I'm getting more and more questions about the various methods of investing that consider non-financial factors. If that sounds vague, it is. That's because there is a whole industry out there trying to figure this all out and the goalposts keep changing.
Socially Responsible Investing
First, there was SRI — Socially Responsible Investing. This is generally defined as investing in a business that is considered socially responsible due to the nature of the business the company conducts. If that sounds vague, let me break it down for you. “Socially responsible” is in the eye of the beholder. For example, someone on the left side of the political spectrum may view a gun manufacturer or a defense company as socially irresponsible. Someone on the right side of the political spectrum may view those same companies as socially responsible because they promote the second amendment and provide for the common defense.
Some people may view drinking alcohol as sinful, and oppose any company that produces alcoholic drinks. Others may view craft beer as a fantastic hobby and part of a well-lived life. Perhaps Investopedia says it best when it says “Socially responsible investments tend to mimic the political and social climate of the time.” It kind of reminds me of the delay we're seeing with the TSP moving from a developed market index to a total international (including emerging markets) index for its International fund because the government doesn't want to invest in companies based in a country (China) with whom it is having a trade war.
Sustainable Investing
Next came “Sustainable investing.” This was the process of directing investment capital to companies “that seek to combat climate change and environmental destruction while promoting corporate responsibility.”
Impact Investing
Then came “Impact investing.” These are investments “made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return.”
Environmental, Social, and Governance Investing
Finally, we arrive at ESG – Environmental, Social, and Governance investing. Now we want the companies we invest in to protect the environment, promote our favorite social causes, and ensure good corporate governance.
I find it very interesting to see Governance thrown into the mix. While there are lots of interesting debates about what is environmentally friendly and what is socially good, every investor wants to see their company governed well. Per Alyce Lomax and John Rotonti, some of the governance factors that a fund might look at include:
- Executive compensation, bonuses, and perks.
- Compensation tied to metrics that drive long-term business value, not short-term EPS growth.
- Whether executives are entitled to golden parachutes (huge bonuses upon exit).
- Diversity of the board of directors and management team.
- Board of director composition regarding independence and interlocking directorates — which can indicate conflicts of interest.
- Proxy access.
- Whether a company has a classified board of directors.
- Whether chairman and CEO roles are separate.
- Majority vs. plurality voting for directors.
- Dual- or multiple-class stock structures.
- Transparency in communicating with shareholders, and history of lawsuits brought by shareholders.
- Relationship and history with the U.S. Securities and Exchange Commission (SEC) and other regulatory bodies.
Those all seem like pretty good things to have, right? The better a company is run, the more profitable it ought to be, no? In fact, that's the case that Kofi Annan made when ESG investing was born back in 2004. Forbes described it this way:
Today, ESG investing is estimated at over $20 trillion in AUM or around a quarter of all professionally managed assets around the world, and its rapid growth builds on the Socially Responsible Investment (SRI) movement that has been around much longer. But unlike SRI, which is based on ethical and moral criteria and uses mostly negative screens, such as not investing in alcohol, tobacco or firearms, ESG investing is based on the assumption that ESG factors have financial relevance.
So the theory is that if a company pays attention to ESG “stuff”, it'll be a better, more profitable company.
Does ESG Investing Work?
Before deciding to invest only in companies with high ESG scores (however those may be defined), your first consideration should be “Does it work?” And what I mean by that is two things:
- Does this investment actually improve the planet and the people on it?
- Does this investment actually meet my financial goals?
I suspect there is yet another reason that people invest in ESG funds/ETFs/stocks etc. Status. Rather than bragging about high returns at cocktail parties, you can demonstrate how environmentally and socially conscious you are. But I'm going to ignore that for now and assume that people only care about the first two questions.
Does ESG Actually Change the Way Corporations Are Run?
The owners of a business certainly have an effect on how a business is run. For example, as the owners of WCI, LLC, Katie and I get to decide how much rainforest land our company cuts down for its new headquarters. We get to decide whether to partner with Phillip Morris to promote the Marlboro brand. In the same way, the owners of a large, publicly-traded corporation can decide how it behaves. However, your effect on that corporation is somewhat diluted.
For example, there are over 5 billion shares of Apple stock. Tim Cook owns a whole bunch of them, but less than a million. He owns less than 1/50th of 1% of them. If you want to affect the way Apple runs its business, you're going to need to organize a lot of people to do it. Even a monstrous mutual fund such as the Vanguard Total Stock Market Index Fund has just 3.5% of its money in Apple. 3.5% of $875 Billion = $30.6 Billion. At $300/share, Vanguard TSM shareholders own approximately 102 million shares, or less than 2% of the company. Now that's a lot more than Tim Cook owns, but it's still nowhere near enough that your votes can somehow change the way the company operates.
I couldn't find any data out there suggesting that the fact that some investors take this approach actually changes how companies behave. So I decided to look for anecdotes. Janet Brown claims that
Investors filed more than 400 proposals just on environmental and social issues in 2015 alone, according to the U.S. Forum on Sustainable Investing….Investors have persuaded hundreds of companies to make significant improvements. For instance, Domini Impact Investments encouraged Target to reduce the use of toxic PVC plastic in children’s products. As a result, Target today has a sustainable product standard that scores thousands of products based on toxicity. Other major retailers, like Walmart and Sears, soon followed suit…. Trillium Asset Management engaged with Home Depot, which was one of the world’s largest retailers of old-growth lumber at the time….Home Depot agreed to use more sustainably sourced wood, and by 2009, Home Depot had sold more Forest Stewardship Council-certified wood than any other company in North America.
So there are definitely some anecdotes out there. Maybe there would more anecdotes or even data if the funds that claimed to be following an ESG strategy were actually doing so. Consider this article in Barrons/WSJ showing that 8 out of the top 10 largest ESG funds invest in oil and gas companies:
For instance, BlackRock (BLK) says its iShares ESG MSCI USA ETF aims to track an index of companies with “positive environmental, social and governance characteristics.” The fund includes Exxon Mobil (XOM), which is awaiting a ruling in a trial involving allegations that it misled investors about how it accounted for climate-change regulations. A spokesperson for the oil giant says the allegations in the lawsuit are baseless.
Vanguard Group’s FTSE Social Index Fund is meant to track an index excluding companies with “significant controversies regarding environmental pollution or severe damage to ecosystems.” Both that fund and another large ESG fund operated by Xtrackers include Occidental Petroleum (OXY), which in 2015 paid Peruvian indigenous villagers an undisclosed sum to settle a suit accusing it of contaminating the Amazon.
Apparently, not only do investors need to choose mutual funds that will monitor companies for their ESG activities but also have to actually monitor the mutual funds themselves to make sure they're doing it.
At any rate, forgive me for being skeptical that investing in an ESG fund is actually changing the world for the better. It shouldn't be a big surprise. When you buy a share of stock from the person who owned it before, the company doesn't get any money. It goes from your pocket to the prior investor's pocket. All it entitles you to is one tiny little vote and your tiny little share of the profits. When you buy a share of Occidental Petroleum, you're not funding the exploitation of Peruvians. That funding was all done before the company went public in 1978. Maybe a really tanking stock price will affect what the C suite does because they want to do well on their stock options, but given that there will always be investors who care more about profits than ESG stuff, it's going to be really hard to drop a stock price hard enough to change corporate behavior just from investor pressure. You'd probably be better off organizing a huge boycott of a company's products than trying to round up enough shareholders to change the direction of the company. The end result of good people avoiding the purchase of bad companies is that the bad companies will be owned by bad people who don't care about the stuff the good people care about.
Do ESG Investments Provide Good Returns?
Let's turn now to the other big question. If, for some crazy reason, you think ESG investing actually works, can you still do well while doing good? If not, how much money will it really cost you to try? Let's take a look at some popular ESG funds.
Another article by John and Alyce suggests that stocks with good ESG scores may actually outperform the overall market. If that's true, everyone ought to be interested in an ESG fund, no? Let's go to the ticker.
According to Morningstar, in 2018 63% of ESG funds were in the top half of the funds in their category (58% over 5 years). That's not exactly saying much though. Consider the Vanguard Total Stock Market Fund. It beat 58% of its peers in 2019 and 74% of its peers over the preceding 5 years and 86% of its peers over the preceding 10 years.
At the end of the day, ESG funds are generally actively managed mutual funds and as those who have been reading this blog (and pretty much everyone else's and any halfway decent investment book and talking to anyone who knows what they're talking about) investing in actively managed mutual funds is almost a guarantee of long term underperformance. Now there are some “ESG Index Funds” and “ESG ETFs” but given the subjectivity of these screens I think the description of these as “index funds” is more marketing than descriptive.
If you're going to invest in an ESG Fund or ETF, where are you likely to start looking? Why not with the usual default choice, the low-cost leader Vanguard? They've got an ESG ETF, with a slick ticker ESGV and a very low expense ratio of 12 basis points. How is it doing? Well, it's Morningstar X-ray looks almost exactly like the Total Stock Market ETF VTI, so that seems a reasonable comparison. It hasn't been around very long, so we only have one year of returns to look at, 2019. In that year ESGV returned 33.37%. VTI returned 30.67%.
So while the jury is still out, it appears to me that it is entirely possible to get adequate, and perhaps even better, returns using an ESG strategy so long as you follow the other principles of investing — diversification, keep costs low, use a passive approach, etc.
The Bottom Line on ESG Investing
If you wish to try ESG investing, at a minimum you will get some status and bragging rights at cocktail parties. You may have some limited impact on the behavior of some corporations. You may do just as well or even better than index funds. On the other hand, perhaps this is a fad, and fickle investors will turn their back on it soon, and there will be a return to the mean as there often is in investing. Perhaps the prices of companies with good ESG scores are being bid up by the creation of all these ESG funds and future performance will be worse. Maybe the luck of VICEX, a fund that tilts toward “sin stocks” like alcohol, tobacco, firearms, and defense companies is about to change (2018-2019 returns were terrible, but it was a top performer in 2011-2012). An awful lot of the information on ESG investing out there feels to me like marketing from fund managers that I have seen time and time again with dozens of different investing strategies. I don't plan to tilt my portfolio toward ESG stocks, personally.
Perhaps the most important principle in investing is to get a good financial plan and stay the course with it through thick and thin. If you still need a financial plan, I created Fire Your Financial Advisor! A Step by Step Guide to Creating Your Own Financial Plan so you can quickly and easily get a good one in place.
My plan has me investing primarily in broad-based, traditional index funds, and I plan to stay the course. We will use the money we make to support good causes. I suggest you do the same–pick a reasonable plan, stick with it, and support good causes, whether or not it involves ESG investing.
If you do go down the ESG road, at least read the fund prospectus to make sure the view of the fund manager on what is responsible or sustainable is the same as your view. For example, here is the description of “good” that the Vanguard ETF uses:
The FTSE US All Cap Choice Index excludes stocks of companies that FTSE Group (FTSE) determines engage in the following activities:
- (i) companies that produce adult entertainment;
- (ii) companies that produce alcoholic beverages;
- (iii) companies that produce tobacco products;
- (iv) companies that produce (or produce specific and critical parts or services for) nuclear weapon systems, chemical or biological weapons, cluster munitions, and anti-personnel mines;
- (v) companies that produce other weapons for military use;
- (vi) companies that produce firearms or ammunition for non-military use;
- (vii) companies that own proved or probable reserves in coal, oil, or gas;
- (viii) companies that provide gambling services; and
- (ix) companies that generate revenues from nuclear power production.
The index methodology also excludes the stocks of companies that, as FTSE Group determines, do not meet the labor, human rights, environmental, and anticorruption standards as defined by the United Nations Global Compact Principles, as well as companies that do not meet certain diversity criteria.
So if you're just fine with companies that dam up rivers and kill salmon, or chop up birds with giant windmills, or support the exploitation of Chinese minorities by purchasing solar panels made up of rare metals mined in China, but against companies that generate clean nuclear power and defend America from our enemies, this one is for you! But if you like hunting, craft beer, drone strikes on terrorists, and trips to Vegas, you probably need to keep looking.
What do you think? Do you use ESG principles to invest? How? How did you choose a fund or index to support? Do you feel like you're making a difference? How is the performance? How much performance would you be willing to give up in order to invest in this way? Comment below!
I haven’t invested in any ESG funds. I agree that it is subjective but also strikes me that we can do more direct and impactful good by building wealth along more traditional avenues and contributing to causes that are important to us?
TPPS
Hilarious! I love your sarcasm!
Yep! Got a good chuckle out of that!
“Status. Rather than bragging about high returns at cocktail parties, you can demonstrate how environmentally and socially conscious you are. ”
Status, status, status, status, status, status, status, status, status, status, status, status, all of human behavior can be explained and predicted through the prism of status. Money is a poor simulacrum for status.
I try to chime in and share our experience when this topic comes up on the FB group or on Bogleheads every blue moon…
One of our 403b’s from a religious-based employer ONLY offered “ESG” funds. I’ve met a handful of people with similar experiences, including sharia-compliant offerings, or even Christian-based hospital systems. I’ve noticed that many anti-ESG arguments tend to be somewhat of a strawman, simply because in our personal experience, all the available funds tracked a major index and excluded companies involved in alcohol, tobacco, adult entertainment, etc. I share this to simply raise awareness of what’s actually out there—these are not necessarily an emotional/trendy free-for-all of active managers choosing a few dozen Silicon Valley companies. It’s been more like SPYX instead of BIAWX for us, just to point out two funds (I just checked and high-expense-ratio BIAWX has just 34 holdings!). In our case, I think ESG-investing has actually been a much better practice than all the Facebook Group folks who insist on individually holding TSLA…
There’s an interesting ethical decision regarding investments with “problem” companies. On one hand, it is unreasonable to sit on the sidelines and whine that there is utterly no “ethical” way to invest. On the other, I doubt WCI would be comfortable investing in a hypothetical private equity firm that builds porn studios. Yet we all must draw the line somewhere. I’ve been happy with our “ESG” 403b, simply because we got a substantial match and it follows an index. We’ve made use of other funds in other retirement accounts. We’ve followed our ISP well the past few years.
Investing is only one small piece of the pie of one’s impact on the world. If you ask me, voting, volunteering, being a good neighbor, being generous with financial donations, treating family with love and compassion, supporting your local farmers market, or shopping at small businesses all have a far greater impact than “ESG” investing. Now if you were to write an “ethics” piece in favor of buying locally rather than doing Amazon Prime or Walmart… I’m sure that’ll REALLY raise a fuss!
Wow. Well said! Thank you for the research you put into making this a thoughtful article.
Haha, the last paragraph zinger put a huge smile on my face – well said.
Thank you for raising all those questions and inconsistencies in ESG investing. I especially like your points about the subjectivity of being “socially responsible” and the social pressure of investing responsibly.
Let me, please add some points to it. First, although investing in companies that have a high ESG performance is far from being perfect and needs to be critically assessed as you are doing it, it is a first attempt in trying to improve the society and environment that we are living in.
Maybe one way to make ESG more efficient would be to assess the real motivators of companies trying to follow ESG criteria. Are ESG criteria followed because of this social pressure of doing good and engaging in CSR activities? Or is it done because the company found a way to incorporate ESG criteria into its business model and create value with it? In the first case, I don’t think it is creating any real value-added for the company and although it can make positive changes in the society, in the long-term, the second case would, I believe, be the more successful and impactful one.
Another important point to remember is that to improve societal and environmental issues, capital is critical. Governments have for sure a role to play in solving those issues, and one can rely on them, but one has to remember that governments are often not the ones able to leverage the highest level of capital. Taking Wal-Mart, for instance, it has higher revenues than the GDP of Belgium or Singapore. One can, thus, question in how far companies with such capital are responsible for trying to solve social and environmental issues. Investing in companies with high ESG performance can help channelled capital into social and environmental projects in a more efficient way than through governmental actions.
To conclude, although I found your critics grounded and justified, I think it is also worth considering the good aspects of ESG investing.
At the end of the day, you have to make a decision with YOUR money. You can weigh the positives and negatives of ESG investing, but then you have to put down your money and suffer the consequences. Personally, I think it has very little effect on what companies do, so I don’t think it really does a lot of good in the world at all. so it doesn’t take a lot of bad for it to outweigh the good in my mind.
Owners of a company go public primarily in order to cash out and make money. Investors primarily buy stocks to make money. So company management is primarily geared toward make money. If they can do some good on the side without getting in the way of their primary mission, I think they all will try to do it. If nothing else, it helps them look good and make even more money. But most of them are pretty good people who would love to do good while doing well.
I just find ESG type stuff so easy to poke holes in that it would be a shame not to poke the holes so at least everyone can see where they are before they decide what to do with their money. It is getting better though, so there is room for optimism.
I might be misunderstanding, but why choose an ETF that hasnt been around long enough to really compare? Why not compare VFTNX with a 10 year history to an S&P500 fund? (was this an intentional pick to prove ones point, or just accident?)
https://www.morningstar.com/funds/XNAS/VFTNX/quote
https://investor.vanguard.com/mutual-funds/profile/VFTNX
Sure its 0.12 ER is higher, but the performance has been better (and enough to compensate for that). It certainly wouldn’t have fit the narrative you have written (maybe why it wasn’t chosen).
I cant tell if I am being ‘trolled’ in the sense that this is on the click-bait side, as far as articles go. You could have picked a fund that did perform better, but didn’t. I love the information you normally convey, but this just seems to be an article written to justify your own beliefs rather than an attempt to convey objective facts about ESG investing. Maybe that is the way of information disseminated over the internet. My hope was that WCI remained a safe haven where inflammatory articles werent written to stir emotions in people, but rather to help others and provide useful information.
This article seems to be reducible to: “Why are you investing in ESG? (1)Those companies are bad too, (2) it wont change the world and (3) it doesnt do better.” For point (1) you may be able to find examples where ESG companies arent great, but if you look at the aggregates of companies excluded vs ESG companies I think you are likely to be wrong. Finding exceptions doesnt actually provide you a foundation for what your wrote. For point (2) maybe you are correct, hard to know what people will do over time if they are given a choice between two funds with similar returns where one is filled with companies they prefer. And point (3), doesnt appear to be looked at objectively to me.
I think we can agree that there are likely problems evident in larger companies, even in the ESG. On the whole I hope that we, as medical professionals, can agree that a lot of things on the list you provided don’t generally increase the well-being of our population (tobacco especially).
So, why not invest in the ESG companies? Are you really that worried about your ability to hunt, increase your carbon footprint, the ability of people with gambling addictions to loose their money, smokers to keep smoking or your desire to drink crap beer (lets be honest, all the companies large enough to carry weight in the S&P500 or TSM aren’t producing good beer)?
Well said, AZ. I had very similar thoughts while reading this piece. I generally find WCI posts to be objective but the author’s agenda became palpable by the final paragraph. Why not let the data speak for itself?
https://www.morningstar.com/articles/994219/sustainable-funds-continue-to-rake-in-assets-during-the-second-quarter
I find it fascinating that you think I have an agenda against ESG investing. An opinion definitely. But an agenda? The word seems to imply some nefarious undercover plot to either steal money from my readers or ruin the planet. I assure you neither is the case.
I do not find data that shows people are actually investing more money into ESG funds to be evidence against anything I said about them (i.e. do they do any good and do they provide better performance than a boring old index fund).
Frankly, I find “ESG” to be more marketing than anything. “Come give us your money and we’ll help save the planet, never mind that we’re charging 3X the ER you would otherwise have.” And pointing out to readers when something is just marketing fluff is exactly the purpose of this site.
Good critique.
The Vanguard Social Index Fund (VFTNX) was not originally an ESG fund, but has converted in recent years to be one. Its current prospectus describes its mission thus:
My recollection (and I could be wrong) was that it did not have any governance component when it first opened and I had assumed it still did not.
15 year returns are slightly behind the Total Stock Market Index Fund and 10 year returns are a bit ahead.
This is likely a result of recent performance of the various market sectors though. The ESG fund is more heavily weighted in tech and health care and less heavily weighted in energy, industrials, utilities etc. When energy does well, an ESG fund will not! ESG funds tend to be growthier than the overall market, so will do well when growth does well.
Check it out on this page to learn more:
https://www.tdameritrade.com/education/tools-and-calculators/morningstar-instant-xray.page
I find it interesting that you found the article inflammatory. I’m not sure an inflammatory article can be written on the subject. I couldn’t even get a dozen comments on this one. Hardly inflammatory.
As far as your three point analysis:
1) You propose a hypothesis without any data to support it. Maybe you’re right. Maybe you’re wrong. But in order to find out, we must first agree on what a “good” company and a “bad” company is. Chances are no two people agree on that, which demonstrates my point.
2) Sounds like you are conceding the point.
3) There isn’t enough data out there yet to know. So you make your bets and you take your chances.
I do invest in the ESG companies. I have money in every one of them, supporting their missions. I also invest money in companies that produce clean nuclear energy and provide arms to defend our borders from people who hate us.
The good news is that it appears you can invest in an ESG fund, feel good about doing so, and still achieve reasonably good returns. Maybe even better returns. So if it makes you feel better to do so, go for it. But I’m not convinced you’re actually doing much good by doing so and I think there is a significant likelihood of being able to do less good (via lower returns and thus less money given to charity.)
P.S. I consider “clickbait” a compliment. I can’t help anyone if they never read my stuff.
Thanks for the response. I am not sure when the fund started following the ESG pathway, I would have to defer to your expertise on determining those types of things.
A couple of quick points: A) I think we can both agree that even at 0.12 the ER is still low and although 4x the ER of SP500 fund, unlikely to be a significant amount of money in the long run (unless one is saving insane amounts of money) when compared to the overall portfolio. It seems more likely that the difference in returns between the benchmark and VFTNX is likely to be much larger than this in the long run (either for or against ESG — but we will have to wait and see). Its the price paid for feeling one might be avoiding investing in some unscrupulous companies. Also that ER would have been considered a great price 10 years ago and will hopefully come down like the TSM has. B) Regarding your investing in ESG companies, that is true, but the ESG investor invests more in those companies and not at all in the ones they wish to avoid. This is the true offer of ESG investing, it allows people to feel like maybe the bunch of companies they are investing in are better than if they stuck with the benchmark.
On the numbered points above:
1) Are ESG companies actually ‘better’? There is no data to support moral claims (at least not yet as far as I am aware of), hence why I cannot offer any data. To avoid the risk of getting into the weeds on moral definitions I hope to simplify my point here. Companies fall on a continuum of enhancing wellbeing/flourishing and increasing suffering. We dont have any way of really working out the data on the differences, nor will everyone agree in the middle aspects of the continuum. Just as there are moral claims which leave a lot of people shrugging their shoulders (i.e. physician assisted suicide). What most people do end up agreeing on are the extremes of the spectrum like volunteering your time at a soup kitchen is good and certain acts like murder and unnecessary torture are bad. What is important is that if you eliminate the ones you think may be the worst actors, you will, on the average, have a cohort which causes less overall suffering. Are there still some companies who do some bad things? Probably, but you are likely to have less than the benchmark.
For example, let us assume you have a group of 10 people all selling you different things — computers, medical equipment, fossil fuels, weapons, advertisements, tobacco, gambling, video streaming, etc. Let us call this group “Benchmark”. Similarly, you have a second group, equal to the first, except the sellers of gambling, tobacco and non-military weapons are removed and you are left with 7 sellers — lets call this group ESG. You can invest $100 into either group.
Can we provide data for the differences in goodness between group benchmark and group ESG? Nope. But I think most would agree that the EGS group is going to produce less suffering than the Benchmark group. Therefor your $100 is going to support companies you can stomach better if you invest in group ESG and you will avoid investing in ones that may increase suffering.
You can get even more extreme to prove my point. Let us say you have one company whos only goal is to produce nuclear warheads that can end the world, and it happens to be incredibly lucrative and willing to sell to any country. If you have a fund which holds this company, because its de facto in the SP500 due to its profits and you have a fund which doesnt include this company, I think most would again agree that the one which doesnt include this company is a better cohort of companies, if admittedly not perfect. Does it mean all the companies in the fund are good? Nope, but it means that on the aggregate, they are better than the fund that includes the nuclear warhead company and I would rather hold the fund without the WMD company.
Regarding position 2) (It wont change the world), I am not conceding, merely remaining agnostic. to determine the answer requires a knowledge of future outcome, which neither of us know. I am unsure of what will happen (as everyone should be, unless we are in the business of prophesying). Obviously the people who are investing in ESG are hoping that slowly more money will support better companies and the excluded companies may not flourish just by being involved in the benchmark de-facto, but will need to change behavior to maintain investors rather than just being profitable. My guess is millennials are going to be much more likely to support ESG funds than regular benchmarks and we may see a shift.
Point 3) (It doesnt do better) is also yet to be decided, but as of yet, doesnt look too far off. My guess is it will depend on what time periods you look at in the future (much like SCV vs TSM). As you mentioned, they weigh different industries.
So if we are in agreement that we are unsure if they will do better or worse than the benchmark (and feel they may be similar), then I ask — why not go with the one that might diminish some suffering in the world?
If you agree with the fund’s definition of a good company, then sure, go for it. I would bet on underperformance over the next decade though if I had to put money down (and I suppose I am) on it.
I also disagree that when I buy shares of a company, except at an IPO, that it somehow provides any significant support to the company. The company’s mission was only supported by those purchasing at the IPO. After that it’s just people in a room shuffling paper around, no money is going to the company. If people only buy the good companies then eventually the price of the good companies will be bid up so much that it will offer subpar returns.
I have been struggling with how to leave what we have to our family after we are gone. Obviously, we practice good estate management, tax management etc., but the parable of the talents kept working on me and I thought I’d give each one of our four children $50,000 and put it in an account that would be monitored by an accountant and give them five years and see who has the largest investment account after five years. Then take the percentage of the total of all of the accounts that each one has and distribute our inheritance that way.
At least they would have to show that they could manage money, to get it.
I would also get to see what happens at least partially, with our inheritance while we are still here.
It would also give the children the opportunity to experience some competition and make them work for their inheritance rather than just getting it given to them.
They have no idea whether we are worth 2 million or 20 million and we don’t plan to tell them. I think knowing that figure would not be good for them.
The problem with that approach is it could encourage excessive risk taking/gambling. “I could get 80% of the inheritance if I put this into Bitcoin and Bitcoin takes off this year.” etc. That’s not really the lesson you’re hoping to teach I suspect.
You are right to identify dubious corporate impacts and virtue signaling as two primary motivators for ESG investing, but there is a third and very important one missing here which is attempting to align your investment returns with your own moral compass. The exact numbers can vary, but it has been widely cited that as much as half of the returns from owning stocks may come from dividends, especially with large caps like S&P500 companies. When you buy shares in one of these companies, you are now a part-owner of that company, and you will harvest some of their annual profits in your portfolio – you are making money however they are making money. If I can easily avoid it by using ESG funds, I would prefer NOT to be a part-owner of cigarette or pornography companies (just two of many examples), because I don’t want to be taking home their profits in the long-term wealth-building plan for my family, even if it means potentially introducing some uncompensated risk into our portfolio. This is yet another example of the very PERSONAL side of personal investing
Appreciate the candid look at this. I am trying very hard to be environmentally conscious and was looking hard at esg but it would really made it hard to reorganize my investments around the esg fund. Also the prior manager of black rocks ESGs recently talked about them being worthless as far as helping the environment. Your point about how little stock you own making no difference is helpful.
Looks like on I will keep my investing separate from my environmental improvements elsewhere. (Ie the PHEV and electic vehicles we have- which fortunately are paying off as little over the long term. Will look at getting that hybrid van and solar panels. May lose money there but the environmental benefit will be there, losses long term will be low, and will keep investments simple and KNOW that it is having an impact (though small since we are 6 people of 7 trillion and decreasing our oval carbon footprint by only about 30-40%))
Noble aims but hard to figure out exactly how to help the most isn’t it?