This content was paid for by Betterment. The newsroom was not involved in the creation of this content.
You buy fair trade coffee, you know to avoid palm oil because of the human misery that produces it, even when browsing online for books you go to the sites of small, local shops rather than the evil e-commerce giants. If anyone asks you about your “buy local” bumper sticker you can tell them all about the carbon cost of buying things that have traveled a long way. For most people, it’s obvious that your consumption habits should in some way reflect your values. Isn’t it equally obvious your investing habits should too?
Old-school approaches to investing focus solely on maximizing returns. Playing the markets can be seen as something like a game; make the right moves and you “win,” i.e. you have more money in your account than before. In this worldview, the companies you invest in are just little symbols on a ticker that either go up (good) or down (bad).
But in recent years, socially responsible investing (SRI for short, the financial world loves acronyms) has become more popular, partly as a result of more millennials—the socially conscious do-gooder generation—becoming active investors. This is part of a movement across the financial world to be concerned with more than just the bottom line. Or more accurately, more companies are now talking about the “triple bottom line,” meaning they are thinking about profit, but also “people” (the impact they have on society) and the “planet” (their environmental impact). This also gets summed up as “ESG”—for “environmental, social, and governance.” There’s a whole industry that rates companies based on ESG (in other words, how environmentally friendly, socially conscious, and ethically run they are). And companies with high ESG scores tend to be more profitable and thus tend to generate better returns for their investors, so if you invest ethically you don’t need to suffer financially.
Sounds great, right? So how do you get involved with this? Here’s how:
Decide what your goals are
Many people who are invested in markets do so passively, through retirement savings. You might make regular contributions to your 401(k) through your work and be only dimly aware that you’re investing in anything. But trying to put your money where your values are means being more proactive. And step one is clarifying what those values are.
Maybe you are primarily concerned with climate change, and therefore don’t want any of your money going toward fossil fuel companies. Or you want to support companies that are unionized (or at least aren’t known for their union-busting). Or you want to avoid companies that manufacture guns, or run private prisons.
But you don’t need to think only in terms of divesting from firms that aren’t making the world a better place. You can also brainstorm the type of companies you’d be enthusiastic about investing in. Does that mean solar companies? Companies that emphasize giving back to charity? Or that pay higher wages, or use sustainable materials? Think about what’s most important to you.
Pick a robot
With socially responsible investing, as with any kind of investing, you can pick individual stocks to buy and sell yourself. This isn’t something most people do or that most experts recommend, because individual stocks can be volatile and unpredictable. You’ll probably want to find a fund—a basket of stocks, bonds, or other securities—that aligns with your values and go from there.
In recent years, exchange-traded funds (ETFs) have been growing in popularity. These are very common, flexible ways for investors to back certain industries or sectors of the economy. You can buy ETFs that focus on solar power, nuclear power, businesses that the NAACP has endorsed as empowering women or people of color… pretty much think of it, and there’s an ETF for it.
The downside to ETFs is that there are so many of them. A more standard approach, for investors who don’t want to pour through a lot of information and who prefer the set-it-and-forget-it approach to money management, will be looking for a digital investing platform.
These are tools that investing platforms like Betterment provide to users who want particular things from their investments but don’t have the time or knowledge to assemble a portfolio by themselves. These robo advisers ask you questions about your tolerance for risk and what your goals are, and then come up with a strategy that’s tailored to your needs.
So in Betterment’s case, you can select between Social Impact, Climate Impact, or Broad Impact, depending on whether you’re more concerned about climate change, social issues, or all of the above.
Keep your eyes open
Anyone who’s read about climate change knows that reducing your individual carbon footprint is all well and good, but what’s really needed is broad systemic change. For regular people, deciding to get into SRI is a bit like deciding to ride your bike or take the bus instead of driving—it’s something you should do for all kinds of reasons, but it won’t single-handedly change the world. Investing responsibly can make you feel good, and it can be a positive force in the world. But it isn’t a cure-all for our problems.
Something to be aware of is that ESG ratings can be somewhat opaque, and it’s not always the case that what an ESG rater values is the same thing as what you value. For instance, some companies involved in oil and gas extraction might get a relatively high ESG score, because “environmental” is just one of three factors that an ESG rater looks at. Browsing a list of companies who have high ESG scores is an interesting exercise—sometimes a company that you may think of as “evil” does well by this metric because it has changed its practices and you should reevaluate your opinion of it. Sometimes though, the rating will seem incomprehensible to you because the company doesn’t actually align with your values.
Even if you use a robo-adviser, you should try to find one that gives you some flexibility. Not everything with an “ESG” or “SRI” label is the same, and you should be cautious about where you put your money. Yes, this is more work than merely stacking money in a retirement account. But doing the right thing isn’t supposed to be easy.
This content was paid for by Betterment. The newsroom was not involved in the creation of this content. Higher bond allocations in your portfolio decreases the percentage attributable to socially responsible ETFs. All investing involves risk, including risk of loss. Performance not guaranteed. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, unless stated otherwise.