a company to sell stock, they can remain “private.” An investor’s capital (money) allows these companies to operate. For example, Tesla was not profitable until a few quarters ago. The reason they were able to function, grow and try new ideas is that they raised money by selling part of their company to investors. This money bought them time and gave them resources to run the company.

      Reply
  • Mike August 24, 2020, 7:55 am

    I loved this sentence:
    “…capitalism is just an expression of human behavior, the nature of capitalism itself may be starting to change.”

    I’ve been thinking a lot about capitalism and its pros/cons vs other economic systems. Because I actively invest in this system and benefit on purpose, I feel that I am by default a capitalist. However, some people in my circle argue that capitalism is inherently bad for both workers and the environment by design. Personally, my current stance that it is up to the government to ensure that these systems are regulated. Any system can be terrible if let to run amok.

    Would love to hear your thoughts on the subject.

    Reply
    • Mr. Money Mustache August 24, 2020, 9:34 am

      And government is just an expression of human behavior too!

      Which is why I am not happy with the current trend in US politics, most personified by the Donald. Having differences of opinion on policies is one thing – we should all discuss and argue over policies. But sowing discord and using racism and religion as tools to get people irrationally fired up and angry at each other, cutting the country into two teams that hate and villify each other – this should not be allowed or voted for.

      It’s easy to get a bunch of people mad. We are mostly just gullible, tribal apes. It’s much harder (and more worthwhile) to get people to rise to higher ideals and STOP hating each other and cooperate. It’s also much more profitable. I’m surprised that Republicans aren’t willing to adopt this strategy as well.

      Reply
      • Andrew August 24, 2020, 10:20 am

        Most personified by the Donald? For sure it’s there, but not so sure about “most.” If you turn your head you may also see the left’s identify politics and rising Marxist ideologies for the most pernicious seeds of discord. Those ideology necessitates division and perpetually ignores peaceful and productive reconciliation. E Pluribus Unum, not E Unum Pluribus.

        Reply
        • Mr. Money Mustache September 24, 2020, 1:35 pm

          Good point and I totally agree – thanks for calling me out on that.

          The identity politics, billionaire bashing, cancel culture, I-hate-you-forever-because-you-didn’t-say-it-in-the-latest-SJW-approved-way of the left wing are completely counterproductive as well. On the Democratic side, I feel that Senator AOC uses this tactic, and I dislike it just as much as when I see Trump doing it.

          I felt these effects recently when I happened to express a different view on how we should describe the seriousness of the current pandemic. I suggested that journalists express the excess deaths as a percentage of normal for the period (14% above normal) , rather than just a number (200,000 or whatever), to help non-data-scientists understand the context.

          Thousands of instant enemies and indignant Twitter unfollows just for sharing a graph!

          It’s not the idea of differing policies that deserve scorn. I’m fine if we want to discuss wildly different tax rates and healthcare policies. But nobody should be encouraging mass outrage. In my dream world, it would be numbers and charts and working to get to the bottom of everything – better decisions come from better data.

          Reply
      • Ms Blaise September 1, 2020, 7:23 pm

        Lovely writing and every now and then a lethal face punch like this, to make me think. Mark Manson does the same with his Monday email which changed my view of nuclear power ( I had previously though nuclear=bad), and reminds me that I don’t have to have an opinion on everything. He also argues that a person is the product or embodiment of a historic trend – or tribal apes, as you so poetically say.
        Keep up the good work.

        Reply
  • TJ August 24, 2020, 7:56 am

    Hi all,
    I have found a great deal of satisfaction investing in worker cooperatives, whether in local businesses using the Regulation Crowdfunding rules or Cooperative loan Funds like

    Shared Capital Cooperative: https://sharedcapital.coop/
    Local Enterprise Assistance Fund: https://leaffund.org/

    Speaking to the point of a lot of small businesses closing due to Covid, these funds target small businesses that are run mostly as worker-cooperatives, producer/farmer cooperatives, or consumer cooperatives. To be transparent, they offer a nominal return usually between 1 and 4% depending on the length of the investor note. But I have begun to think about this – if a business makes a profit, then the business needs to balance who to offer that profit to. Is it shareholder-owners? Is it employees for a job well done? Is it to invest back into new growth? These are all tough decisions, and can be concentrated in very few hands.
    Cooperatives of many kinds have distributed ownership, aka distributed decision making. It feels more resilient to me. So when I am only getting 1-4% (which I have heard Vanguard creator John Bogle say that we should exprect lower marker-stock returns in the coming decades as so many of our large businesses mature and do not experience double digit growth), I fully expect these companies to make smart decisions to be able to continue serving their owners (workers, who stand the most to lose if a business goes under!) and their customers. Its also harder to make extractive business decisions when there are so many people who have to agree on that.

    Reply
  • Felix August 24, 2020, 8:17 am

    Can anyone tell me why 3M doesn’t make it into the ESG fund?

    Reply
    • David J Watson August 25, 2020, 2:52 am

      Surprising given all the PPE they’ve made for COVID crisis!

      Reply
      • Felix September 3, 2020, 4:00 am

        I know they make tapes and PPE as I’ve used their products, but I assume there is something they do I don’t know about? Or is it an error by the fund to not include them?

        I assume MMM will be familiar with 3M too due to his construction work.

        Reply
  • SimpleYoung August 24, 2020, 10:04 am

    If you’re including Microsoft, the abbreviation should be FANMAG instead of FAANG. Honestly, I think we should all just eliminate Netflix and discuss “The Big 5” (5 largest by market cap) instead of playing with alphabet soup, but that’s just me.

    Reply
  • Mandee August 24, 2020, 10:21 am

    Alongside ESG, there is a little-know field called Impact Investing.

    “Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” (https://thegiin.org/impact-investing/need-to-know/)

    This industry is so new that there are no index funds available currently, but it’s something to keep on your radar in the upcoming years to see what happens in that industry.

    Reply
  • Owen August 24, 2020, 11:19 am

    It’s so difficult to know which company is really “socially responsible”. First, because these huge companies have operations and supply chains which are impossible for outsiders to fully comprehend, and secondly (as you pointed out) there is nothing close to an objective measure of what socially responsible means. For example, while you really praise Google (and I recognize that this is true to you), to me, Google is one of the most evil companies currently in operation. I base this off of their near monopoly combined with their heavy handed social engineering (suppression of search results, deplatforming, normalization of no privacy, development of a Chinese state approved censored search engine for Mainland China, and so on…). They, along with Twitter, Amazon, FB, etc are working to implement in the West Chinese style suppression of wrong-think, the only difference being that it is implemented by private corporations rather than a single gov’t. In a country which no longer has free speech, frankly it doesn’t matter to me what kind of cars are driven. Civil liberties are the foundation of social responsibility. I do feel quite hypocritical having most of my portfolio in index funds which are FAANG heavy…. but I have switched my gmail to protonmail, and deactivated my Facebook. So in a way, I think I am following your advice.

    Reply
  • Marie August 24, 2020, 3:26 pm

    As You Sow created a great tool for analyzing and ranking funds that align with your values. Search for fossil free funds, deforestation free funds, gun free funds, etc.

    https://www.asyousow.org/invest-your-values/

    Reply
  • Peter Koehler August 24, 2020, 5:02 pm

    Of the three e-bikes you linked (Ride1Up, Luna, Rad) – do you have a recommendation / favorite?

    Reply
  • Sean Riley August 24, 2020, 5:26 pm

    MMM I am glad that you posted on this topic as it something I think about often. Not just in the context of investing, but in the context of existing/consuming. There are number of ways that I can reduce my yearly spending if I don’t mind using companies that I find are very actively doing damage to the world. I wonder how MMM and other readers make that trade off. Personally, I find Amazon to be up there with oil companies when it comes to the damage it is doing to our communities. The business model is based on very unethical and I think illegal pricing designed to kill local businesses and the environment (encourage consumption and shipping small items in large boxes). However it was and still is very difficult to quit Amazon. I pay more, and receive items in less time (if it’s not available locally) than ordering directly from manufacturers. But I feel it is right do so, even at a monetary loss for me. I suppose everyone has their own personal judgments on what companies are damaging the world and decide how they want to do business with them.

    Reply
    • Mr. Money Mustache August 25, 2020, 12:41 pm

      I wonder about Amazon occasionally too. In some ways, I think ordering stuff online and shipping direct to houses is much better than having copies of retail stores in every town – because those tend to come with parking lots and traffic and busy roads that destroy the livability of an area. With Amazon, a single efficient delivery van (which will soon be an electric one made by Rivian), makes short hops between adjacent houses so its very efficient on a per-person basis. Even when you include the extra cardboard.

      What DOES build a community much more than retail stores is walkable/bikeable paths to get around,
      public parks and plazas, restaurants, pubs, theaters, downtown offices and coworking spaces, etc.

      So in my own idea of an ideal city, the manufactured products might come from places like Amazon, but there would be still be plenty of locally produced simpler things, sold in markets or cool downtown shops or whatever. We could encourage restaurants by giving them more favorable tax treatment, since they are a public good. And there would be no car parking lots at all.

      Reply
      • Sean Riley August 26, 2020, 5:06 pm

        Good points MMM. Is it better for one person to drive to a store to buy a paint brush or to have one van deliver the paint brush to your house en route to another delivery nearby? I recently ordered some school supplies for my kids online and each item came in a different box. One box could have held a pair of boots but instead had a single pencil sharpener in it. But is that any worse then everyone getting into a car and driving to a local hardware store to buy one single pencil sharpener? Regarding Amazon though I can’t get over one company having so much power. As much as they try to be good , like Google, the end game is profit and when there is no one else to complete in that space it seems bad for society and earth. Maybe it will turn out like the giant Costco in the movie Idiocracy where you have these mega stores where you can buy virtually anything (including a law degree). Or maybe the giants mega stores will actually be warehouses with robots pulling down products and loading them into electric delivery robots! Who knows. But I think it’s good for everyone to think through who they do business with, whether with investing or consuming, as it does matter.

        Reply
      • Nick September 18, 2020, 1:01 pm

        This sounds like a rather bizarre rationalization for continuing a behavior that, as it stands today, has an enormously negative effect on society and the environment. Yes, if every item you bought from Amazon directly divested from big box stores, then there could be a silver lining to the massive amounts of waste and unsavory labor abuses that your Amazon purchases contribute toward… but they don’t. Target, Walmart, Costco, etc are all thriving right along side Amazon. It’s like saying, “All the garbage I create is actually a good thing. Someone just needs to invent a way to turn it into clean fuel!”

        Reply
        • Mr. Money Mustache September 19, 2020, 8:26 am

          Ahh, but *IS* Amazon negative for the environment, on a per-product basis? (hypothetically assuming for a moment that consumption were equal in a big-box world vs an Amazon world)?

          That is something I don’t have data on to compare. My point was only on urban planning and land use, just because it’s something I happen know more about at the moment.

          Also, if you look at big-box retail and malls in general, I think you’ll find that they ARE on a multi-decade decline, thanks to online shopping.

          I am not sure quantitatively about how much better we are using our urban space on a national level yet (here in Longmont they have been leaving this useful central land empty and people drive past it while the town continues to sprawl out on the extreme fringes). But I’m hoping that the natural pricing pressures of scarce land and expensive housing eventually start encouraging that space to be used for housing.

          Reply
  • David J Watson August 25, 2020, 2:49 am

    I thought about ethical investing for a while. I am a nuclear power advocate – it’s a big part my life. I know that nuclear energy is not unethical but the vast majority of the “educated” classes believe it is bad. They haven’t really looked into nuclear, they’ve just heard a lot of bad stuff about it. That got me thinking: how many other things that we consider bad are actually good, and vice versa? If only there were some national organisation independent from the capitalist system that could assess that for me…..oh, wait, that’s what government regulation does! In the end, I decided that if a company is operating within the law in a liberal country e.g. US or UK (my country), then it passes the test for me. Anything else is just outsourcing your morality.

    I you think you need ESG funds to sooth your wealth-guilt, then remember that capitalism has brought billions of people out of extreme poverty.

    Reply
  • Brian Bailey August 25, 2020, 4:23 am

    Nice to see you back at the blog, MMM.

    As a practicing (or perhaps, aspiring) Mustachian these past several years, I’ve taken an interesting detour recently: rather than investing more money in the stock market, I’ve bought a decrepit, trash-strewn, beautiful farm at the edge of my town (and a bikeable 7 miles from my house). We are working to develop a fallow field into a market garden to supply our local community with fresh, organic, no-spray fruits and veggies.

    This is year 1, so each tomato probably cost us something like $126. Farming is pretty capital-intensive, and there is an endless array of equipment that can make life easier, with the line between “necessary” and “convenient” getting pretty blurry in the middle. We are trying hard to shop with a spring-loaded middle finger when considering whether we REALLY need that new tractor implement.

    But I do expect to be cash-positive in year 2, and moreso in year 3. And I love the work! Being outside, doing physically demanding tasks, nurturing life at every turn. My hourly rate of pay is probably never going to even approach my desk job, but it should be pretty respectable once we get in the groove.

    So there’s another investment approach: buy yourself a job whose output is a social good. Just watch out for that fancy new tiller: it’ll cost ya a few thousand tomatoes.

    Reply
  • CommitmentDevices August 25, 2020, 9:22 am

    I’d rather just have a Vanguard ESG target retirement date fund, but those don’t exist yet so this is how I build it myself.
    * ESGV – Equities – US – 55%
    * VSGX – Equities – Intl – 35%
    * EAGG – Bonds – US – 7%
    * BGRN – Bonds – Intl – 3%

    For allocation %, I try to match Vanguard’s target retirement date fund for my retirement date.

    End result is a decent approximate of a total world portfolio with an ESG filter and very low expense ratios.

    Reply
  • Amanda V August 25, 2020, 11:10 am

    Have you considered adding a whole house fan to your house to lower your energy expenditure even more? We are in the greater Boulder area as well and it works great here. Love using it in the evenings to cool the whole house down and in the mornings to really chill the house before it gets too warm. If you have a basement and attic, it works great to move cool air up from the basement and to expel hot air out of the attic. We have seen a huge shift in our energy bills in the summer. It’s killing me right now not being able to use it with all this smoke.

    Reply
    • Mr. Money Mustache August 25, 2020, 12:33 pm

      Of course! I’ve always done that with all of my houses and even the HQ building. It may be a bit less smoky here in Longmont, so the method is still definitely in use (plus the house wouldn’t really be able to filter the outside air anyway if I had the windows closed, would it? If it were airtight enough to keep out smoke particles, we’d run out of fresh air to breathe!)

      Reply
  • Andrew Swain August 25, 2020, 11:13 am

    A great Ted Talk on this subject back in 2015 at the London Business School… This research points to the socially responsible companies (at least in respect to how employees are treated) tend to outperform significantly YoY. Definitely worth the watch if you have a spare 15 min….

    https://www.youtube.com/watch?v=Z5KZhm19EO0&feature=youtu.be

    Reply
  • CK Smithson August 25, 2020, 12:26 pm

    I would argue defense companies are ethical as they keep us free; who would want an unconstrained North Korea running amok? Or Iran? And we were very thankful for them in WW II Also, Lockheed Martin does not make munitions.

    Reply
  • Chris Bullock August 25, 2020, 12:45 pm

    I’m so glad you picked up this topic…. a really good further exploration of the topic can be read in Clean Money Revolution.

    It makes a good case that ESG investing is where the smart money is going and it can avoid equity traps such as fossil fuel industry. In keeping with your optimistic view of the world, our increasingly wealthy world has more options for choosing our preferred future and ESG companies represent that shift and will likely outperform. We have an urgent need for capital to be invested in the ‘new economy’ to transition to a cleaner, greener future and making investment choices to support that are very likely to be more lucrative and rewarding (not just financially). I highly recommend giving the book a read for a more thorough explanation.

    I agree that spending choices are even more powerful, which is what I love most about this blog and the impact it is having over a growing segment of our affluent society.

    Reply
  • Karl August 25, 2020, 1:24 pm

    I think that I’ll add that on the local end we made our major investment in a 10kW solar array on our home along with replacing our 2 (yes we are car clown commuters) older automobiles with electric vehicles. This is not something you can do without a ton of savings and a definite plan, but the money would have otherwise gone into market investments or other home improvements. The big changes we have seen is that we have a solar system that covers 100% of our automotive fuel costs, and has reduced our home electric bill 30%. As a second hand result, we never fuel the cars or add oil, which has ended our support for big oil at home as well as in our investments. I am thrilled that we are in an area where 90% of our electricity is coming from clean nuclear plants and likewise happy that our excess power feeds into that same grid to minimize the periodic start up of the backup coal plants.

    Overall, I feel that we are making bigger progress with changing our behaviors at home, even though we have also made changes in our investments and general investment strategy.

    Reply
  • ryan August 25, 2020, 3:26 pm

    Thanks Pete for the insightful post. Best article I have ever read marrying investing, values, ethics and morals. Always wanted to better align my investing and values – you have provided the needed tools. Thank you!

    Reply
  • Debbi Harris August 25, 2020, 5:33 pm

    I am going to tiptoe in with a tiny suggestion. Your article was spot on for investments in the market. Might I also suggest that investors look at giving a little bit of their discretionary income towards Kiva loans? These are micro loans where you choose exactly what projects to invest in so you control the type of loan, the part of the world (there is a domestic arm), and your desired risk level. I treat these as charitable donations and sometimes choose loans with a high chance of default because the borrowers are living in circumstances that are truly awful but a more cautious investor could make a higher return. This type of investment is not a substitute for the stock market but does allow borrowers who will never be able to access typical credit to improve their quality of life while making you some money at the same time. MMM, I would be interested in your thoughts on alternatives such as microlending for a portion of one’s portfolio.

    Reply
  • Greg August 25, 2020, 5:55 pm

    I switched about half of my investments to SRI funds in 2013. The majority of that is currently VFTAX (formerly VFTSX), since they recently gave a discount on the expense ratio (.14%). I just looked at the return and Vanguard said it was 13.7%. The other chunk of money is in the SP 500 fund (VFIAX) which returned 13.5% since 2010 (expense ratio now .04%). I was worried at the time that the SRI fund would do worse and that I was justify potential investment loses due to my personal beliefs. However, like this article highlights, I knew I was being morally flexible since I did not change over all of my money or use a higher expense ratio company like Calvert (which I thought had investment funds most closely to my beliefs). I wanted to share the percentages to add some stats as MMM requested and was pleased to see that so far, the SRI fund is doing “about the same” as the SP 500.

    More importantly though is probably that I was able to make these investments for over 16 years due to not driving to work.

    Reply
  • Jaga August 25, 2020, 6:08 pm

    I find “As You Sow” to be a good way to explore options based on values.

    https://www.asyousow.org/invest-your-values
    Their tool for exploring low-fossil mutual fund and ETF choices is https://fossilfreefunds.org/

    Based on this info, I’ve begun to transition some of my VTSMX to choices that reduce my risk of exposure to stranded fossil assets. You can use your own search settings based on your goals.

    Reply
  • Natalie Smith August 25, 2020, 8:05 pm

    *raises hand
    Um excuse me, I need more information on how to build this bike over the other bikes, please. I’ve got an old 1967 Schwinn Varsity (steel) that really needs more power than these little legs can give it.

    Reply
  • Philippa Waterman August 26, 2020, 3:32 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
  • Amir August 26, 2020, 7:54 am

    Would you consider removing the Chase credit card links from your website? They are literally the worst bank in regards to funding oil companies and the grass-roots pressure on divestment has actually yielded some results, including a recent pledge from the company to avoid arctic drilling (albeit this represents only 1% of the oil investments)

    https://www.newyorker.com/news/daily-comment/money-is-the-oxygen-on-which-the-fire-of-global-warming-burns

    Reply
  • Michael August 26, 2020, 9:51 am

    Sorry MMM, you’re wrong on this point (otherwise, I love you man).

    Avoiding socially dubious companies as investments does the opposite of what people hope: Create change.

    By avoiding these companies, you get no say in how they are run, and assuming the share price is lower as a result, you also reward those that DO invest in them with higher yield. You are also not depriving that company of any money, since shares bought or sold are transactions with other investors – not with the company. That is, the company doesn’t get the money if you buy the shares anyway (barring specific equity raises and things like that).

    One could make an argument that you are driving down the value of a CEO’s stock and exerting pressure that way, but that’s a very indirect approach and remember that they likely only own a tiny percent of the company anyway.

    The correct way to affect positive social change is to PURCHASE SHARES in those companies and vote for socially-conscious board members, or invest in funds that will do this on your behalf. Or outside of investment, make consumption choices away from those companies.

    Reply
  • Travis August 26, 2020, 5:10 pm

    Pete, it’s as if somebody out there heard you. Exxon is no longer part of the Dow-30. Article discussing how/why:

    https://www.npr.org/2020/08/25/905818004/exxon-mobil-exits-the-dow-drops-its-oldest-member

    Reply
  • justonepercentbetter August 27, 2020, 7:04 am

    I’m one of those rare birds who chose real estate investment as a vehicle towards financial independence. One thing I value as a rental owner is providing quality apartments to good people at affordable costs. My crew is wonderful, maintenance issues are fixed timely and preventative care is provided quarterly. I’m not changing the world by any means, but proud of my little communities. Investing in these feels a tiny bit socially responsible and making the neighborhood a better place… That said, very excited at the trend towards socially responsible investing! I’ll keep an eye on this and diversify my investments in the future.

    Reply
  • Luke Wilcox August 27, 2020, 8:14 am

    Since there is so much difference of opinion about what makes a “good” company, it seems like it might be helpful to move the conversation a level down to impact-related data (things like amount of carbon emissions relative to peers, percentage of employees making a living wage, product-related fines, etc.). This data may be easier to align on what is good vs. bad.

    Unfortunately data like this is really hard to find and use, and it’s not yet measured in any standard way (though there’s a large movement toward standard corporate sustainability reporting through organizations like the Sustainability Accounting Standards Board). 

    I’ve spent some time working on gathering and showing this data in one place for free — haven’t cracked the code yet but you can see where we are so far at https://ethos.so. 

    The goal is to make impact-related data transparent and easy to use in picking brands, companies and investments that align with your individual values. We aren’t there yet but working on it. Would love any suggestions to help us keep improving — it’s totally free and we’re in the process of building it. 

    Reply
  • Alistair August 27, 2020, 1:08 pm

    Have you seen these nano-diamond batteries? Curious what your thoughts are about them? https://newatlas.com/energy/nano-diamond-self-charging-batteries-ndb

    Reply
  • raman August 28, 2020, 3:30 am

    Thanks, MMM, excellent article.

    I did a bit of digging to try and find the most effective ways an individual can make a difference for climate change. These include the following (many of which you’ve recommended over the years): downsized house, bike/ walk for local travel and commute, run one small economical car, went vegetarian, recycling and less food waste, more UK trips (where I live) rather than flights.

    Having made these changes I then explored solutions from Project Drawdown: https://drawdown.org/solutions/table-of-solutions – Some of the top solutions an individual can do include reducing food waste (check), health and education (for this I loan to kiva https://www.kiva.org/ ) and having a plant rich diet (check, and better for your long-term health).

    The big one an individual can effect is land sinks (including tropical forest reforestation) – for this is donate to Rainforest Trust – https://www.rainforesttrust.org/ – By protecting tropical rainforests (working with indigenous populations and using legal channels), they can have an out-sized effect for your dollar. Over the last year I’ve donated ~ £500 ($660) which has protected over 500 acres(!) of tropical rainforest. Its also highly rated on charity navigator (for transparency and governance).

    Appreciate that for Rainforest Trust and Kiva, these do not build my retirement pot, rather I see them as an investment in humanity’s future (and all your great advice over the years means I can divert some savings to these causes!). Lastly, as an investor, agree that there is a wholesale shift towards ESG and its not a fad (as you say, when the big investors get in on the act you know its real – Vanguard, Blackrock, etc). I also use CDP as a way to vet individual companies and the “A-list” correlates closely with your list from Vanguard.

    Thanks again for the great article.

    Reply
  • Karl hungus August 30, 2020, 8:43 am

    Oil is not going anywhere soon. Global demand goes up every year. As India/China continue to grow, their oil needs will only increase as well.

    Reply
    • Mr. Money Mustache August 31, 2020, 8:01 pm

      I’ll go on the record here to take the opposite side of this bet!

      My own guess: Global oil demand will begin a permanent and accelerating decline within the next five years. The present exponential switchover of ground transportation to electric vehicles will be the biggest factor (60% of demand gone just from that), but eventually it will only be used for industrial purposes like plastic and fertilizer.

      Reply
  • Arno September 1, 2020, 8:49 am

    Happy to see the idea of ESG/SRI is not just something I’m wondering about :)

    However, I am missing the main reason that drove me into ESG/SRI-investing: I just don’t want to make money from things I consider bad. I personally find it hard to align “I refused to do military service” with “My money comes from bioweapons manufacturers”.

    Of course, I’m compromising with SRI ETFs here, not going all the way to single stock picking or just looking for an active management that aligns with my ideals (for a price). But that’s the general driver why I’m buying ETFs based on MSCI World SRI and MSCI EM SRI (I’m based in Germany, so the exact product probably won’t be known here) instead of the regular versions.

    MSCI SRI have a combined exclusion/best-in-class approach, and while I do not agree with all their criteria, that probably does explain why (just as an example) Pepsico is in there, The Coca Cola Company is not, Coca Cola European Partners PLC is…

    Feel free to disagree with me,
    Arno

    Reply
  • drplastickpicker September 3, 2020, 6:13 am

    Thank you MMM. I have been thinking about this quite a bit and your post really broke it down in an easy to understand manner. On the environmental front, a bunch of us have been working to get big funds to divest of fossil fuels. Harvard Forward elected 5 members onto the alumni board, and they were mosty part of an environmental slate of candidates and one was a diversityt candidate. I figured that working on that end was bigger impact as that is a $40 billion dollar fund. We are hopeful that this will do forward. We are working on getting our HMO pension fund to also divest. But I haven’t really looked at our own funds. I think I’ll start small and thank you for doing the research and explaining it well. It makes me reassured that our purchasing actions or how I chose to spend my dollars is equally if not more impactful. Since I started my own blog project, we have really stopped our mindless consumption and donating money to vetted fiscally effective environmental organizations and also spending money trying to influence our own small community on environmental actions. So I feel that is more of a good use of our extra “fun money.” Thank you for doing what you are doing.

    Reply
  • Katie Pendergast September 6, 2020, 8:24 pm

    Is it better to jump in and invest now or to wait for a potential dip in the market in order to buy low?

    Reply
  • Dana September 7, 2020, 9:28 am

    Can you do another post about bikes ?? All the bikes you currently own. A guide on which to buy etc. Currently looking for a bike

    Reply
  • allegra September 10, 2020, 3:14 pm

    Thanks for this article MMM. Since reading Your Money or your Life I’ve started investing midsize companies with a purpose on a local level, and in stocks of companies producing disruptive innovation. We don’t have access to Ark ETFs in my country but Cathie Wood is an inspiration so I pick stocks in energy storage, renewables, AI, streaming and medical innovation. I choose the future not the benchmark. It’s ok if it takes me longer to get to FI, I enjoy my job. Social Capital VC Chamath Palihapitiya says ESG is a scam. I don’t disagree with him. How does ESG contribute to save our future ? Facebook is still destroying democracy. Alphabet refuses to moderate Youtube cesspool of hate comment boards that breeds mysoginistic and racist, violent behaviors. Big Oil produces more plastic packaging than ever before. A nice label will not change that, in my opinion.

    Reply
  • M Chelsea September 10, 2020, 6:44 pm

    My suspicion is that the causation may be reversed with regard to higher returns enjoyed by ESG-focused firms. Those firms may already be engaging in better overall business practices that result in superior performance as to the environmental and social matters.
    Due to government regulation, pollution will impose real costs upon polluting entities. Further, companies that have poor governance are not going to perform well anyways. ESG may not reflect that focusing upon ESG issues improves performance, it likely simply identifies those firms that already engage in good governance that have a positive ESG impact as a side effect.
    This article provides good background as well: https://www.ft.com/content/46bb05a9-23b2-4958-888a-c3e614d75199. I find I can get around the paywall by going on private mode. What are your thoughts?!

    Reply
  • Luke September 16, 2020, 3:05 pm

    My initial reaction to the article is that unless everyone also decreases their consumption of these sin stocks’ goods, avoiding the stock will only increase the returns to those that do buy the stock (including the company itself). I was thinking specifically gas and oil companies, since I have viewed them as favorable value investment industries in recent months. Ironically, I replaced my oil boiler with a natural gas boiler last year, which apparently is efficient enough for the State of Connecticut to subsidize with a 10 year, 1% interest loan. The only more “efficient” option would be installing solar panels and converting my house to an electric heating system but that would require me cutting down two big, beautiful trees that give my home and yard desirable shade, the cost of which would off-set any energy cost savings. With that being said, some of the information people shared in the comments section regarding modular nuclear reactors and large-scale batteries that aren’t dependent on proximity to dams is new to me and challenges my bullish view on natural gas as the reserve energy source of the next couple decades.

    Reply
  • Austin Negron September 17, 2020, 11:20 am

    I’m all in on Tesla and Lemonade…
    Have you heard of Lemonade?

    CSI (Corporate Social Responsibility) is one of the cornerstones of Lemonade.

    I also invested in them because I believe the general trend, especially with Gen-Zs is to rent more and buy less, mostly in part to our desire to travel around and do things remotely.

    Best,
    Austin

    Reply
  • MKE September 21, 2020, 8:32 am

    I think I read this on MMM comments at some point: Capitalism / materialism is all about people buying things they don’t need with money they don’t have to impress people they don’t like.

    Within this framework, it will always be tough to tell what company is good or bad. Large public companies have all bought into the concept of looking out for shareholders and no one and nothing else. Business school graduates are literally indoctrinated in the idea of not giving a shit about anyone or anything except money. No public company is turning these droids away. What started off OK in the 50s and 60s was distorted by this thinking and has created increasing heartache since it took root in the 70s. It used to be OK to try to let everyone benefit, but now it’s not.

    Also, as Warren Buffett said, only buy shares in a company an idiot could run, because someday an idiot will.

    So from an investing standpoint, you have sociopathic clowns who don’t know what they are doing selling junk to idiots who don’t need what they are buying.

    Large companies have teams of pyschological consultants advising them on how to dupe the masses into believing they are nice. Can you outsmart them when their job is to outwit you?

    Car companies are much worse than soda companies. The west is not on fire because people drink too much soda. Soda is a symptom, cars are a cause. If you have to walk or bike a mile or few to school or work every day, then you won’t have soda as a dietary staple. If your life is based on cars, then you can drink all the soda you want. And that is what people do.

    Walk, ride a bike, buy local. When it comes to investing, you will never see behind the curtain.

    Reply
  • Dave September 21, 2020, 4:32 pm

    Hi there MMM,

    I liked this post, and the potential tax-loss harvesting angle you mentioned relative to your Betterment funds. I did a bit more digging at Vanguard and found that the expense ratio of ESGV is 4X that of VTI (0.12% vs 0.03%). Excuse me if I’m not the first person to note this in the comments, I just didn’t have the time to read through them all just now… I still, sadly, sell most of my time to an employer still.

    Anyhow, just thought I’d mention it, in case others hadn’t noticed.

    Keep up the good blog! Dave.

    Reply
  • Chris October 15, 2020, 8:23 am

    MMM – I am more interested in your detailed strategy with moving dividends from VTI and funds and or savings through Betterment. I haven’t jumped down that hole yet but the more I learn the better it sounds.

    Reply

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